JF2142: Improving Tenant Renewal Ideas With Brian Davis

Brian started investing before the 2008 crash and at the age of 24 had acquired 13 rental properties and ended up losing quite a bit during the real estate crash of 2008. He goes into how he was able to purchase 13 properties at such a young age and how he was able to recover from his loss and move forward. He shares a great idea of what to ask your tenants to help incentivize them to renew their lease. 

Brian Davis Real Estate Background:

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Best Ever Tweet:

“One way to improve and increase tenant renewal is to think what upgrades will add value to your property while also improving the tenant’s experience in living there” – Brian Davis

TRANSCRIPTS

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice to ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever; we don’t get into any of that fluffy stuff. With us today, Brian Davis. How are you doing, Brian?

Brian Davis: I’m doing great, Joe. Thanks for having me.

Joe Fairless: Well, I’m glad to hear that, and it’s my pleasure. A little bit about Brian – he is the co-founder of sparkrental.com, he’s been a landlord for over 15 years. He and his family tend to travel a whole lot and we’ll talk about that; his company is based near Philadelphia, Pennsylvania. So with that being said, Brian, you want to get the Best Ever listeners a little bit more about your background and your current focus?

Brian Davis: Sure. So I got interested in financial independence with real estate from when I graduated college onward. I graduated college in 2003, so a little while ago now, and I was working for a mortgage lender, and specifically, I started doing hard money loans for them, for real estate investors; and this of course, during the bubble in the mid-2000s, and I started thinking to myself, “These guys are all making passive income from real estate. Why couldn’t I do this? Why can’t I invest in rental properties?” So I went on, bought a whole bunch of rental properties and overspent, and then lost a bunch of money when the bubble burst.

Joe Fairless: You and a lot of other people.

Brian Davis: Yeah, I got overzealous with it as a 20-something. I didn’t really know what I was doing, but I came out of that with a lot of lessons, many of them, learned the hard way, and I started working for a company that provided legal forms for landlords online. I was with them for a long time, and then–

Joe Fairless: What company?

Brian Davis: EZ Landlord Forms is the company that I was working for. So I managed EZ Landlord Forms for about eight years, and then in 2015, my wife and I decided that we wanted to move abroad. Now I was telecommuting when I was working with EZ Landlord Forms. So I figured it’d be no big deal to move abroad. My wife is an international school counselor, so we moved to Abu Dhabi. And right after moving, things just went downhill between me and EZ Landlord Forms. So I left and I talked to a former colleague of mine, [unintelligible [00:05:02].12] and we decided to split off and create our own company, Spark Rental, which focuses on helping everyday people build passive income from rental properties on the side of their full-time job with the idea of eventually building enough to be able to pay their bills and reach financial independence. So we do a bunch of different things on that behalf.

We do a lot of education, we have online courses about financial independence from real estate, we have online property management software that we feel is the best in the industry, or at least is about to be; that’s a long story in itself, which we can get into later maybe. So that’s a quick background on me and where I’m coming from.

Joe Fairless: So let’s talk about Spark Rental, and then let’s also talk about your 20’s, because there’ll be some interesting things to learn there. So we’ll focus more on Spark Rental but first, would love to learn more about how big was your portfolio and how much money did you lose?

Brian Davis: So my portfolio at the time of the bubble bursting was 13 properties. These were single-family homes in Baltimore City and they were largely in not very good areas in Baltimore City, and that’s one of the many lessons that I came out of that with, is just how the numbers on paper, especially in lower-end neighborhoods, don’t necessarily reflect the reality of what you’ll earn… Because particularly lower-end areas have some hidden costs that just don’t show up in your average cashflow analysis. So things like vandalism and crime, and even though in a normal cash flow analysis, people look heavily at vacancy rate, I think it’s very easy to underestimate vacancy rate, particularly in tough neighborhoods… And you end up underestimating the turnover and evictions and the costs associated with those turnovers and evictions.

