One of the keys to being a successful landlord is finding good tenants. At some point in your landlord journey, you may come across a situation where you have to decide between better tenants or higher rent. Of course, in an ideal situation, you would love to have both.
This post will share my latest tenant search experience. I’ll give you some things to think through if you ever come across this dilemma.
Better Tenants Or Higher Rents
When I was in my 20s and 30s, I would have never passed up on tenants who were willing and able to pay the highest rent ASAP. No matter how annoying the prospective tenant seemed, if they qualified financially, a deal was always made.
I was 100% focused on generating the maximum return on every investment. An unoccupied property puts a big drag on returns. Less profits meant more work time until financial independence.
However, due to my focus on profitability, I also suffered by agreeing to tenants who were not a great fit. With one group of tenants, rent was paid late eight times in one year. In addition, my neighbors texted me on multiple occasions saying my tenants were throwing loud house parties. Further, these tenants also damaged my house. They tested my faith in humanity.
After each poor encounter, I logically became pickier with the tenants I chose. Now that I’m in my 40s, I no longer just accept anyone who qualifies. The tenants have to be a great match. Not only must they check all the financial boxes, they’ve also got to have great references and be pleasant to interact with.
Come to think of it, this must be what dating is like as you get older. You get so picky that one day, you might end up with nobody!
Why I Gave Up More Money For Better Tenants
Recently, I passed on four male software engineers who wanted to rent out my four-bedroom home.
One guy relocated from India, another guy relocated from Atlanta, and two guys were working in the sleepy suburbs near Facebook and Google. They were all college friends at the Indian Institute of Technology in Mumbai and wanted to crash together.
Unfortunately for them, they revived my PTSD from when I rented out my old rental house to 5 male engineers years ago. My old tenants trashed my house and never paid on time.
I was hoping these new guys would be super nerds, given IIT is like the MIT of India. As super nerds, you hopefully don’t throw coronavirus parties. You’re respectful to your neighbors. And, the only romantic relationships you have are with your computer.
Their combined base salaries were over $60,000 a month. They also were willing to pay $6,700 a month in rent immediately. On paper, they looked great. But once I started talking to them, my impression of them quickly fell apart.
Here were some red flags.
1) Bargained Right Away
When they initially reached out they immediately asked for a discount. They hadn’t even seen the place yet. I declined as I had just listed my property and wanted to test out the market. I thought I priced the property fairly and I had other interested parties.
In my experience as a landlord since 2005, I’ve found that whenever someone bargains right away on price, they tend to be much more high maintenance tenants.
2) Already Got Rejected By Another Landlord
After I declined their low-ball ask, I thought that was the end of them. Then, two weeks later, they inquired about my property again at my original asking price. They said they had seen 15 other properties and felt like mine was the best one.
I asked them about their search experience and they said they got to the final stages of one property. After about a week of going through the process, they were denied by the property manager.
I asked them why they were rejected and they said the owners were hesitant about having four guys living above them. But then they said the owner was on vacation and lived in another property. I was confused.
Having prospective tenants say they want to rent your place after they passed on your place initially doesn’t feel good. When you then find out they got rejected by another landlord, you begin to wonder what’s wrong with them. Nobody wants to feel like they are the consolation prize.
3) Talked About Their Servants
One of the prospective tenants texted me and demanded that I speak to him right away. He wasn’t polite or thoughtful in his ask. When I didn’t respond to him immediately, he texted again. How annoying.
On the phone, he asked if I would clean the house before move in if they were to rent the place. I was insulted, because I had thoroughly cleaned the house earlier for hours. I hadn’t even agreed to rent the place to them yet, and he was already demanding I clean an already clean house.
The prospective tenant could hear the annoyance in my voice so he tried to explain, “My servants back in India keep my parent’s house exceptionally clean every week, which is why I have high standards of cleanliness.”
