Real Estate Investing, with Tony John

I previously explained how the quality of your tenant can affect your property value. This happens when a valuer (and presumably, the market), can see that you have a better, more secure, more reliable tenant, and decides that the property is worth paying more for. People will pay more to get a lower risk. That’s why we have a different capitalization rates in different areas.

Why do we care about this? Because a higher valuation gives you greater equity, which makes it easier to buy your next property. I keep drumming that in, because it’s so important to keep remembering why we care about this.

But you know what? Tenant quality is even more important than that. There are intangible benefits to having a good tenant. These benefits may not be reflected in a valuation report. They may not affect the value of your property to the outside world. But they sure make a difference to your life.

I’ve had two commercial properties with struggling tenants. Both of them fell behind in their rent payments.

On a human level, these stories are very sad. Nobody wants to fall behind in their payments. These tenants are not bums, they are trying to be responsible members of the business community. They bought the business with high hopes of making good money. But now they are making a loss, for whatever reason. When you meet them, you can see the signs of stress and shame in their face.

At a business level, the situation is a disaster that can not be allowed to continue. I rely on their rents to pay interest to the bank. If they don’t pay, I risk becoming the same as them, unable to meet my financial obligations to the bank.

Both times, I found myself worrying. Worrying whether they would pay rent. Worrying whether I could pay my interest bill. Worrying if I would need to find a new tenant, and whether I could afford an empty building. A struggling tenant affected my peace-of-mind.

In the end, both tenants ended up selling their businesses, and moving on in life. One paid me back completely what he owed, the other paid me back 30 cents in the dollar.

Luckily, the new owners of both businesses are thriving. The new tenants have never missed a rent payment, are profitable, and are happy.

The benefit to me is that I know that I will be paid each month. I don’t lie awake, wondering what will happen if they don’t pay rent. This is a huge benefit to me. Having a tenant that you worry about is a real drain, mentally. Replacing a struggling tenant with a good operator, who you can rely on, makes a big difference to the quality of your life.

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Some people wonder what I do all day, as a real estate investor. Heck, even my own dear mother has trouble understanding what I do. I think it was easier for her when I had a simple job which everyone understands, so she could just say “my son is an engineer“, rather than “my son spends most of his time at home either looking after his daughter or doing real estate investing stuff.”

So what do I do each day? I find that with real estate, once you have a few properties, they each generate some ongoing work. The amount of work is usually fairly small and steady, but occasionally there will be a spike of work if a particular property has ‘issues’.

Let’s take yesterday.

I had to deal briefly with five properties.

1. I had a tenant whose airconditioner got fried by a recent power strike. He wanted me to authorise a repair. For most properties, I use a property manager for this stuff. But as an experiment, I’ve been managing this property myself, so I can weigh up the benefits of a property manager.

2. I arranged to meet with a business partner about a block we want to subdivide. This subdivision is proving to be difficult, and we need to get a plan for hurrying it up.

3. There’s another property we’re getting a new lease drawn up for. I had to check the progress with my lawyer.

4. Another property hadn’t paid as much rent as I expected. I had to call the manager and find out why.

5. I met with another business partner about a block of sheds we are planning to build.

Some of this work is planned in advance, and other pieces are not planned, but are instead a reaction to some event such as a phone call. The first four pieces of work were generated by existing properties. The final piece was working on my next real estate investment. I like to have something in the pipeline.

This is a reasonably typical day for me. All up, it was about half a day’s work. This is about as much as I like to work, because I like having time to do other stuff, including this blog.

None of the work is hard, complicated, or breathtakingly exciting. It’s not rocket science or brain surgery. It’s not even glamorous - people don’t crowd around me at parties when they discover what I do. But each activity is necessary to keep the portfolio ticking along, and growing. It’s not the minute-to-minute actions which are exciting - there’s nothing exciting about any particular letter, fax, email, or phone call. Some people even suggest that what I’m doing must be pretty boring.

But it’s the overall game which is exciting. I love building a portfolio, and I love the lifestyle that goes with it. This is what makes each phone call worthwhile. I love looking at spreadsheets, showing me how much my properties are worth, and how much money they give me each month. Growing these numbers over time is a game I love to play.

Then tomorrow, in the middle of the week, when most people I know are going to work, I’m taking the morning off with my business partner. We’ll go flying my plane, then talk about life, the universe, and future deals. Real Estate Investing has given me this flexibility. It would be extremely difficult to go back to a regular job now.

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