So one of the things that Danny and I are really big on educating new rental investors about is how most of the expenses and most of the labor involved in owning and managing rental properties comes during turnovers. So a focus of ours is minimizing those turnovers, and especially in some areas– I’m generalizing a little bit here with lower-end areas, but there can be a combative relationship between landlords and tenants, and sometimes tenants will damage the property out of spite. I’ve had that happen many, many times in the midst of a very combative eviction.

Joe Fairless: Why don’t they like you? Why do all of them try to trash the place? What are you doing to these people?

Brian Davis: You’re just trying to collect the rent, but I’ve had a lot of professional tenants over the years, all of which has really turned me off of some of the lowest end real estate. Now granted, this was ultimately my fault for thinking that I was smarter than everyone else out there when I was 24 and going in and finding these great cap rates, and these deals that look fantastic on paper, not really understanding some of the hidden costs that come with these properties.

Joe Fairless: How did you get 13 properties as a 24-year-old?

Brian Davis: Well, it was over the course of a few years. It wasn’t all when I was 24, but it helps that I worked for a mortgage lender. So I had relatively easy access to capital, and I was living in a very and extremely affordable home. I had a pretty low-cost lifestyle, and that’s actually something that I still try to maintain to this day; I still do maintain to this day, is a very high savings rate. So I was making reasonably good money, but not spending a whole lot on my lifestyle. So I was able to funnel a lot of money into real estate investments.

Joe Fairless: So let’s talk about Spark Rental, because one thing you said about the lower-income areas that resonated with me is the cost of turnovers, and you said that your focus or one of the areas of focus is to minimize the amount of turnover that takes place at a property, and you said one thing that you do with Spark Rental was education. So what are some tips that you have for minimizing the amount of turnover that we have at our properties? Whether it’s– I don’t know if your tips are lower-income specific or if it’s just in general, but however you want to approach that question, I would love to hear your thoughts.

Brian Davis: Sure. Some of it is just about building a relationship with your tenants, and it doesn’t mean necessarily a personal relationship, and you don’t have to go out and friend them on Facebook and I don’t recommend that you do, but having a very courteous and kind and professional relationship with them. So things like we urge our students to just keep a very brief file on each of their tenants so that they can pull up whenever they pick up the phone to call them, and things like their children’s names, maybe you have their hobbies or what they do for a living, just so that even if it’s just 30 seconds of small talk when you first pick up the phone and call a tenant, “How is your son Bobby doing? Is he still playing baseball?” whatever it is, just to send the message that you consider them a human being and not just a source of a paycheck, and there’s a lot of things you can do to keep that relationship.

One of the things that we recommend is that landlords are extremely responsive. Even if you can’t make a maintenance request right away, for example, the important thing for your tenants is to stay in close communication with them so that they don’t feel like they’re being ignored, so that they don’t feel like you’re an absentee landlord who hasn’t heard them or haven’t gotten the message that there is a leak in the property or whatever it is… But just say, “Hey, I got your message. I’m sending someone over as quickly as possible. It may not be until tomorrow, but I am on top of it and I will stay in close contact with you.” So responsiveness goes a long way with building that relationship with your tenants and that trust.

We also recommend that landlords find incentives to extend their leases as long as possible with their good tenants. Now obviously, every landlord has some tenants that are not as good and you probably want to replace them when it’s convenient to do so and when you’re not going to end up in an eviction scenario, but just building those relationships, incentivizing your lease renewals and sending holiday cards, whatever you can do to build, that trust that professional relationship between yourself and your tenants.

Joe Fairless: What are some examples that you implement to incentivize the resident to extend their lease?

Brian Davis: One idea that landlords can do is they can offer to lock in either today’s rent amount or they can offer a less steep rent increase for renters who renew for a longer term, such as two years or even longer, or added flexibility. Sometimes what tenants really want is a month-to-month lease, and it’s the difference between them either exiting right now or staying with you on a month-to-month basis. So some of it is just about feeling out what is most important to that particular tenant. In some cases, it’s about repairs and upgrades to the property. So landlords can approach their tenants and say, “Hey, I can’t make any promises, but if you could wave a magic wand and have three repairs or upgrades made to the property that would really make you want to stay here, what would those three things be?” And then you can look at those upgrade ideas and pick one or two or whatever that will actually increase the value of your property, increase the market rent for your property and incentivize your tenant to renew longer.