Uh huh. After a 15-minute chat, I told him I didn’t think my property was the right fit. I told him he should be looking for a full-service, 4-bedroom apartment at the Four Seasons or St. Regis. He said they looked, and couldn’t find anything big enough. He was still interested.
4) Mismatched Expectations
After we got off the phone, I looked online and found a couple of great places at the Four Seasons and St. Regis to house his friends. Rent was $35,000 a month for one and $42,000 a month for the other.
I sent him the listings and he responded, “Are you trying to tell us something?”
Uhh…. yeah, I thought to myself.
One of my biggest concerns is renting to tenants with mismatched expectations. These prospects were expecting 5-star resort accommodations for Motel 8 pricing.
OK, $6,700 a month isn’t exactly cheap. However, when you’re making over $60,000 a month and are used to servants cleaning and cooking for you, spending about 11% of your gross income on housing is affordable.
People who are rich, but bargain hard aren’t people I want to deal with. Instead, I’d rather work with people who appreciate the value of a property.
When To Give Up More Money For Better Tenants
Despite the group of prospective tenants willing to move in the very next week, I told them we weren’t a good fit. I was willing to keep my rental empty for at least another month in hopes of finding better tenants. Luckily, I did.
Here’s when I think you should give up more money for better tenants. Once you have bad tenants, they will drive you nuts.
1) You just don’t have a good feeling
Everything can check out great on paper, but if you don’t feel good about your prospective tenants, you will likely feel worse after your tenants move in.
Annoying people get more annoying. And if your prospective tenants did something to insult you and don’t apologize, your resentment will fester.
2) You can afford to wait things out.
Perhaps you paid for your property in cash. Or maybe you have enough passive income streams that you don’t mind having your property vacant for months.
I know some investors who keep their properties vacant for years. Real estate is just one way of parking money, especially for overseas investors. Some families buy up properties to give to their kids one day. Renting out the home is of secondary consideration.
3) You highly value your time and low turnover.
A great tenant who pays on time, takes care of your property, and lives in your property for years is worth a lot. It’s up to you to quantify how valuable a stable tenant is.
If you accept four roommates, you have to deal with four different lives. There could be a revolving door of roommates that could eat up a lot of your time. Alternatively, you could hold out for a family, which will probably stay for longer.
The older you get, the more you will value your time. Therefore, as a tenant, you may want to look for older and wealthier landlords to rent from. They may be more willing to give you a better deal if you are more self-sufficient. Here are some more tips for tenants in a strong rental market.
As a landlord, quantify the value of your time and happiness. Compare the amount you are considering giving up for better tenants with the time you will gain not having to deal with them.
4) You’re undecided on whether to rent or sell.
A good real estate investor is always weighing the pros and cons of selling or renting his place, especially when there is a vacancy. A vacant property sells much better than an occupied property.
The more undecided you are about whether to rent or sell, the longer you should wait to rent. Again, if you get unlucky with bad tenants, your life could be a living nightmare.
If you’re deciding on whether to rent or sell, create a race. In one lane is a realtor who tries to sell your property for top dollar. In another lane is you or a leasing agent who tries to get the ideal tenants for the highest amount of rent. Whoever finds someone first in 30 days wins.
I set up this type of race between myself and a realtor in 2017 and lost. Therefore, I ended up selling my rental home and reinvested most of the proceeds.
5) If you believe the rental market will sour.
As a landlord, you should always have a view on the future rental market. If you believe the rental market will weaken in the coming year, you may want to offer a discount to market now to lock in great tenants who will hopefully stay for the long-term.
Rental markets tend not to stay weak for more than 1-2 years as lower rents draw in more demand. Ideally, you want to have a tenant who will ride out the recession. By the time it’s time for a lease renewal or new tenants, the rental market will have rebounded.
Just know that the rental market is strengthening now, especially in big cities.
Don’t Rush To Rent Out Your Property
As a landlord since 2005, I strongly recommend you take your time in finding the perfect tenant. Even if you have to give up an extra month or two of rent, it’s worth finding a tenant who will fully honor the lease agreement.
