His Tenants Requested Their Own Rental Increase: The Binder Strategy

Hey YouTube, this is Cody, and today I have a special guest, Dion, who is coming over from Dion Talks.

Appreciate you having me here. I'm excited about this. I'm actually interested in sharing a concept that some of your viewers might not have seen.

Christian didn't even hear about this one yet. So this is an exciting topic on how you get your tenants to request rental bumps, meaning they're asking you to pay you more money every month. Deon, how the heck do you do that? And what is that even called?

Well, the reason I like this strategy is because I've found all of my deals on the MLS and used conventional lending. It's a lot easier to find a deal on the MLS that will cash flow if you have confidence in your knowledge that your tenants are going to ask for you to raise the rent. I call this the binder strategy.

Okay.

And how this originally started was I prefer to buy properties that are rent-ready or already occupied because I call myself the lazy investor. I run a truck driving school, so it's a full-time W-2 job. I run a nonprofit. I have 3 kids. I like to go on dates once in a while, so I like to actually have a life. So I'm not investing to create a job. I'm investing to make work optional. So I don't want to buy properties and do a rehab. I don't want to buy properties and have to relocate a tenant. I don't want to do find a tenant, screen a tenant, place a tenant, train a tenant. I want tenants in place. So this strategy originated because I would buy properties that were for sale by owners who are trying to exit the business. They had years of equity. They haven't raised the rent. They're older. They haven't taken care of the place. They pretty much ignored the tenants and often ignored rent increases for the tenants too. So what I do is I don't do this right away because I'm not sure if I want to keep the tenants that are in the unit already because I didn't get to screen them. I didn't get to look at credit scores, look at eviction history. I didn't get to see their work. I didn't get to vet them in any way. So those tenants are in place. And they're living in fear that the new owner is going to say, I'm buying this, I'm owner-occupying, you have to move out, I'm going to move in, or I'm buying this and I'm raising the rent to what makes sense. So then they can't afford it and they have to move out. So tenants live in this fear of being relocated. For the first 2 months, this is my vetting period since I didn't get to vet the tenants. I sit back and I look for 3 things. Do the tenants pay on time? Do they call me for super trivial things? Do I get noise complaints? Those are really the 3 things that would make me have a problem tenant. So if I have those things, I don't renew the lease. I want the tenants to go. I'll do a rehab and I'll get— I'll get, you know, the highest rents possible.

Yeah. But for those that are not wanting to do that, maybe they don't have money for the rehab or the remodel.

True.

What do they do?

And I've never had a tenant that I didn't want to keep so far. Some tenants that were bad tenants, even with the previous owner, become good tenants because during those 2 months, there's a couple of things I do. 3 things. I replace the locks with coded locks. I buy in Class C areas, so tenants aren't used to having locks where you don't need keys. So that's like an upgrade. I replace exterior motion— exterior lights with motion sensor LED lights, which adds safety, more light, and makes the place look better. And then I ask the tenants if there's anything that they would like fixed, because the previous owner generally ignored them. And I'll fix small things. And it's never been something like, hey, we would like a whole new bedroom added. It's been, we would like a screen door, we would like a ceiling fan replaced. Super simple things. Now the tenants know I'm going to take care of the place, and they become good tenants. So at 2 months, once I've decided I want to keep the tenants— tenants don't know what's going on with property prices. They don't know what's going on with rents. They have usually, especially in the properties I'm buying, been there for years, sometimes decades. So I want to educate them and not just say I need to raise the rents because my costs are more. Tenants don't care about our costs. We point it out, but they don't care. If tenants cared about your costs, a property that was paid off and a property that had a mortgage would rent for significantly different amounts, but they don't. Area average rents, set rents, not your debt structure, not your cost. So what I do is I make a binder, and that's why I actually call this the binder method. The COVID of the binder, the front page is an image of the property with how much I paid. So this is just printed off of Redfin, Zillow, Trulia, Apartments.com, any, any of the data that the tenant's going to be able to look up on their own anyway. On that front, there's going to be the price I paid and then the estimate. I want them to see what it's currently worth, not what I paid. They can see both because that's going to be— and you can tell the tenants this— what your property taxes and your homeowner's insurance is going to be based on that, that new expense. But like I said, tenants don't care about your expenses, they care about theirs. But this lets them know you're being transparent. Then you open the binder and the first page is a map of all the rentals in the area, similar units. So if you have a 10-unit apartment complex, you're looking at apartment complexes. If you have duplex or small multifamily, other small multifamily, single-family house, how many bedrooms, does it have a garage, those kind of things. As similar as possible, you're looking for the same search criteria. That your tenant's going to be looking for. Every page after that is an image of the unit of the properties off that map and how much they're renting for. An example is I've purchased properties where the current tenants were paying $1,120 and $1,125. So I've actually purchased properties that were lower, but this was the most recent one. Area average rents were $1,500 to $1,600. Some were $1,550. That was the area average rent. The best thing for me, and the tenants know this, would be for me to kick the tenants out to rehab the unit, spend $5,000 to $10,000, and then rent it out for $1,600. I'm going to spend $10,000 to make $1,600 a month and displace a tenant. But it's going to be a big time sink, it's going to take energy and effort on my part. So I don't want to spend the time, I don't want to spend the money, I don't want to spend the effort and energy, and I don't want to displace the tenant. So I show the tenants, this is what the area average rents are for a unit just like this. Here's what I paid. So my expenses are more, and then I give the binder to the tenants and I ask them, What do you think would be fair? How many tenants have ever been involved in the conversation of setting their rents other than the first time they're looking for a rental? They get to pick based on price. I've never had a tenant say, I think what we're paying is fair, because they know the best thing for the owner would be to kick them out, rehab, and get highest rents. I've never had a tenant say, well, if the area average rent is $1,500, I'd like to pay $1,500. They're not stupid. They want to get a good deal. This is a negotiation. Those two tenants that were at $1,120 and $1,125 both went to $1,460.

