As real estate investors and rental property owners, are tenants our customers? Seems like an obvious question with an obvious ‘yes’ answer, but when we look at it from a different perspective we get a different answer. In this special 200th episode of Racking Up Rentals, Jeff explains why he does NOT see tenants as customers, and instead sees them in a different role. This change of perspective reframes entirely how we see the business of building a rental portfolio.
Let me ask you a question our tenants customers might seem like a silly question might seem like it has an obvious answer most people would say, yes, but in this special 200th episode of racking up rentals, we’re going to talk about why maybe it would be helpful to frame tenants as being something other than customer. So Let’s cue up the theme song. We’re gonna jump right in, help me celebrate 200 episodes, and let’s have a thoughtful discussion.
Welcome to Racking Up Rentals, a show about how regular people, those of us without huge war chest of capital or insider connections, can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans, nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to. You see, we are people-oriented deal makers, we sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media, this show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.
Thank you very much for joining me for another episode of Racking Up Rentals. Show notes for this episode can be found at www.thoughtfulre.com/e200. Please do us a big favor by hitting that subscribe button in your podcast app, it does make a big difference in helping other fellow thoughtful real estate entrepreneurs who are searching for a community in a message like this to find it. Alright, so onward with today’s episode.
And in today’s episode, I want to talk with you about a conversation that I think is really interesting, but I promise it’s more than just interesting. I think it’s actually also useful. Now, I will say you’ve already seen the title of this podcast episode, you know, the premise, this is why I don’t think of tenants as customers. Now I want to make two important disclaimers. Just because we’re going to talk about tenants not being customers per se does not mean that tenants aren’t valuable stakeholders in the bigger picture of what we’re doing and doesn’t mean that we don’t need to care greatly about doing right by them and keeping them happy and and treating them like people and appreciating that this is their home we’re talking about. So it’s not at all about that. But it’s about reframing them a little bit.
That’s the first disclaimer. And the second one is that you don’t have to agree with me if I was typing this out right now I’d put a little smiley emoji right there because you don’t have to agree with me. I don’t I don’t think that we need to pretend that there’s a right way of looking at things in a wrong way of looking at things. I think there are different ways of looking at things. I’m gonna tell you how I’ve chosen to look at it. And my hope, as always is the case is that it might provide you some food for thought that helps you walk around the topic and see it from a different perspective so that you can decide ultimately, the philosophy and the perspective that you want to adopt.
So with those disclaimers out of the way, let’s let’s jump into talking about why I think that tenants are not necessarily customers. So the first question you might ask is like, Well, dude, who cares about the label? Why does that matter? And I would say you’re right, that the label doesn’t matter. But what does matter is what I call the frame, because the frame is sort of the lens through which I mean, if you think about a frame, right, you can only look at what’s what’s through the frame. And if you move the frame around, or if you, you know, you just look at something from a different angle, it tends to look different. So the frame does matter. And because we are thoughtful real estate entrepreneurs, we appreciate the idea of seeing things through a different frame or from a different perspective than sometimes other people tend to, or maybe the frame that’s been presented to us, by default, we tend to be, you know, excited to walk around a little bit and just see if it looks different from a different angle. So the labels don’t matter. But when we reframe it the role that the tenant plays, if we tweak our perspective on the role that the tenant plays, it can tweak our perspective on the game, we think that we are actually playing. And that, to me is where things get interesting.
So why don’t we start there? What is the game that we are actually playing? So I would say, for most real estate investors, they would say, here’s the game I’m playing, I buy a property, because people will pay me to use that property. And that’s how I make money. So yeah, like, of course, tenants are customers, because they’re the people writing the check every month to use my property. And that’s how I make money. And that’s why I bought the property.
