Is there a disconnect between the highest and best use of your rental property and your marketing niche?

That’s a really important question that has given my partner/son Josh and I the ability to create an increased cash flow, an improved tenant clientele, and increased property values on all of our units over the last few years.  Of course, we didn’t ask the question exactly that way, because “niche marketing” has only become all the rage in the past several years.  But the thought process is the same.

There’s some fun and profitable lessons here, so let’s explore the subject.

First of all, niche marketing is defined as the marketing of a product or service to a small and well-defined segment of the market place, typically a market whose needs are not being well served.

Some various residential rental property niches might be: high end, low end, ghetto, on the way down (deteriorating), on the way up, mid-level rentals, seasonal, senior housing, student housing, low income housing, subsidized/Section 8, etc.  Then each one of those categories could be broken down into even smaller segments.

You need to always, always, always invest primarily for cash flow, so whichever niche you choose should lead you to an increased cash flow.  To flesh out the idea, here’s some personal examples:

Around 23 years ago, when my family had to foreclose on 90 2-bedroom units (which had 50+ vacancies when we took possession) our marketing niche was “any living human being with money in hand.”  That was a rough crowd of tenants, but we had to have cash flow NOW.  We had 15 years of deferred maintenance to handle and a big first mortgage to pay.  As we gradually upgraded our units we also upgraded our tenant clientele and life improved 🙂

I used to go out at night with a step ladder and a bag of light bulbs to replace all the bulbs that the little punk gang kids had knocked out with their baseball bats in the parking lot.  My son would run behind me whispering loudly “get back in the house.”  But we had a bunch of single-moms that came home from work late at night and I wasn’t about to have them come home in the dark.  I also wanted to let the little gang punks know that I would replace those bulbs until the cows came home.  The punks eventually gave up.  I didn’t.

Unless absolutely necessary (or unless you have calculated a large profit by doing so), I would advise against aspiring to dominate that tough niche!  Instead, after five years of hard work, we changed the niche UP.  We returned the property to beauty with a good working-class tenant clientele, and saved the asset for our family estate, so the exercise paid off.  It was a good investment that continues to support my parents with a lovely cash flow in their retirement.

The important part of that story is that we changed UP the niche from ghetto non-payers to working-class payers, increased the cash flow, upgraded the property, and thereby increased the value of the property by a nice margin.

I recently read in Robert Kiyosaki’s new book that he buys primarily “workforce housing” properties in areas where there are solid jobs that need a steady work force.  I personally LOVE that niche.  Josh and I have done the same thing.  (Any time I catch myself even vaguely channeling R.K. it’s a good day!)  Notice the emphasis on J.O.B.S.  That would be a prime requirement.  In niche-marketing speak: that requirement “narrows the niche.”

We narrow our niche further by requiring good credit (with emphasis on “payers” or people that have a “habit” of paying their bills on time).  We narrow our niche further by requiring a good rental history.  We narrow our niche even further by requiring no felons and no sex offenders.

You need to decide early on what type of people you want to deal with and what kind of areas you are willing or unwilling to invest in.  This is your life.  When we started, we had no budget so we did almost all the work ourselves.  Consequently, one of my main requirements when we shopped for property was: “would I feel safe here at 11:00 PM vacuuming carpets?”  If not, neither would my future tenants, so we walked from every investment where the answer to that question was “no.”  Not our niche.

On the other hand, I was in Home Depot one day and a nice-looking landlord couple had a cart full of cheap gold shiny light fixtures and they were picking out some shiny gag-me linoleum.  I was looking at Pergo right next to them.  They looked professional, so I was curious and schmoosed them up.  They said that they rent to subsidized housing people who like cheap shiny stuff and that they basically “hose the place out” between tenancies.  Their attitude was horribly disrespectful to their tenants, their niche.  Not my idea of a good business plan.  Not my idea of a good marketing niche.  Pass.  But that landlord couple seemed happy and successful.  We all get to choose which investments we want and which we don’t, and obviously there’s more than one opinion!

In our approach to apartment complex purchases, Josh and I chose under-performing properties caused by sub-standard management (tired, fed up, out of town, do-it-yourself owners, etc.), in good or great areas.  We have been able to raise the aesthetic of the properties, handle all deferred maintenance, raise the qualifications of prospects in our marketing niche, raise the quality of the tenant clientele, raise rents significantly (often by $100.00 – $250.00 per apartment unit per month), and thereby raise the value of our properties.  Note that we purchased under-performing properties and then changed the niche UP to become properties that were all that they could be.

I got another insight about niche marketing earlier this year, when we refinanced a 36-plex.  An underwriter flew out from California at one point to inspect the property.  He asked for copies of all the leases and the applications.  I told him I’d have to redact the confidential info on the applications.  He said no problem, he was only really interested in seeing what kind of J.O.B.S. the tenants have.

Light bulb!

Well that was a fabulous study, because I hadn’t realized before that point that we have so many tenants in the IT and computer fields.  I’m the marketer, but I had to learn who the bulk of my customers were from an Underwriter.  (My partners think I’m a lot smarter than that, so please don’t tell!)

When I thought about it further, there was even more to learn from that exercise – and that is that I market almost exclusively on-line.  So guess who is looking there: a more sophisticated, literate group with good credit.  Booya!

When I thought about it even further, I realized that I gave up putting signs out on a few of our properties several years ago because I got a ton of calls from a mostly unqualified segment of the rental applicant pool and I was wasting time and spinning my wheels.  We have one property in particular where I never put signs out because the phone rings all day with calls from people that are completely illiterate.  Yet we have filled that 18-plex with fabulous tenants by marketing on-line.  On the other hand, we have three properties where flags and signage pull some good calls.

Also, for the past couple of years at least, I would say that probably half of our tenants who leave do so to buy a house!  So a large segment of my marketing niche is people who want nice, immaculate housing with no deferred maintenance, but they don’t want to pay for a lot of extra amenities because they are saving and preparing to buy a house.

It’s a great exercise to really zero in on the highest and best use of your rental property and your best marketing niche.

However, our successful formula might fall flat in other niches.  For example, Josh and I have recently been out shopping for another complex.  Last week I looked at a xx-plex that rents as student housing.  I thought, looking at the numbers, that it might be something that we could niche up.  But when I walked the property I found a huge amount of deferred maintenance inside and out.  It would take an enormous renovations investment to get the units upgraded, but I don’t think our current niche would live there even after the investment.  Why would working people want to be surrounded by college students?  Would there be a sufficient market for students willing to pay $100 – $150 more per month for lovely upgraded housing??  Some investor who doesn’t have a business plan of adding value by upgrading the niche, would probably be a better buyer for that property.  For us, that property would be more like gambling than investing.  Not our successful niche.

So can your rental property cross up from one niche to another?  Absolutely, that’s how many smart investors make good money.  Start at the curb and work your way inside.

Plus, (here’s a big bonus) you might find that your financing costs and insurance costs can go down because your properties will be seen as well managed, and thus lower risks!

All this geeky marketing stuff is not naval gazing.  Zeroing in on your market niche and exploiting it or changing it up, is smart marketing.  It has allowed us to keep our units filled with great tenants and maximize cash flow during a rough recession.

Always aim at crossing up to the next achievable niche above where your property resides, or at least getting to the top of the niche your property is currently in (example:  bottom of the A-Class properties or top of the B-Class properies).  This will cause you to continually improve your clientele, your property aesthetics, your cash flow, the value of your asset and the quality of your life.

Happy niche marketing!