Have you ever worked in an environment where you’ve had a personality clash with someone? Maybe you didn’t see eye to eye with a co-worker or manager, and that led to conflicts and a very stressful working life.
The workplace is so much happier (and more productive) when you get on with the people around you.
And if you’re really lucky, your workmates could well become friends outside of work. You might meet up for dinner together, because you have the same interests, opinions and values.
In other words, these workmates have personalities that are compatible with your personality.
Compatible personalities are important in property investment too
Most property investors have never seriously considered the type of tenant they would like to rent their property to.
But you actually need to give a lot of thought to this part of your property investment strategy, because the tenant quality is going to determine your property investment experience.
If you rent to undesirable tenants that don’t see eye to eye with you, you could spend a lot of time dealing with damage and cash flow problems. Managing that kind of tenant needs extremely good people skills so that the tenancy works out in your favour.
After all, property investment is a medium to long-term exercise. You or a Property Manager will be managing tenants in that property for 10+ years, 24/7. That’s quite a commitment, and like any commitment, you need to be comfortable with it.
Think carefully about what you’re comfortable – and uncomfortable – with
How will you cope over a 5 or 10-year period with repeated rent defaults and damage to your property? Or would you be more comfortable by appointing better quality tenants in a better socioeconomic area?
You’re going to have to make a call as to what you can manage as part of developing your property investment strategy. You should invest a reasonable amount of time in this process.
Think of it as due diligence for your property investment strategy: after all, you’re already doing pre-purchase due-diligence checks such as obtaining a Registered Valuation, Builder’s Report, solicitor’s title checks, and so on. Assessing your own skills and personality profile is just as important.
If you don’t want your properties looking like the ones on the TV2 ‘Renters’ programme, then that is a good starting point.
Do you think you would be comfortable with managing tenant types that appear on the ‘Renters’ programme?
If you can that’s fine, however many people aren’t equipped with the required management skills or extra time for tenants of that type. This is a very important issue for property investors, and you need to be very honest about your own skills and personality type here.
If you’re thick skinned, you may be able to cope with the psychological burden of on-going repairs (following damage), absconding tenants, rent defaults and tenancy tribunal hearings. Even with the appointment of a Property Manager you are going to be involved with these issues.
By figuring out what you don’t want in a tenant, think about the qualities you do want
If you’ve decided that you don’t want to deal with the types of tenants that appear on ‘Renters’, then you need to think about the kind of tenant that you do want to attract.
You may decide that you would like tenants in your properties that are like your own family, friends or work colleagues.
This is the first wake up call, because this tenant profile may not be available in the area you are looking at purchasing in.
Or, to secure that tenant type, you may have to allow for a greater vacant period and more marketing than is typical in your proposed investing area.
Select your target suburb based on the tenant profile you want to attract
When you are establishing your investing rules, start with the tenant profile you want to rent to.
From there, you can establish the areas in your city that attract this tenant profile.
Generally, the desirability of living areas in any city is going to be related to proximity to conveniences, employment, schooling, lack of crime, etc. Those areas may attract people on higher incomes, thus the rents in those areas will be higher than for those in less desirable areas.
How different suburbs will shape your property investment strategy
The suburbs you like will shape your property investment strategy. For example, you may enjoy socialising at the cafes in some of the abundant, leafy suburbs in your city. The tenant types in those areas will also be drawn to the café lifestyle… and this kind of tenant will be very different to the tenant profiles in suburbs where takeaway bars and liquor outlets line the local shopping precinct.
As a long-term investment both locations may perform well in terms of capital growth.
What is very different is the time and cost of management and cost for maintaining the investment. One location will have a much higher time and cost burden over 10 to 20 years: are you comfortable with that? Engaging a Property Manager will not totally remove that time and cost burden.
Remember, property investment is a long-term strategy!
Because property investment is a long-term consideration, you need to be very comfortable and realistic about the type of management you are taking on.
It’s important that your investing journey is enjoyable and manageable; many investors have lost that opportunity because they were exposed to management problems that were beyond their skill level.
Your goal should be to be active in the property market over many property cycles, not to sell up because of a stressful experience. Often, a stressful experience could have been avoided by purchasing in a slightly better area.
Have you crunched ALL the numbers? Are you sure?
Before you announce that you only buy based on the numbers, remember first to determine the tenant type you require for your investment.
The tenant type will always determine your numbers: did you plan for that?
That’s an important concept, because the tenant will determine what your cash flow looks like at the end of each financial year.
That elusive cash flow positive property that you purchased may be negatively geared from day 1 because you exposed yourself to the wrong tenant type. In reality, that property was never going to be cash flow positive because the tenant profile won’t allow it due to damage and continual rent defaults.
Tenant profile and socioeconomic considerations are always going to affect the cash flow of your investment. Make sure you realistically allow for this in your due diligence and buying rules.
You may not be able to choose your work colleagues based on personality types, but with property investment it’s your business as to whom you choose to go on this journey with.
- Decide on what kind of tenant you’d like, based on your personality and your people skills.
- Select a suburb for your property investment that attracts this personality type.
- Invest some time into this process: it’s an important part of your due diligence for your property investment strategy.
- Remember that the tenant type influences the cash flow on an investment property, so be sure to factor in damage and rent defaults if you’re targeting a lesser quality suburb.
- Even if you engage a Property Manager, it won’t shield you from the stress and time it takes to deal with difficult tenants.
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