Rental Pricing by Bernie Madoff
“When I used to rent my property out, we had tenants in it paying $ 1,495/month. You have it listed for $ 1,195/month. What’s wrong with you?”
First of all, if things were so rosy in $ 1,495/month self-management land, I don’t think you would be talking to a property manager. But I already digress…
To begin, there are universal truths in this world, a balance if you will, that are governed by the laws of nature. Some examples are:
What comes up, must come down
2 + 2 = 4 (unless you have a good accountant)
Jack Bauer (TV Show, “24″) will never die; and, by default, his daughter, Kim, won’t either because she is the only reason he has to live
The higher the risk, the higher the return (and vice-versa)
Which brings up the whole Bernie Madoff thing… Bernie, pre-2009, was doing pretty well and his investors loved him.
What wasn’t to love? Investment advisors who provide 20%+ returns every year for their clients typically have a lot of friends (especially considering the market averages about 8% over the long term). Unfortunately, everyone knows the end of the story (2009) when it turns out his investment fund was a fraud. And investment advisors that lose all of their client’s money wind up with no friends, and some, like Bernie, wind up in a jail cell.
So, 20% versus 8%. Risk versus reward. Would you rather have a tenant who pays $ 1,195/month with 700 credit scores or $ 1,495/month with 400 scores? Good tenants know their value and typically have a good hand on what market rental rates for homes are. Bad tenants know that they are lucky to get accepted into a property and are willing to pay more than the market rent (a risk premium).
It’s much like a good tenant can be compared to a Triple-A bond (stable investment with an average return), while a bad tenant is more of the junk bond variety (high risk, high return).
So the question is: Do you want to sleep at night or invest like Bernie? Which movie do you prefer: “The Fast and the Furious” or “Bridges over Madison County”?
More on how the “$ 1,495 Tenants” happen with help from his good friend, Allen Stanford, next time.
