26 January 2012
How to find profitable tenants
This week, we’ve been reminding ourselves of the benefit of testing, and how to find those profitable tenants. You may know that we’ve focused on single let properties over HMO type units in the past.
You see, many of our experiences stem from trying to use our local housing allowance [LHA] model, which we use on single let properties in a HMO environment.
Unlike family’s claiming housing benefit, the single person room model just doesn’t seem to work with tenants claiming benefits.
Let me show you the difference on 2 properties we own that are opposite each other on the same street, of exactly the same size and type, but managed by 2 different letting agents. One letting to LHA tenants claiming benefit and the other to working professionals.
Property 1:
Property 2:
The difference between the two properties is stunning!
One agent clearly does a better job than the other [even managing to provide such amazing things as monthly rental statements!], but most of this is down to the fact that single benefits claimants attracted to HMO accommodation appear to have a higher propensity for being in and out of prison, involved with drugs [we took 130 needles out of one we cleared after sacking a terrible agent!] and theft.
These factors mean that other tenants in the building move out a lot more often, creating huge voids and non payment of rent for the tenants who end up in prison.
Of course, the agents involved in both of these models told us up front how much each investment strategy would work, so the question arises, how do you decide which route/letting agent to go with when making the decision on which strategy to follow?
Testing IS the ONLY way…
An early mistake we made investing in property was to rely on what we had been told by people and market participants about expected returns…
We would often find a model that we believed worked, and quickly purchase a large number of units, outlaying capital on
refurbs without first securing the income stream.
These days we frequently try new things, but if we want to try a new model we will often do the following things:
1. Test the market and tenants for the property type as above
2. or buy a few properties at any one time
AND then test the return from the LHA tenant and one with a private tenant with different managing agents.
We will then assess the results after around 6 months and start to move in the direction which seems to be working.
Due diligence is all good, but it can only take you so far: you then need to just jump in at the shallow end, and make sure you watch like a hawk, keeping track of the financials on a monthly basis, with a view to scaling later.
“If you go as far as you can see, you will then see enough to go even farther” — John Wooden
Invest for Freedom, Choice & Profit
Rob Moore & Mark Homer
Co-Founders of the Progressive Companies
Full Time Property Investors
Double Best Selling Property Authors
Over 350 Properties Bought & Sold
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© Progressive Property Education LLP 2011
Comments on How to find profitable tenants »
Testing is KING.
It is all too easy to do something based on what someone with an ulterior motive or a lack of training and education in the field says to you.
This gets confusing, conflicting and their experiences are often different in reality but also different through their perception.
There is always an 'Entrance Fee' of some kind in any business, you have to earn the right, get the knowledge, and work hard enough not to have to work hard.
Test small and walk away if it goes wrong [but you're not damaged], or [gradually] scale up as the results come.
And testing is not something just for the start. Continual testing, reviewing, feeding back and tweaking [Toyota make a million tweaks a year to their production line] will bring you compounded success
Rob
Typos courtesy of lack of ability to type
Test, test, TEST!!!!
Great post guys
Just shows that you can have two assets that are almost exactly the same and they give totally different revenue streams. You must do your homework and test before you jump in with two feet
I found the MLWTS lecture really interesting at the 2012 PPSC. Of course, it's probably right to put a good spin on things when you are making a presentation to 700 people but I'm sure that, despite testing and experience, things must occasionally go wrong. It would be interesting to hear how some of the VIP's doing MLWTS have dealt with the occasional problem tenant.
Living in Blackpool, I've heard many stories involving problem tenants and how 'cool' (in reality, imbecilic is a more accurate description)they are for doing whatever they did to upset a landlord. However, this approach does interest me because of how easy it appears to be. My mother (nicer-than-nice)and step-father (could be tough when he needed to be) were also involved in this business too, and for the vast majority of their time in the business, they ran things well. The occasional bad tenant was dealt with very swiftly, even if it meant losing a deposit or a week's rent. Basically, get rid !!
Another advantage with this method, as opposed to say lease option route (how long a term might you need now to make money at the back-end if property values are slow or non-existent?), is that it offers cashflow during a time when property appreciation might not be a good short/medium term strategy. What say you?