Wow.

So I'm not at area average rents. I'm not even at the $1,600 I can get after a rehab, but I got over a $300 increase to the rents on both sides of the duplex because of a 10-minute conversation. And it took me 2 minutes to make the binder.

Yeah. So, I mean, you could have spent $10,000 to get an extra $140 a month. That's not really that great of an ROI, though.

And been a jerk of a landlord that kicked tenants out and displaced them and had to screen a tenant, place a tenant, had the vacancy and burn rate of those months. So I've used this on every property that I purchased that had tenants in place. Sometimes they were vacant. I will do that. It's not my preference. And then in 2020, since we weren't allowed to do rent increases because of an eviction moratorium, in 2021, rents had skyrocketed that I used this strategy on all of my existing tenants. Because normally what I would do is use the binder strategy when I buy a property, and then tell them, I don't raise rents every year, but I do a 5% increase every other year. So in 2 years, we're going to get a 5% increase. And from 2013 until 2020, that pretty much kept up with rents in my area. But rents went up so much in 2021 that I used the binder strategy, and across the board, my tenants asked for a 20 to 28% rent increase. And some of these were $380, $310 increase from where they were at, without having to do a 10 turnover or a rehab and the tenants are happy. Happy tenants don't trash properties and happy tenants don't leave. Doing this strategy in the last 10 years, I've had 2 tenant turnovers.

That is amazing and a good best practice when you're going out and you're managing your rentals and you're trying to make money because we buy rentals so that we can buy back our time. Look at what other people are unwilling to do and do that. Be transparent with your tenants. Let them know what's going on. This strategy works very well, and it can take the burden that a lot of smaller landlords that are getting started have of, oh, I don't want to be that person that kicks them out, and I don't want to be the person that's just raising their rent through the roof. You can give them an opportunity to be proactive, involved, and everybody's going to be happier for it.

And what I really like is there's different ways to invest in real estate. You and Christian are scaling much faster than I am, and you're actually growing a property management company. You can educate your property manager on, this is how I would like renting to increases to happen. Educate the tenants on what area averages are and then show them what the increase is. Or if they can, ask them what they think the increase should be. You can, you can change this to match your situation. I've used this strategy successfully on the Section 8 program. One of the counties that I invest in, they told me for a 3-bedroom house, $1,800 is the most we will pay. Area average rents were $2,300 to $2,400. So I took several screenshots of those $2,300 to $2,400 rentals, sent them to the Section 8 housing counselor and the tenant. And I said, here's what area average rents are. I want to increase rents to $2,200. I've already talked to the tenant. That's what they think is fair. So the binder strategy happened with the tenant first, the housing authority. Since I did the work for them, the counselor could then go to their boss and say, here's what the rents are for the average. They don't even want to go to the average. They're just going to $2,200. They came back and agreed that $2,200 was fair. And now that Section 8 tenant is paying $2,200 a month because I sent an email. That's how much work it took to make hundreds of dollars more a month.

And that adds up to thousands a year. That can be life-changing for a lot of people. So that is a phenomenal strategy. Do you have anything else viewers should know about implementing that, or is it just that simple?

It really— that's the thing, it is that simple. Don't overthink it. This can be done through text messages, through emails. You're educating the tenant on what current area average rents are before you even bring up the topic of changing the rents. I have a YouTube channel, Dion Talks Financial Freedom. I do short videos and teaching people how to reach financial freedom. I'm also going to be taking the Cody and Christian Osgood Multifamily Strategies course and doing some videos on a review to tell you if I think it's something you should take or not.

Alrighty, well, that's it for today. And again, check out Dion's channel. He does Dion Talks. You will hear a lot of howdies, but, uh, stay tuned. Like, subscribe if you haven't already, and we'll see you guys next time.

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