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Jonathan Cook: On today's episode of The Investing Revolution, we're going to talk about the TPR, what that means, and how that's going to make sure that your tenant is a high quality tenant throughout their lease. This is the Investing Revolution, a podcast designed to help your real estate investment strategy. On this podcast, we'll teach you the actionable steps to take and pitfalls to avoid so that your real estate investing can thrive. Welcome to the investing revolution. I am your host, Jonathan Cook. And today we're going to discuss the TPP are what that means and how that's going to get you a really high quality tenant that's going to last for a long time. The TPR is an internalized tenant and property performance report that we have created here at Revolution that that takes into account the entire life span of your tenant in a property to make sure that when we're doing renewals, we're able to renew their rent at a higher rate, kind of depending on where they score in that that system itself. So I want to discuss what they actually mean, how that works, what we do here in house and how that all works together for rent increases renewals and maximizing your profit. The TPR, it stands for Tenant and Property Performance Report. How it works is throughout the lease of a tenant, we score that tenant based on three separate criteria. The first is the ledger score, the way they're all scored on like a ten point system.
Jonathan Cook: When we have clients that work with us every single year, we give our clients a it looks like a report card, kind of like what your kids would have in school. So you're able to see at the end of that lease before we renew at that tenant what their score is, how well they've performed in your property and what your property is doing. At the same time, there's a whole lot of math involved in this. There's a internalized algorithm that we use and we use that to judge these tenants. The higher their score is typically, the lower we're going to increase that rent because it's based on a sliding scale of severity. And I want to dive into what that really means. So I'm going to go through the three different criteria that we're going to judge our tenants on and base their score off of, and then kind of walk into how that works for rent increases this this system. Like I said, it takes into account their ledger, their performance in the property. So condition reports and any leasing violations and they're all judged on this sliding scale of severity is how we we score that tenant so just talking about the ledger score itself, rent is always going to be due on the first of the month and they're going to receive late fees if they pay after that. But we recognize that a tenant paying a day late is not as concerning as a tenant that's paying 15, 20, 25 days later, whatever might happen.
Jonathan Cook: And so there is a scale that we use every single month. Their ledger is judged on this. It's calculated in and it goes in through some automated systems that we have that ultimately at the end of the lease period, after a year, they have a ledger score. So if they're paying on the first every month, they're not going to receive any deductions on their overall ledger score. But if they pay on the second they have a point or two deducted, it kind of depends on on what the math is. So they're going to have a much lower deduction on their overall score for a day late. And it goes up a little bit every couple of days after five days, it the deduction goes up a little bit more. After ten days, it's going to go up even more than that. 1525 And it just kind of is a scale that we use that's judging how late they're making their payments. The second pillar or column that we're going to use to judge them on is condition reports. So we have a system where when we move a tenant in, we're taking in a full photographic documentation of the entire property before the tenant moves in. That's that's going to set our benchmark for damages in the property that that might be tenant related. So once we have that baseline, after six months, we're going to again do a complete interior and exterior property.
Jonathan Cook: Condition report. We're going to walk in and take a picture of every square inch of the house. We're going to notate any damage, any scuffs on the walls, any major damage, holes in the walls, nail holes, big holes, broken items. Those things are all kind of weighed in terms of how difficult it is going to be to repair, how much money it's going to cost our investors to get it back to the condition that the property was in before the tenants moved in. And we judge how many points are deducted based on that severity of score, of course, like scuffs on the walls and and dirty carpet, that's going to happen where, I mean, a tenant living in the property is going to create some level of wear and tear. And we're aware of that. And it it is still calculated, but those are much, much lower deductions overall than nail holes or something fist sized. Somebody punches a wall or somebody falls into a wall. And the way that that scale kind of goes up is, can I clean it and repair it really quickly and easily? Do I actually have to, like put some putty in the walls and like repaint corner to corner, or do I have to replace something? So there's definitely a major swing between scuffs on the walls and somebody karate chopped a kitchen counter in half or whatever might happen in a property. If you've owned or managed any rental properties for any period of time, you've seen crazy damage that's happened and we judge it accordingly.