So I want to just pause there, let’s, let’s do a little analogy. You know, much I love analogies. I want you to think about an apple tree. And people buy a small apple tree, which is like a rental property. Okay, drawing the drawing and drawing the connections in an analogy. A young apple tree is like a rental property that you just bought. And most people buy a young apple tree and they plant it because they want the apple tree to produce apples. And then they want to sell those apples. And then when they can, because they’re enjoying the profit from selling the apples rate, this is kind of a cash flow. They then take that profit and they say I want more apples to sell, what do I need to do? I need to buy myself another small apple tree. And so they buy another small apple tree. And over time, they think my gosh, I’ve I’ve had these apple trees for a long time. And now I’ve got several of them. And I’ll tell you what, we’ve sold a lot of apples, and we’ve made a lot of money as a result. But me, I see I see it a little bit differently. I love to buy young apple trees as well. But I buy a young apple tree and then I buy another one but I’m not buying it because I want to sell apples. I’m buying it because I eventually want to own a mature orchard.
Okay, let’s stop and think about this. Owning a mature orchard, an orchard full of mature apple trees. There’s there’s one major ingredient that goes into that. And that is time you know, I’m sure any anybody knows that they planted a tree you don’t plant a tree. And doesn’t matter how much love you give it or encouraging words are fertilizer. It just takes time to grow a tree. So time becomes the most important ingredient. We can’t rush it I mean, sure, maybe we can give it good, good environmental, the right water and stuff like that. That might help a little bit, but it doesn’t, it doesn’t shrink a 20 Year tree growth down into you know, a six month process.
So what is the role of the apple thing because I still have the apple tree as well. I didn’t buy it for the apples. I bought it for the creation of a mature orchard. But what is the role of the apples? Well, the role of the apples is to produce income that allows me to tend to the orchard for all the years it takes to get those trees mature, right. So if you’ve got 20 years to let the apple trees grow, that it takes some maintenance to make that happen, right you got to trim the trees you got to treat them well and you have to water them water’s not free and you’re gonna have to do all these things and clean up the apples that are on the ground and all this kind of stuff. And that’s not free it takes money to maintain the tree. As it grows, it makes it takes money to maintain the whole orchard as the trees in the orchard grow and mature so what what is the role of the apples in the sale of the apples is to provide the funding that makes the orchard sustainable now this is an important word sustainable now in my mixing of metaphors and analogies as I am so want to do.
Sometimes I stumble upon something like this where I’m talking about a sustainable orchard and what I’m Yoon is in an orchard that can survive that long. I’m not talking about environmentally friendly farming techniques, although I’m sure that would be a really good move as well. So it makes the the orchard sustainable over time because we can sell the apples and now we have something that we can pay for the maintenance of the orchard while the real thing happens, the real thing happens is that the tree whose trunk was, you know, two inches in diameter when we planted it now is two feet in diameter 20 years later, because we’ve allowed time to happen, and we’ve had the money to fund the ability to buy that time.
So let’s bring this back to real estate. When I buy a property I am I’m planting a tree. And that tree takes time to grow. Can it produce apples on day one? Yes, absolutely can’t. And I would argue that it should as well. But I am buying it so that it has time to grow. So what does grow mean, in the case of this rental property? Right? Well, it could mean lots of different things. But I would say it’s not any one thing. It’s actually multiple, slow compounding things, those are those that’s three elements, right? There’s multiple of them. So there’s multiple layers there. All of which happen rather slowly. And by themselves is not an enormous thing by itself. But the third element is that they compound so you have lots of small, slow compounding things like for instance, one thing we would typically call appreciation, which is in many cases, as much inflation as it is appreciate appreciation right as as our dollar becomes less has less buying power than that means that the things that we want to trade dollars for we have to trade more of those dollars, that’s as much inflation as it is appreciation. But the the inflating of the purchase price or the value for the property is one of those things inflation like well, we might not think of market appreciation as being all that reliable. Inflation has tended to be pretty, pretty reliable as a general trend over the last 100 years or so that we have things in the category of tax benefits depreciation of the property on the tax returns, which which reduces the amount of tax we pay, by writing off the interest on the loans that we get, which reduces the amount of tax that we have to pay.
