A Synopsis of The Effective Landlord
Dan Lieberman’s The Effective Landlord is an essential read for any property investor or manager. It contains the basic formula for acquiring low quality properties and turning them into reliable positive cash flow machines.
Dan’s investment and management thesis in his own words is:
Make your property desirable to the tenants you want to live there – and then the money just flows in.
It is a very simple principle that compounds on itself very quickly.
Attractive properties can command higher rents.
Higher rents at desirable properties attract higher quality tenants.
Higher quality tenants commit fewer damages and move out less often.
Fewer damages, move outs, and higher rents generate greater profits.
Greater profits allow you to invest more into making properties more attractive.
And on and on as your wallet gets fatter and fatter and your tenants become happier and happier.
The book is full of real-world examples and actionable tips any property manager can use. Below is a summary of the book’s key topics. I hope you purchase the book and read the whole thing in full.
Focusing on the Experience
With property management, like all businesses, customer experience is a key component in the value proposition.
This component is ignored by most property managers. This is your opportunity to differentiate yourself easily.
Focus on the key interactions your tenant has with you. This includes signing their lease, receiving their keys, requesting maintenance, and renewing their lease or moving out.
Small improvements in appearance, like cleaning the shared garbage area, can pay great dividends.
You can improve your tenants’ experience by allowing them to customize their unit, like ordering from a menu.
Your interactions with your tenants defines your brand. You can greatly enhance your brand by improving the tenant experience.
Keep on top of trends. Simply updating the cosmetic appearance of low-cost fixtures like lighting can greatly enhance perceived value.
When you cannot afford to make major improvements all at once, sell the vision to attract forward-thinking tenants. Make sure you deliver on this vision!
Transforming Your Property’s Image
Consider the “three minute rule”: “You have three minutes to make an emotional appeal to your prospective tenants. Otherwise, you’ll lose them.”
Consider what the “wow” factor is on your property. It can be something simple but it allows the tenant to visualize their new life at your property.
“Wow” factors could include a patio where they can imagine sipping their morning coffee or drinking an evening wine, a common area where they can host parties, or a nice outdoor barbecue area.
If you have a limited budget in a multi-unit, consider enhancing common areas before upgrading individual units.
Treat the entire path of showing a tenant the unit a marketing opportunity. Everything they see and experience should be designed to enhance the property’s value.
Think about small upgrades that have an outsized impact: For example, tiling an entryway or a small bathroom instead of carpeting or vinyl flooring.
Paint is an inexpensive way to keep up with trends and appeal to tenants more.
Space, lighting, and colors can all be used to make a place feel larger and more welcoming.
Determining the Proper Rent
While controlling expenses is important, dollar for dollar, there is more upside in increasing rents than decreasing expenses. The first priority should be maximizing rents, then focus on controlling expenses.
Lower rents and lower application fees may increase demand, but they also decrease the quality of your applicants and tenants.
Rentals, like all real estate, have their value driven by location, location, location.
Be sure to know what is driving your prospective tenants’ purchase decision: is it the amenities or the location? What should you emphasize?
When pricing rent, consider the effects of online searches. For example, a unit with a price of $2,000 may never turn up in a search, but $1,995 will.
To gain more revenues, consider non-rent sources of income, such as pet fees, parking, storage, etc.
Try to price out added value, such as a better view, higher floor, etc. Identical floor plans do not mean identical value.
When increasing rents, there are opportunities to soften the blow, for example ask the tenant to choose from one of three upgrades you were already planning on doing, and also let them know about the increase in rent.
Finding a Property with Potential
A property with “good bones” can be transformed from a low performer to a high performer by accentuating its best features.
Look for the key positive features that you may wish to highlight for a property and make sure the construction is high quality.
If an area is run-down, consider if you would have updated it anyway. If so, then the deferred maintenance may not be a big deal.
When considering upgrades, think about the immediate vs. the longer term. Also, think about the “bang for the buck” on upgrades. A few thousand dollars may increase the rent substantially, vs. raising it even more may cost tens of thousands.
Look into market rental rates--you don’t want to overinvest in a property if the market cannot afford the higher rents.
Before choosing to allow pets, consider whether or not the unit can handle the extra wear and tear.
You will receive the most value by looking at the features that are unique or can be substantially better than similar local properties.
Tenant Happiness That Pays Off
You can get tenants to stay in the same way you attracted them in the first place: standing out from everyone else.
Tenants are your customers; treat them with respect and care. Small tokens can show you care, like a gift upon move-in.
A business does not survive if it makes its customers work hard to be your customers. Find ways to make it easier, like being proactive and communicative about maintenance.
Only 80% of maintenance requests are completed properly and address the tenant’s issue on the first time they’re done. You can follow-up with tenants after every maintenance request to show you care. Even a simple email or text will do.
The text and email records can also serve as a good counter-argument in court if the tenant claims they were not paying rent because maintenance was never done.