Jonathan Cook: Again, it's going to slide up based on that severity. Leasing violations can be a number of things and we try and appropriately score those as well. Things like an unauthorized pet and a property that can cause you a lot of damage. It is a major lease violation. We have a system that we're going to charge the tenant if they have an unauthorized pet. So those are lease violations, but so is not maintaining the yard. That's a much less violation than having an unauthorized pet or smoking in a property. That's something that we don't allow doing illicit behavior in the property, you know, making meth in a bathtub or something, things like that are all major lease violations. And again, like, like everything before we're using a sliding scale to to judge these tenants and come up with an overall scorecard. Once all three major pillars have been calculated, we we use that together an average them to come up with a total tenant score. Most tenants are probably going to fall between the seven and seven and a half out of ten range. I mean, not all tenants. I mean, we've got great tenants that score ten out of ten, but but most, most tenants have one or two little issues and that doesn't make them a bad tenant. That is a an average tenant. And when we're talking about maximizing rents for you and maximizing profit for you, one of the most expensive things that can happen in your property is for it to go vacant.
Jonathan Cook: So we want to keep tenants as long as possible while simultaneously increasing rents slightly in a fair way, following the market and following how they perform, as well as still making it a smart decision for them to stay in the property and let them understand the benefits that we're able to give them so that they're happy with a slight increase as long as they're performing well. And the way it works in actual practice is when we get these scores back into us. There is a separate area entirely where it takes whatever their current rent is, what they're paying right this minute, and a new market value. So every year we're performing a complete market analysis on that property and that is the two ends of the spectrum. You've got the high end wherever the market value is and whatever the tenant is currently paying. Once we take that score that that we come up with with the TPR, that that score is then used in comparison to what they're paying in the market value to come up with a new range for a price increase if they're average, if they're between seven and seven and a half, it's much closer to market value. It's ratcheting up significantly more so than a between seven and a half and nine and between nine and ten. And the score definitely matters and ties back into how much we're increasing the rent at, because if we have a perfect tenant in place, we want to keep that perfect and we want to keep that perfect tenant for as long as possible.
Jonathan Cook: And so that rent increase is going to be much. Much lower, even though you're not getting as much income. The great thing there is we're keeping that super high quality tenant for as long as we can. We incentivize them to stay in the property. Because I don't want your property to to sit vacant. You lose 2% a week on your income while it's sitting there vacant or around 2%. So the overall scoring system, once we have that score, once we average it and we get that new rent increase, that's then gone back to the tenant. Of course, all of our investors get a copy of it so that they can see this is how well my tenant is performing. We go back to that tenant and explain their score to them. It's not a very difficult conversation to have. Every time that you have a tenant in place and you want to increase rent the next year, it's going to be a negotiation. It's going to be a rough moment because nobody wants to pay even a penny more than what they're already paying for rent. Note No tenant wants to do that, and that's why this scoring system works so well, is because we go back just with internalized data.
Jonathan Cook: It has nothing to do with opinions. It has nothing to do with how well the tenant has talked to us nicely over the phone. You know, it's not taking into account anything that can't be tracked and analyzed internally through through hard data. We go back to that tenant. And Mr. Tenant, congratulations. We, of course, want to keep you in this property. You've scored a 7.2 out of ten, which is around average for most of our tenants. And because of your 7.2 out of ten, that means that this year we're increasing the rent to whatever that new number is going to be. And of course, it's going to be a range. There's a lot of math in that algorithm that gives a reasonable range for a price adjustment. And we go back to that tenant to let them know this is why we are increasing the rent to what we are doing. There's less of an argument there. There is more of a reason for why we're doing it, and it puts the responsibility back in the tenants hands. They know in our properties that they can control how much their rent will increase based purely on their performance in the property. Usually, even though we discuss this before we sign a lease with a tenant, we discuss how this is all going to work until it hits their wallet, until they actually have to shell out extra money the next year. Most of them don't internalize it, and that's okay.
Jonathan Cook: But when we walk them through it, we're explaining, all right, so next year, for the next coming year, yeah, your rent is going to increase to whatever it's going to jump up to. But your score is a seven point whatever because of these items. So next year, we're going to wipe the slate clean. We're going to start over right here. Let's make sure that every month, instead of paying on the fifth or the sixth or whatever you've paid in the previous year, let's make sure that we pay on the first and we're able to coach them into becoming a better tenant because every property manager worth his salt can say, We screen tenants the best and we have the highest quality tenants that we put in your home at least time. We recognize that that's not the end of it. I mean, the transaction isn't over. Once I lease your property, the transaction hopefully isn't over for many, many years because I'm going to operate this small business for you. And when we're doing that, a major part of it is making sure that that tenant who was high quality when we placed them in there continues to be we've all seen really high credit score tenants come into a property and create major damage and major headaches and cause issues for investors. And we've seen tenants with low credit scores or poor previous rental history that we're taking a chance on. And they turn out to be just the best tenant we've ever seen.