The last thing you want is tons of turnover, missed payments, constant e-mails and texts, and property damages. Of course, you won’t truly know how great your tenants will be until they’ve moved in for a while.
Your goal is to try and generate as much income as 100% passively as possible. Even if you have to accept lower rent for better tenants, it could be more than worth it.
To quantify, I say go with better tenants over higher rent at least 80% of the time. Therefore, you can afford to wait it out for better tenants.
Found Better Tenants
As for me, I found better tenants for $150/month less. It only took a week longer to find them. Because they have a family, I believe they will stay for years. It’s nice to have tenants who are in a similar boat as us. Further, they have solid financials.
I am glad to give up $1,800 a year in rental income to deal with just one unit versus four roommates. There are just too many moving parts with four roommates. And one of the roommates said he would be leaving San Francisco in a year. This would mean finding at least one replacement once the lease is up.
I continue to be very bullish on investing in rental properties. The value of rental income has gone way up (100%+) because interest rates have come way down (-60% in 1 year). Yet, single family home prices are only up single digits in my neighborhood.
With stocks doing phenomenally well during the pandemic, it’s time for real estate to catch up once we achieve herd immunity.
As someone who doesn’t want to go back to a day job, generating passive income is my top priority. I’m hopeful everything will work out just fine.
Best of luck in your tenant search!
If You Don’t Want To Be A Landlord
Being a landlord is not for everyone. It takes patience, effort, and discipline. However, investing in real estate over the long-run has proven to be a great way to build wealth. Therefore, also consider investing in REITs, real estate ETFs, and private real estate crowdfunding deals.
To diversify my real estate holdings, I’ve invested in 17 real estate crowdfunding deals across the country, two REITs, and two real estate ETFs. It feels great to earn income 100% passively without having to deal with tenants or maintenance issues.
My favorite real estate platform is Fundrise, where they’ve created private diversified funds for passive income. Historical performance has been steady, especially during down years in the stock market. For most investors, investing in a diversified fund is probably the best way to go. Fundrise is free to sign up and explore.
For those of you who like to invest in individual real estate deals, check out CrowdStreet. CrowdStreet focuses on real estate projects in 18-hour cities, those cities with potentially faster growth and better valuations. With technology and the growth of work from home, I believe there will be continued migration to 18-hour cities. CrowdStreet is also free to sign up and explore.
Both platforms are free to sign up and explore.
Readers, have you passed up more money for better tenants? Have you ever accepted new tenants you didn’t feel good about and ended up regretting your decision?
Note: One helpful thing I learned from other landlords is to have your tenants contact you only by e-mail instead of text. Include this point in your lease, and say you tenant can only text you if something is urgent.
Related posts about landlording:
How To Select The Best Tenants
The Worst Landlord Story I’ve Ever Heard
How Long Will Rent Increases Last? Advice For Renters
Benjamin Phillips says
Solid article and as a landlord (in SF) I agree with all of the points made. One thing I’m curious and I feel has been left out of the conversation is hiring a property manager. They would take care of 90% of any headaches (you mention wanting this to be passive) and generally know the local market and regulations well. Often they hold the lease so the renters do not even know who you are. Granted, this cuts in to your overall renturn but I think echos the point of wanting to take less money for better renters/less work.
Financial Samurai says
My worry is that it takes effort to manage the property manager. I’m a condo owner with a property manager hired by the HOA. I give them 1-star.
However, if I leave San Francisco, I will most likely hire a property manager.
Serious question for all landlords: Does it influence your decision at all whether the tenant is coming from a previous rental vs someone who owned their home outright before renting from you? Also, what about duration of previous tenancy? If I decide to own rental property in the future, those would be high on my list of criteria. Am I off base?
Financial Samurai says
It’s nice to have prospective tenants who have owned property before. There is more of an understanding about what it takes to own and maintain a property.