Joe Fairless: What has been something that’s been– they’ve had that magic wand and they’ve waived it and then you reviewed? What’s something that you’ve done?

Brian Davis: Well, let’s see. One time, I actually put in central air for a tenant which– that was not a minor one, but I felt that the neighborhood was up and coming and the expense was justified. So I did end up pulling the trigger on that. But it could be anything from replacing the carpets which, in many cases, you’d have to do anyway if that tenant left, to painting to upgrading the kitchen or bathroom.

Joe Fairless: So replacing carpet, painting, upgrading the kitchen or the bathroom or just installing central air.

Brian Davis: It depends on the property and the neighborhood and the tenant. What makes sense for that property, what’s an upgrade that will add value to the property that will boost the market rents even if this tenant were to leave six months or a year later? So you just have to take it case by case with each tenant and each property.

Joe Fairless: Are the three main components of Spark Rental education, courses and property manager software?

Brian Davis: Yes, those are our main components.

Joe Fairless: What’s an example or course that you’ve got?

Brian Davis: Our flagship course is our Fire From Real Estate program. It’s all about reaching financial independence and retiring early with rental properties. So in that, we’ve had three main focuses. The first focus is on maximizing your savings rate, because if you spend every penny that you earn, then you don’t have any money to invest with. So whether you use real estate as your vehicle for reaching financial independence or something else, like index funds or dividend-paying stocks or whatever, your savings rate matters because that is what enables you to invest money in any income-producing asset. So that first section focuses on savings rate and areas where you can boost that. The second section is all about real estate investing and particularly investing in rental properties that generate maximum passive income or semi-passive income because rental properties aren’t 100% passive, as you know.

Joe Fairless: Sure.

Brian Davis: But yeah, so that second section is all about rental investing, property management and that side of the business, and then the third and final section is about preparing to take that leap to pull away from your full-time job if you’re ready to do so, to pull that trigger.

Joe Fairless: On maximizing your savings rate, identifying areas to save, what are some tips you have there?

Brian Davis: Well, if you look at government data from the Bureau of Labor, the three things that Americans spend the most money on are housing, transportation, and food, and those make up between two thirds and three quarters of the average American household, usually around 70% of the American household spending.

Joe Fairless: What percent?

Brian Davis: It’s around 70%; it fluctuates between around two thirds and three quarters of the average Americans’ household spending each year. So those three things offer the greatest room for maximizing your savings rate; the greatest opportunity for savings. So we focus first and foremost on saving money on housing. We get into house hacking and all of the many different ways that you can house hack. So for example, I’ve had housemates before when I was a young professional living downtown. I bought a house and rented out rooms housemates to cover the majority of my mortgage. Now, my wife and I live overseas and her employer actually provides us with free furnished housing. So that’s one way of getting free housing. My business partner Danny, she actually house-hacks with a foreign exchange student. So she has a Chinese high school student who lives with her and the placement service pays her a monthly stipend that covers most of her mortgage payment, and she’s done things like renting out storage space before, but you can do the traditional house hack of buying a small multifamily and renting out the other units. There are many different ways to house hack and not all of them are appropriate for all people, but the idea is to get creative with your housing and find a way to have someone else pay for it.

Joe Fairless: I love how you took the approach of hey, here’s what the Bureau of Labor statistics says we spend most of our money on, and those are obviously the main ways to take a look at to see if you can save money. So that’s housing. What about food? Make your lunch?

