If $5,000,000 Flows Through Your Hands, How Much Do YOU Keep?
By David Tilney
I knew a commercial real estate developer who once bragged to me that $5,000,000 flowed through his hands each year. Pat had the cars, the McMansion, and wore the custom tailored clothes of success. I asked him how much of the $5,000,000 he got to keep. Evidently not much, since he moved back to Texas several years later after losing his house to foreclosure.
A lifetime ago I worked in the insurance industry where I learned that there are only two things that can provide an income stream: man at work or capital at work. I liked the idea of capital working for me and I knew from reading George Clason’s book, The Richest Man in Babylon, that I needed to save from my earnings to create capital. The problem was that I was a consumer and it was difficult for me to put aside any great amount of money at the end of each month. I realized that I must either eat dog food when I was young (save for the future) or be forced to eat it when I became old (because I would be broke). I needed a “forced” savings plan that also allowed me to have the satisfaction of buying things. Leveraged single-family houses provided for both of these needs.
Certainly leveraged houses aren’t the only way to create capital, but for me it was the way I was forced to invest monthly by paying down mortgage debt instead of consuming all of my cash flow. I started buying property while I still had my “day job” and transitioned by creating various income streams to support myself full time. I sold real estate, ran a good-sized note portfolio for a friend living in Hong Kong, sold software and managed rental property for investors. I also enjoyed sales negotiation, but did not like the inefficient use of my time. I found that property management provided steady monthly income and allowed me to cover the overhead I thought I needed to manage my own properties.
As years passed my net rental income improved to the point that I decided I no longer wanted to manage properties for others as their agent. I started “master leasing” properties from owners and sub-leasing to occupants in 1984. Later I cancelled every agency agreement and offered to master lease and sub-lease the properties that I formerly managed. All of our owners agreed to the new business relationship. I gained the decision-making control and the time management that I wanted, while the owners reduced their liability exposure with the occupants and OUR NET INCOME INCREASED. I reduced my overhead and sub-leased properties to other managers who handled our bookkeeping and the day-to-day tenant issues. In my sandwich position I could fine tune our business systems, mentor the other managers and free up my day-to-day involvement. It was like I was the conductor of the band. This is still one of the business models we use today. My company also leases properties from owners and sub-leases directly to occupants. I really do enjoy managing houses and this allows me to have a ‘laboratory’ where I can continually try new approaches to maximize bottom line rental income and increase efficiency.
The name of our company, Keyper Corporation, was created from the words “key persons.” We understand that our success is only possible because of the wonderful owners, vendors, lenders and TENANTS that do business with us. My wife and I feel very blessed. How many people can say that they love their occupation and that almost all of their business interactions are positive? Our tenants are our greatest assets and we try hard to make them feel like they are an important and integral part of our team. We share our expectations with them during the lease-up and give them support so that they can be successful. Our residents are responsible for maintaining and improving the house and grounds and they must pay the rent on time and get along with the neighbors. We screen for occupants who are looking to rent for multiple years since turnover quickly devours net rental income. We had one couple rent from us for almost 25 years, only moving because of major health issues; another couple was with us for eighteen years. Historically, most of our tenants have rented for 5+ years. Our tenants have more discretion in making decisions regarding maintaining the house and grounds than with a traditional landlord - tenant relationship. We find that our bottom line improves and our turnover decreases if residents internalize and make our house ‘their’ home. Rent receivables have rarely been a problem. Currently we transmit a batch ACH (automatic clearing house) file to withdraw all monthly rents directly from our tenants’ bank accounts and deposit them into the escrow account at our bank. This procedure saves us hours of work each month and allows us to collect rent from almost anywhere in the world.
In the early 80s we had our only eviction. Since that time we have taken the position that if tenants fail in adhering to the terms and conditions of their rental contract it is not their fault. It is our fault for “hiring” the wrong applicant for the “job.” This change in our attitude has helped us tighten up our screening procedures and forced us to get better at sharing expectations with all new tenants.
In 1991 I wrote a seminar originally titled, The Who, What, Where, When, Why & How of Property Management. That seminar evolved into Hassle Free Property Management, a seminar we have been presenting and updating for over 25 years. This seminar provides a complete system, which landlords can implement to manage single-family houses. The current seminar material is over 250 pages and includes all of the forms and procedures that my wife and I use in our business.
In 2007 I wrote my second seminar, Master Leasing. Housing prices were at an all time high at the time and many found they didn’t have the capital to get into the game (my kids included). More importantly, people NEEDED IMMEDIATE INCOME. They couldn’t wait 25 or 30 years for their loans to pay off. Many “flippers” are in that position today. Their markets have dried up because of competition and because there are not always people available to buy the properties they have for sale. Master leasing is recession proof and can work in any location. Many have implemented the techniques I teach at my seminar. Jan Leasure in Monterey CA, DeWayne Talley in Bonita Springs FL and Matt Fonk in Tampa FL are three that I know have successfully built monthly income streams using master leasing. My daughter and son-in-law, Erin & Kurt Eilmes, support their family of five by master leasing 90+ single-family houses. This number gives them the income to maintain their lifestyle and the time to spend with their young children. Master leasing can allow you to ‘test drive’ properties prior to acquisition. It can create positive cash flow from a negative cash flow property. Best of all it provides immediate income in a market where there is NO COMPETITION!
© David Tilney, 2009 (reprinted with permission)
www.DavidTilney.com
David Tilney graduated with a degree in psychology from the University of Denver in 1973 and has been managing single-family houses in Colorado Springs, CO since 1978. He has spent 40 years developing a unique system of property management, which enables him to operate from any location without paid employees. David teaches this system at his HASSLE FREE PROPERTY MANAGEMENT seminars; he also teaches a seminar on MASTER LEASING. David lives with his wife, Mary, in Naples FL for eight months of the year and divides the rest of his time between Colorado Springs and traveling.