The best way to maintain your assets
Let me ask you a question. Is a rental house an asset, or a liability?
I ask this question a lot and most of the time people say a rental house is an asset. When I ask them why, they kind of shrug and say that they just assume that it is. Well, for us to decide one way or the other, we need to know the difference between an asset and a liability.
If you do a quick Google search to define assets, definitions will appear that say something like “An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.” (Whatever that means) And then if you google liability, it’ll say that it’s anything a person or business owes — I.E. a debt that must be repaid.
So with those definitions in mind, people classify jewelry, boats, art, stocks and just about anything else that costs a lot as an asset. But that whole idea of ‘expectation of future benefit’ throws me because things that may have value today, could be worth far less than what you paid for them tomorrow — especially if the item is something that doesn’t produce cashflow and you’re only counting on its equity. Ask anyone who has had stocks crash or bought a house right before 2008. Equity can change dramatically overnight.
I always like the definitions that my buddy Kerry Milligan taught his two daughters. Periodically Kerry would ask them to recount what assets and liabilities were in front of a group of real estate investors. They would sheepishly say, “An asset is something that puts money in your pocket while a liability is something that takes money out of your pocket.”
And those definitions make total sense to me.
So thinking about it that way, is a rental property an asset or a liability? The answer is it depends.
If you have a great tenant in place that takes good care of the house, pays on time, is comfortable to work with and is a good neighbor, then your rental house appears to be an asset. But what happens if you have a terrible tenant who tears up the house, doesn’t pay and does it during the middle of covid shutdowns and you can’t get them out? That takes lots of money out of your pocket, doesn’t it?
But that was an extreme case. What about when you have tenant turnover and your house is sitting vacant? Even then you must pay taxes, insurance and other holding costs like utilities and yard maintenance while you find a new tenant. So while the house is by itself, i.e. vacant, money is leaving your pocket to pay those bills which makes the house a liability.
So that begs the question, if the rental house itself is a liability, then what is the asset?
The tenant is. They are the ones putting money in your pocket — not the house.
And once you realize that fact and start viewing your tenants as your assets, you will spend a lot more time making sure you put good ones in place. This will require you to put some thought into how you handle your application process.
But once you get a great tenant in place, how do you go about maintaining them? In other words, what makes them stay?
At our company our tenants stay for an average of four years, with our longest tenancy to date being ten years. We really do have good people. They take care of our houses, pay on time, are comfortable to work with and are good neighbors. And we repay them by giving them a great place to live and superior customer service.
But that is not all we do. We make them feel valued.
For instance, when someone has a baby we show up with food from David Burton. When someone has been in the hospital, we show up with groceries. When someone has a graduation, we call and send our personal congratulation. We do that because that is what good neighbors do. And little things like that make our people see that we value them which endears them to us.
I want you to remember that real estate is a people business, not a house business. It is people who buy the house, who rent the house and who live in the house. Without the people, the houses are nothing more than a money pit. And as we’ve seen above, that makes them liabilities.
So, stop focusing on the houses and start focusing on the asset. Get out there and let your tenants know you appreciate them in whatever way works for you. I’ve known landlords to buy turkeys and distribute them door to door during Thanksgiving and others who send gifts at other holidays. In whichever way works for you, make sure your people see that you value them, because that’s the best way to maintain your assets.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.