Brian Davis: Well, yes. It sounds simple and it is simple, but food that you make yourself costs a tiny fraction of food that you pay someone else to prepare for you. So if you make your own lunch every day, you’re looking at a cost of usually in between $1 and $2 or $3.50 or whatever cost to make your own lunch and bring it to work with you versus paying $7 to $15 to go out to even a cheap restaurant near your office; even if you go to Subway or whatever, you’re still probably going to spend $7, $8, $9, $10 dollars. So yes, you can save a massive amount of money by making your own food, and that goes for every single meal of the day. So we urge people to classify meals out or even meals in that you order like delivery or whatever. Any meal that you don’t prepare yourself, that should be classified as an entertainment expense. And there’s nothing wrong with that; I love dinners out as much as the next guy, but it falls under our entertainment budget. We don’t try to sugarcoat it in our budget by calling it food because food is necessary. Going out to a fancy restaurant is not necessary; it’s entertainment. So making every single meal or at least the overwhelming majority of your meals, breakfast, lunch and dinner, is an easy way to save on food and there’s a lot of other things you can do with that to get a little bit more creative.

My wife and I make enough dinner each night to have leftovers the next day for lunch. So I just take that with me for lunch the next day. One favorite thing that we’ve done before is we have Tupperware exchanges with friends where each person will make a big batch of food. For example, a huge batch of lasagna or some other meal that it saves well in Tupperware, and then you get together and you exchange all those Tupperware so that you don’t have six nights worth of lasagna for dinner in a week, you have one of five or six different things that you can just exchange with other people, and you can freeze whatever your don’t eat and get creative with it like that, and that saves time, too. You have one big batch that you cook, and then you have meals for the entire week.

Joe Fairless: Keeps it fresh too, because everyone’s got their own cooking style and you can taste different stuff.

Brian Davis: Exactly, and get some ideas for new recipes of your own.

Joe Fairless: Taking a step back, based on your experience, what’s your best real estate investing advice ever?

Brian Davis: One of the main things that we focus on first, at least with new investors, is learning how to accurately forecast cash flow for any rental property; because if you get that wrong, then you open yourself up to negative cashflow, bad investments and a lot of lost money. So we actually make it a free tool on our website. We have a very detailed rental cash flow calculator that’s available for anybody to use; no login required, no email submission required. It’s just there on the website for anyone to use, because that is such an important thing, maybe to me in particular, because I got that so wrong when I first started investing. So we focus heavily on accurate cash flow forecasting, because if you get that right, then you’ll never make a bad real estate investment in your life again. You’ll always know the returns, at least the yield, that you’ll earn on a property before you buy it. So if I were to pick one thing, that would be my one thing. I can go on, but–

Joe Fairless: No, it’s good. Thank you. I know you said you had 13 properties in Baltimore City and they weren’t in good areas and you learned a lot of lessons as a result of what happened. How much money did you lose would you estimate?

Brian Davis: That’s a figure that I never went and calculated exactly–

Joe Fairless: Too painful.

Brian Davis: –because I didn’t want to know, but I would guess that I lost in the $150,000 to $200,000 range from that round of properties.

Joe Fairless: Psychologically, if someone is experiencing something like that, you’ve been through it, you’ve come out the other side, what advice would you give that person who is, say, in the middle of it?

Brian Davis: Well, first thing I would say is that all things come to an end; it’s going to be painful in the short term, but you’ll come out of it okay ultimately, and the most important thing is to learn from those lessons. That person just learned a very expensive lesson, it would be a shame to let that lesson go to waste; it’s tuition that you’ve paid for education. So in my case, I went on and I continued buying properties, of course, but I could have felt burned by real estate and said, “I’m never going to touch real estate again,” but that would have wasted on all those hard-earned lessons that I had learned. So I would urge people to consider it the cost of tuition. They will never make those same mistakes again because they got burned so badly. So they will be a much more conscientious investor moving forward.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever lightning round?

Brian Davis: I’m ready.

Break [00:22:13]:05] to [00:22:56]:04]

Joe Fairless: What’s the best ever book you’ve recently read?

Brian Davis: The best ever book that I’ve recently read– this is a business book, not a real estate book, but it’s Traction by Gino Wickman, and it’s all about systematizing your business so that it becomes less dependent on any one person, including you, and something you can scale and you can automate without having the business collapse if one person pulls away or it doesn’t require you to work 80 hours a week for that business to function and succeed. So Traction by Gino Wickman.