Now you might be looking at this and go why wouldn’t buy a rental property just for an interest write off? And the answer is no, you wouldn’t, because that’s just one of many slow and small compounding things that add up over time. How about the amortization of a loan, perhaps the principal pay down when someone else is paying rent for the property, that’s another one of those things that adds up slowly over time, cashflow would be another one of those things that we tend to be very focused on right now. But it’s just one of the many things that all add up and compound over time. And as these things add up and grow over time, it’s like the trunk of the tree getting bigger and bigger and bigger and bigger and turning from a young tree into a mature tree. So that you know, say, say 30 years later, just to use a nice round number, the property has doubled in price doubled in the dollars that a person would have to exchange to get it, it doesn’t have any debt associated with it anymore. Because all that has been paid off largely by somebody else. All along those 30 years, you’ve paid significantly less tax than you would have otherwise, you’ve enjoyed some cash flow, you reinvest in the cash flow, it’s maybe allowed you to buy something else, etc.
But the point remains that we can’t operate property for 30 years and pay down the debt and cover all the expenses of that property without some income, because that’s a monthly significant cost. So what do we do to fund that? We sell the use of the property to other people. The use of the property is like the apples. We sell the use of the property to other people and the people who use the property otherwise known as tenants. The people who use the property are our apple buyers. So the use of the property is the apples and the people who buy the apples. These are the tenants that people using the property.
So if tenants aren’t customers, then what are they? And like we said they’re obviously important to the whole equation. We’re obviously going to treat them well. We’re obviously going to want to keep them happy and all of that good stuff. I like the word users. Users, to me is the best description of what a tenant really is. is and again, they’re very important users, but their users have a property. If you think about Google for a second, Google as a business, you go on Google and you search for something. Are you a customer of Google? Well, from one perspective, you might say that you are. But when you look at it from a business model perspective, and I read a book even kind of talked about this, from a business model perspective, you’re not really as the searcher the customer, who is the customer for Google, the Google customer is advertisers. Advertisers give Google money for access to a lot of eyeballs of the people who are actually doing the searches. So I would say, and this book, articulated this way to that as searchers, we’re actually users of Google, not customers of Google.
Now, I know Google’s got like 80 billion different components to it, including YouTube, and Google Docs, and Gmail, and calendar, and all these other products and nests, and all this other stuff. But we’re just talking about kind of the search concept here. As the searcher, you’re actually part of the product like you, as the user, you are part of the product, you are part of what they’re selling to the advertisers. And I think to some degree, that’s kind of relevant to what we’re talking about as well, our tenants are our users. They are part of the bigger picture, but they are not the end in and of themselves.
So you might be asking yourself, okay, okay, Jeff, who cares? Really? This is all fascinating. But do we really need just another, you know, intellectual exercise to do? And I would say, well, we’re thoughtful real estate entrepreneurs, we do like a good intellectual exercise. But no, there are a couple practical elements to this. And so here’s what I would say about about those. The first thing is considering tenants as users, changes our perspective on what we’re even doing, right, again, just like the orchard thing, like, are we getting trees so that we can sell apples? Or are we selling apples so that we have time for our trees to get bigger, and that’s the real value that we are creating? What are we really doing as we build a rental portfolio, our default perspective that we’ve been taught to have is we’re buying a property because, you know, cash flow is what sets us free from our jobs or whatever creates financial independence. And I think that when we look at it from this perspective, that tenants are users, and that the real game we’re playing is, is growing a mature orchard of rental properties, so to speak. It takes a little bit of the emphasis off of cash flow. Now, I’m never going to coach a client and say, Hey, we should design this deal for probably less cash flow. Or you should buy things that are upside down each month. That’s not what I’m what I’m talking about. But what I am saying is, we do tend to, in my humble experience, have a pretty obsessive and sometimes maniacally singular focus on on cash flow, when cashflow is just one of the many things that leads to the real benefits of owning a rental property and a rental portfolio. That at the end of the day, when you look at your full mature orchard of rental properties, cash flow is only going to be one small section of the overall benefit. That portfolio of mature properties really delivers to you, it’s it’s maybe the most obvious one, it might be the one most top of mind for us. But it’s in the grand scheme.