The longer the previous rental duration, the better. It’s just like an employer hiring someone. If he sees the person has job hopped every 6 months, that’s a red flag.
Years ago, a friend told me a story which I have no reason to doubt. A couple in his church had two children, and were trying to decide whether or not to try to have a third child. They talked to people who had only two children, and asked them if they regretted not having a third child. They also talked to people who had three children, and asked them why they had a third child, and did they regret it? They also prayed and prayed a lot as to whether to have two children or three children.
They finally decided to try to have a third child. The wife became pregnant and delivered triplets! My friend said perhaps they did not make themselves clear, when they prayed about three children!
Financial Samurai says
Amazing! And I have no doubt. I had a client once who had triplets after having one. Nuts!
Jack @ Turtle PF says
Great post! We are fairly new investors and own a few properties in the Indianapolis area. I think having better tenants is a great strategy to go. Turning over the property can be expensive, especially when using a property manager (leasing fee, repairs, etc.). The slight increase in rent is probably not worth it financially over the long term.
We’ve had a modest 3 bedroom 2 bath house since 2006. We found great success renting to military families that are coming to JBLM in Washington state. Early on, we discovered a military housing website that we could post our rental for free. We’ve kept the rent a little below market (as a military discount), and the house is uniquely able to accommodate pets (tile floors and a fulling fenced yard. Oh, and we were able to offer month-to-month tenancy, and the average tenant has stayed 2 1/2 years before they are re-deployed.
Wash, rinse, repeat.
This strategy resulted in a virtually 0% vacancy rate since about 6 months after we bought the house. The house has appreciated by more than $100K, and the rental rate covers the mortgage (15 year fixed at 3.25%) and taxes with a surplus of about $300 per month.
Might sell in the next year on a 1031 exchange.
Sam, back in 2018, my rental was vacant for 6 months – ouch! Had to hold out to get the right tenant. Believe me there were plenty of times when I almost fell due to desperation and ready
to rent it out to whoever walked in.
Thank goodness my wife was alot more patient than I, she said, sacrifice now than suffer thru all the head aches later.
Problem was, a lot of the prospects will give you the song and dance until you dig into their employment and credit scores. Boy, what a nightmare, so folks do you due diligence.
Great article, Sam.
I couldn’t agree more that having quality tenants is the biggest factor in having peace of mind (and frankly any mind at all) when owning rental properties.
Bought a duplex in fall of 2019 and took a couple of months to prep it for rental. In that time, my pregnant wife, was diagnosed with stage 1 breast cancer. The last thing I wanted on my plate was paying for another mortgage with unknown treatment expenses so we listed the property. First people who were interested had several dogs. I met with them and they seemed nice and I accepted the deposit for them to move in Jan 1 2020 (it was December 17th) Their first question was could they have the key early and start moving their things in. It didn’t feel right but I didn’t see a downside so a let them. Long story , short – that ask should have tipped me off that they would be very high maintenance. To top things off,I rented to another high maintenance tenant on the other side and had a very stressful first 8 months as we dealt with weekly calls and emails ranging from legit issues to minor annoyances (ie. front door creaking) including many of which were specifically listed as tenant responsibilities in the lease.
Finally one of the tenants decided to break their lease and leave and I was able to have a frank discussion with the other and we seem to be in a better place for the last 4 months.
In the end, things are looking positive on all fronts (health of baby and mom, most importantly) but, in retrospect, some additional due diligence and trusting my gut would have saved months of headache during a time that was already unusually stressful.
Do the research. Trust your gut and wait for the right person. They are out there but it can take time to find them.
Financial Samurai says
Glad your wife is better! And hope your little one is doing well!
Moving in early… my new tenants asked if they could drop off some stuff 3 days early as well and offered to pay $50/day or $150 to do so. They weren’t going to stay, just wanted a jump start before their trip. I said OK. Just need to get renters insurance, something I forgot to mention in this post that I now will.