Jonathan Cook: I mean, with as many properties as I've managed over the years, I've got several stories that that are going to fall into those categories, and that's why we created the TPR. It's a way to gauge that performance of the tenant throughout the lease so that if we know that, yeah, on initial screening they seemed to be really good. But while they've been leasing the property, we've discovered all these additional issues that we couldn't have found in screening. We didn't know they were going to punch the walls or cause a bunch of damage or smoke in the property or whatever it might be. We have policies in place to tell them not to do that, but once they're living in the property, we're not babysitting them. But this is a really good way that we use to judge how good of a tenant they are truly throughout that lease. So at the next year, if they are a problem tenant, we can take that opportunity to just not renew the property with them if they fall below a certain threshold which. Our threshold is right at about a five. If they fall below that threshold, we're not going to renew with them, even if they're theoretically paying every month. But if we recognize that that tenant is a really problematic tenant, we're going to go ahead and move them out and replace the tenant with a much higher quality tenant that we can then again judge through this EPR system to make sure that we have the right residence in your property for you that's going to overall maximize your return on this investment.
Jonathan Cook: So that's the way that we handle the whole process. The tenants, when they recognize that their rent is going up and they see the hard data on why it's going up, it's an easy conversation to switch over to next year and explain next year, make sure that you're paying on the first all this damage that you've done in the property. We're going to make sure that you're not causing any more damage. Don't violate the lease, cut the grass on time, pull the trash cans in from the street, whatever the issues might be, because they're documented, we can put it in front of them and say, these are the reasons. So next year, if you can erase these reasons or if you can increase your performance in the property, then your rent increase next year will be significantly lower because we don't control the market, we can't control what the market value of our rental does. The market is the market. It's changing no matter what I do every day. It's just a supply and demand issue. And if there is somebody in the area willing to pay $500 a month, rent more than you are for the same property, that's what's happening with the market value. This is a way that for our tenants, they recognize that even if rent goes up $600 in a year, some crazy number that is as long as they are performing really, really well, it's not going to increase some crazy number.
Jonathan Cook: It's not going to get jumped up so high that they can't afford to live in the property. And that little extra level of protection and assurance that they have with this really allows us to keep the highest quality tenants in both Atlanta and Orlando. It's a policy that we have that ensures that our investors are going to make the most return in the long run. And because of that, it's become one of our our most effective tools. It's one of the most asked about systems that we have internally, which is why I wanted to make the episode on that today. And I hope that understanding how the system works makes you recognize that a property manager, a high quality property manager, is looking out for your best interests, not just on the day that you've signed a management agreement. We put it in at your property, but through the entire leasing period of your property before you either sell it or move back into it or do whatever with it. This is just that extra added layer of protection that we offer here. And I've heard there are some other companies that are doing some similar concepts and it's important. So ask your property manager when you sign up for property management, what are you doing to ensure that my tenant continues to perform well outside of just screening on the initial lease payment placement? If they don't have something like this, ask them.
Jonathan Cook: Why not ask them what they do to judge their tenants throughout and figure out why they're increasing rents to what they are. If they're just following market conditions, that has some slippery slopes that you can you can run into some vacancy for. If it's based on a flat fee, we increase 3% a year period regardless of whatever happens. That's not necessarily good for you or the tenant. There's definitely going to be parts where you have a perfect tenant that really doesn't deserve a 3% increase in a year because they are making you more money. They are fantastic. They're not costly costing you anything. They're not causing any damage. That's a really good tenant. They deserve to be they deserve to benefit off of their performance in your property, vice versa. If you have a really bad tenant in your property, if they pass the screening and are still only getting a 3% increase a year, but maybe they deserve a 5% increase. Maybe a 7% increase kind of. It kind of depends on where they're performing. Then you're not getting a full maximized return on this investment. And that's just how we at Revolution work that strategy. And if you have any questions, please feel free to reach out. Make sure to like and subscribe to the podcast. Follow us on YouTube, hit the bell, hit all the notification buttons and join us back again next week. Thank you.