In my opinion, in my perspective, the just one small slice of the pie of the real benefits we get from having taken the time to plant and cultivate and sustain this orchard over time so that it’s now a whole bunch of big trees, or in other words, great rental properties. The other thing is that it does is it changes our perspective specifically on tenants, of course. And what it means is that now we can start to see that tenants, they tenants have a job to do when I’ve had this conversation before with people who who tended to understand this perspective that I was sharing, you know, they even use the word employees. I remember actually hearing a podcast like way before, you know, like 15 years ago or something where somebody was describing their property management philosophy as having a frame of tenants as employees and at the time that struck me is very interesting. And now I don’t choose to use that word myself. But I do kind of see the merit in that mentality a little bit because they have a job to do. They have a role We have invited them into this picture, for a reason, they are not the end, they are the means to the end, they are the means to sustain this scenario that has to be sustained in our for many, many years so that the trees can grow. They are not the end in and of themselves.
And so what does that mean? Again, back to the disclaimers, we treat everybody with respect, we understand this is their home all of that. But a user is also replaceable. Now, we don’t want to go replacing users if we don’t need to, we don’t want to act like they’re disposable. But the truth is, if we’re growing quality trees, and those quality trees are kicking off quality apples, there are going to be other people who would be happy to buy the apples as well. So while we want to have, you know, lots and lots and lots of respect and appreciation for the role that the tenant as user plays, if they choose to go away, it’s okay. Because we can find another user, the user again is the means to the end, not the end in and of themselves.
So, as we wrap up, you might be asking the question, okay, Jeff, you made a big deal about how tenants are not customers, then, then who is the customer? Right? And I’ve given this a lot of thought, myself, right? Because I like to walk around my own philosophies, as well. And, and try to, you know, map over my analogies and answer different questions. I’ve asked myself that exact question. And so here is the answer that I’ve come up with. I think the customer is us. I think the customer is the owner of the orchard. I think the customer is the real estate investor who owns the portfolio. Why? Why do I think that? Tenants are users who allow us to do what is needed to sustain the orchard? As it grows? For whom are we sustaining an orchard as it grows? We are we’re doing that for the owner.
Now. Maybe what I’m really saying here is that we have to separate in our minds that the two different hats that we wear the orchard owner and the orchard manager, right, the orchard manager is in charge of keeping that orchard sustainable making sure enough money comes in to be able to prune the trees and fertilize the trees and water the trees and whatever the heck else they need to do as they sell the apples. But who are they serving? Like? Who is their client? Really their client is the owner of the orchard? So I think the answer is probably you the listener you as the person listening to this as the real estate investor. As the person who is working to buy plant an orchard that will grow into mature trees mature rental portfolio, I think you are the customer. And I think the tenant is the user that is critical to making your whole plan work. But I think ultimately this is to serve the customer who is really you.
Here’s what I want to leave you with. It’s just sort of a simple way to frame what we’ve just talked about in you know, in basically a sentence or so. And I hope that this sticks with you. And I hope that it’s these just few words that maybe make your wheels turn a little bit, give you some food for thought some apples for thought so to speak. I personally I don’t acquire properties so that I have something for people to pay me to use. I acquire users so that I have a way to sustain my properties over time while they mature, and deliver the overall benefits that I know I’m going to get from a mature portfolio of properties. Okay, just to say one more time. more quickly and succinctly. I don’t acquire properties that I have something for people to pay me to use, I acquire users so that they will pay for the properties over time and allow them the time it takes for them to really do what I know that they can do for me.
That is it for today’s episode of Racking Up Rentals. Again, show notes for today’s episode are at www.thoughtfulre.com/e200. Please do us a big favor by hitting that subscribe button would be so appreciated. And if you would rate and review this show just real quickly, doesn’t have to be long or eloquent. Just a rating there and a couple words would be super, super helpful and very appreciated.
Did you know that we have a Facebook group for Thoughtful Real Estate Entrepreneurs too? We do and you should be a part of it. It’s called Rental Portfolio Wealth Builders and we would love to have you join us there. Just go to group.thoughtfulre.com and you will be taken right to that page we can hit the Join button. If you liked this episode, please take a screenshot of that and post it to Instagram and tag us; we are @thoughtfulrealestate. I will see you in the next episode. Until then, this is Jeff from the Thoughtful Real Estate Entrepreneur signing off.
Thanks for listening to Racking Up Rentals where we build long term wealth by being win-win dealmakers. Remember: solve the person to unlock the deal and solve the financing to unlock the profits.