The ‘Lowest Of All’ Real Estate Tactic

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

March 2004 

Many friends and clients of your humble author own real estate overseas such as the USA, Canada etc, and most such assets are rental investment properties, be they residential, office, or retail. Some have had / are having problems with their tenants, especially those ‘professional’ ones whose intent is to reside / use the premises for free making use of loopholes in the law. Your author harbors no perfect solutions, yet based on his own experience and practices to date, the following may help in reducing the chance of meeting or falling for such professional tenants:

a)      Consider using the ‘lowest of all’ tactic = ‘Of all’ here refers to the pool of competing properties and is not meant to cover the whole market or city, and the trick is to make sure whatever asking rents one is seeking is the lowest among the comparable real estate listings. In all likelihood, not only would the landlord attract most if not all the prospective tenants (and thus offers), there is even a chance for multiple bids that the final rent may exceed the asking one. Further, this works not only in good times but also in bad times, and the landlord may not actually be incurring a loss as the property concerned get rented out sooner with as little vacant time in between leases as possible.

b)      But insist on doing a credit check = this is a common practice in many overseas markets and prospective tenants who have nothing to hide are unlikely to mind (people who do are probably not very good tenants anyway). While this does not guarantee a stable rent-paying tenant, it does reduce the chance of having one tremendously.

c)      Budget for wear and tear and essential repairs / renovations / minor works = these are inescapable items and the only way to avoid them is NOT to become a landlord. For instance, using a residential unit as example, repainting every 2-3 years, or changing the broadloom every 4-5 years etc, are not unreasonable expectations. Even the best tenants would incur some normal wear and tear for the landlord.

d)      Hire a couple of good competent real estate agents to work for you and pay them well = the key words here are ‘competent agents’ and ‘pay them well’. Avoid being a miser scheming dimes and cents out of the agency / brokerage fee as good competent real estate agents can help you reduce the vacancy rate via introducing their best prospects to your properties first.

e)      Treat the properties as ‘assets’, not as ‘homes’ (that you like or may reside in yourself later) = because the latter would cloud the issues for you. As landlord and investor, one should only concentrate on generating the best possible revenues, in both rents and capital appreciation terms, from the properties.

f)        Have a sense of the revenue / return mix = for instance, what proportion of the return on investment is obtained via rental income and what portion is realized via capital / price appreciation. Also, pay some attention to the currency exchange rates as one can win on the capital / price appreciation side while losing money on the currency exchange side.

The above are not some sophisticated theories, just common sense via experience.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

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