Offering upgrades on renewals enhances the property’s value and increases tenant happiness.
Enhancements in service are hard for a renter to find elsewhere in the rental market. It transforms your units from housing commodities to differentiated value propositions.
Standard policies and processes that you stick to help establish a better customer experience. These are especially important during personal interactions with renters, like when they move in, move out, or request maintenance.
Avoid giving rent concessions as an apology, it is a slippery slope. Instead, give gift cards to local restaurants.
Attracting Good Residents
Good residents pay rent on time, respect the property, and attract more good residents. Bad residents cost money, can destroy the property, and drive out good residents.
Set your policies and standards in advance: write them down, publish and share them.
Many landlords miss out because they focus exclusively on the internet for marketing. Also consider flyers, referrals, and relationships.
Use online advertising to help showcase why your property is special. Go beyond just pictures of vacant units, and highlight the unique selling points.
Have a referral program. Your good tenants will refer their friends, who are also likely to be good tenants. Also, people are less likely to move out from a community their friend lives in.
Email can also be effective in promoting units, either by emailing previous applicants or by notifying your existing residents of your referral program.
Actually analyze the information you receive in the application, including background checks, credit scores, answers to questions. Consider the whole picture when choosing who to rent to.
Talk to the renters to get a sense of potential behavioral or personality issues a prospective tenant may have.
Maintenance, Utilities, and Turnover
The best way to reduce utility costs is to transfer them to the tenants. If you cannot due this for legal reasons, consider energy efficiency investments to lower costs. Utilities often offer rebates for these programs.
Micrometers and regular inspections can go a long way to uncovering leaks and other issues.
Maintenance is controllable by investing in high-quality products and services, which save you money in the long run.
Most hardware stores are geared towards homeowners. The materials they sell will need to be replaced more often than slightly more expensive but more durable materials.
Labor costs are important. You can reduce them by keeping common materials on site or nearby so workers do not need to drive to Home Depot for basic parts.
Save money by standardizing, buying in bulk, and storing common replacement parts on-site or nearby.
Create a checklist of routine maintenance tasks. Use this checklist for move-in, move-out, and routine inspections.
If you are a do-it-yourselfer, consider the value of your time. Is it worth 2 days of your time to paint an apartment? Or is better to pay someone $250? Are you wasting time you could be spending trying to fill the apartment faster?
Charging your tenants for maintenance calls will reduce calls, but it may hide problems that will become worse over time.
Teach your tenants the basics during move-in, like how to reset a garbage disposal, flip a circuit breaker, push a button on a GFCI outlet, or turn off a water shut off valve
Turnover is another large source of cost, not only in the cost to repair and refill a unit, but also the lost revenues from the days it sits vacant.
Two-thirds of all turnover is controllable. People move mainly because “maintenance takes too long; the maintenance is not done very well; the manager is rude; the apartment costs are too high.” They also move for uncontrollable reasons, but most are within your control.
When tenants are moving because they feel costs are too high, what they really mean is they are not getting enough value for what they are paying. You can increase value through the recommendations in the rest of the book.
To reduce turnover costs, reduce your total turnover. Customer service and respect go a long way towards this goal.
Typical turnover costs are well over the cost of monthly rent. That only accounts for direct costs and ignores the opportunity cost. How could you have spent your time differently if you were not focusing on refilling the apartment?
Other ways to reduce turnover costs include: having large enough security deposits to cover repair expenses, efficiently scheduling showings so the unit does not sit vacant, lining up your vendors to quickly repair and clean an empty unit.
Avoid reducing rent in order to retain tenants: it reduces the property cash flow and overall value. Instead consider what one-time actions you can take, such as cleaning the carpets or performing a minor upgrade.
Proper, routine maintenance can greatly reduce turnover costs by preventing small repairs from turning into big ones.
Improving Problem Properties
If you are considering investing in a low-performing property with the intention of turning it around, first consider if it is even worth the effort. Is there enough upside potential for you to recover your investment?
There are bargains to be had if you find properties with high potential but terrible tenants.
It is cheaper and faster to avoid the legal system if possible. It is in both your and your tenant’s interest to avoid an eviction.
If you are going to evict, even if you want to avoid court, document your case early and completely. The worst tenants will be documenting as well, so make sure your documentation is better.
Many tenant complaints about “uninhabitability” are caused by the tenants themselves. Take time to educate the tenant about their cause, even if it means drilling a hole, patching, and repainting to show them the mold on the walls is coming from inside the unit, not the structure.
If you have cosigners on a lease, like parents or grandparents, feel free to call them to encourage a change in tenant behavior. The cosigners do not want to be liable for their relative’s mistakes.
Lean on strong documentation such as leases, move-in, move-out checklists, and written repair requests to help avoid problems in the future.
Make rent payment as easy as possible. It does not make sense to charge tenants for the right to pay you. Do other businesses do that?