Joe Fairless: What is the best ever deal you’ve done?

Brian Davis: Best ever deal I’ve done. This was a property that I bought originally to live in, and I bought it to eventually keep as a rental. This was in Fell’s Point in Baltimore, and it was an estate sale. There was one block from the harbor in the Marina. It had a rooftop deck overlooking this beautiful Marina with yachts. So I bought that for $150,000 and I – it’s a separate story – ended up putting a hot tub on the rooftop deck just for fun… And then we moved out and we rented that property for $2,400 a month in rent, and eventually, we sold it in the mid two-hundreds a couple of years later. It just ended up being more hassle than it was worth keeping with us being overseas, but it was fine. I had a lot of fun living there and then I went on to earn some good money on cash flow on it.

Joe Fairless: Best ever way you like to give back to the community.

Brian Davis: Free education is one thing. So we recently did a free webinar with no sales pitch at the end. It was just pure education that was about the impact of the coronavirus pandemic on real estate investors, which is something that people kept asking us about and were desperate for more information about. So we did a two hour completely free webinar with no sales pitch whatsoever, and we got an incredible feedback from it of people just thanking us for spending all the time to put that together. But we have an extremely comprehensive blog with hundreds and hundreds of free articles; all of them very long.

So when I give money, I give it to libraries. I’m very big on the free transmission of knowledge, free education and particularly, in a human-driven way; and the internet is wonderful, but it’s no substitute for getting knowledge from a fellow human being.

Joe Fairless: This isn’t something I usually ask, but I know based off of our conversation before we started recording, you’re in Brazil. So do you typically travel, and if so, how are you able to do that?

Brian Davis: Sure. We try to hit around ten countries a year; we do a lot of traveling. This particular year is different because of the coronavirus pandemic, and because my wife is pregnant, so we can’t travel as much as we normally do. But there are so many ways to travel inexpensively beyond just staying at Airbnbs and trying to eat at locals’ restaurants. We use tools like Skyscanner to find inexpensive locations to fly to places that we never would have considered otherwise. So a quick example, we were living in Abu Dhabi for a few years and we just pulled up Skyscanner and said, “Alright. What are the cheapest flights from Abu Dhabi to anywhere in the world?” and then one of the cheapest ones that popped up was Bulgaria, and my wife and I looked each other and we said, “Well, what’s in Bulgaria?” We looked it up and we were like, “Oh, this is intriguing. Let’s go.” So we got round trip, nonstop flights for something like $150 a piece, and had an amazing week-long vacation in Bulgaria that, to this day, it generated a love for us for Eastern Europe, and we actually want to move to Eastern Europe at some point, that’s how much we love it.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Brian Davis: Connect with us either on our website, sparkrental.com, there are contact forms all over the site; they come directly to me or my partner or our immediate staff members, most of whom are either friends or family. We have very much a family business here. You can also connect with us through social media. We have a huge presence on Facebook. We actually have the largest Facebook group for landlords, with 30,000+ members and investors on there. But Spark Rental on Facebook, @sparkrental on Twitter, @sparkrental on Instagram or through our website, sparkrental.com.

Joe Fairless: I notice the pattern there… [laughter] Thank you for being on the show talking about the deals that did not go right and talking about what you’re currently focused on and how you’ve evolved from learning those lessons while you were in your 20s, and now what you’ve created with Spark Rental, and the lowering turnovers parts. Some very tactical things that we can do. Just be a human being with the resident, get to know them, hobbies, kids’ names, etc. Not to have a fireside chat with them, but just to make sure that they understand that we’re all in this together and that you care about them at some level, and then be extremely responsive and then give incentives to extend leases, and you talked about the magic wand and you said that you should always put a central AC in every unit regardless if that makes financial sense and I have to applaud you for that. [laughter] So thank you for being on the show; I enjoyed it. I hope you have a best ever day and we’ll talk to you again soon.

Brian Davis: Joe, thank you so much for having me.

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