I’m looking to get into the real estate rental game and found A LOT of useful information here. It’s funny how we all pick up gems of information that stick with us throughout life. One ditty that stuck is NOT negotiating the credit score. One seasoned rental veteran shared with me that he sticks super firm to a FICO score of 700+ and not 1 POINT less. He went on to say that he finds a big difference between a 700+ and even a 680 or 690- and that he doesn’t care how the story unfolds. He said he’s heard every sob story along the way and even rented to those with 700- who had cosigners. Bottom line is that the number gives strong insights to the full person story, and it’s either a 700+ or it isn’t. By the way it’s hard to collect from cosigners too. He wrapped it up by also saying he’s very firm in his property description wording around this.
In the notes I’ve taken, the credit score normalizes the comparator person by person. I’ve come to realize your credit score is YOU and gives strong clues on how the perspective tenant will treat the property, get along with the neighbors, act toward the landlord, keep the yard up, etc. It takes a lot of responsibility and effort to maintain a good credit score, even for those with very strong finances. The financial responsibility most assuredly translates into other areas of life.
On another topic we as people are creatures of habit. Even saying “pricing it fairly” translates to the higher side of this dynamic, even if it’s just a little. We all want to get maximum dollar out of the best tenants, right? For us MBA’s think back to efficiency frontiers in finance and econ. I put my leasee hat on when thinking about the whole rental process. I usually tried to bargain somewhat with a perspective landlord to gauge his/her response. I pointed to an 800+ credit score, stable rental and employment history, etc as my value proposition. I was always amazed at how many came back with, “No way,” “Too many applicants to consider that,” “I’ll do it if you sign a 2 year lease vs. 1,” etc. My very favorite of all time was my wanting one to run a water line to an icemaker READY fridge only to be told he would do it if I signed a 2 year lease. Really, dude? As a very good renter, I in turn walked away from almost every one of these and have been amazed at how many had called me back later wanting to accept my original offer- nope.
I think what I’m poking at is that good renters go through an interview process as well. These insights give us clues as to how the landlord will treat us or what we’ll be expected to sign (yes, leases can be very burdensome/intrusive), how often the landlord may want to “inspect” the property, how he/she will deal with maintenance requests, etc. Bottom line is that a very good landlord can empathize with a very good tenant and spot one among the many, even if he/she has to make a financial concession. I think this has been said but I want to add a little more granularity/context.
Financial Samurai says
Yes, good landlords are fair, flexible, and good communicators. The goal is to great a positive relationship for the entire stay.
The credit score cut off line for excellent gas moved up to about 760+ now btw. And banks are asking for 800+ before offering their best mortgage refinance / new mortgage rates.
Below 700 credit score is getting tough, unless they are recent medical student grads with lots of debt or something.
Julia REinvestor says
Being a seasoned landlord allows you to notice when something doesn’t feel right.
You were right to trust your gut on this, as in the beginning of the professional relationship, tenants are really trying to be on their best behaviour.
You should always meet and interact with prospective tenants in order to know the person who you’re giving the keys of your house to! I would rather sign with star tenants then earn a bit more and have way more headaches.
Higher rents lead to better quality tenets for me. I raised my rates maybe 6 years ago to the top of the market prices. It cut down on a lot of the “bad renters” from applying but you still get the few people who ” have cash in hand” to make the first month’s rent and ready to move in now. Obviously this will be the only money you will every get out of them. My decision when picking tenets now is who will be a longer term tenet.
It is also important to have high quality rentals. People don’t pay top dollar for dirt.
Also for the sake of the class I am in the Boston metro area.
Frugal Bazooka says
Another great story, informative and useful.
It reminds me of when I was a landlord in my late 20s (it was horrible). I wish I had someone to advise me on how to do it right back then. I was idealistic and worked very hard to do a good job, but multiple tenants were liars who destroyed my property and rewarded my trust by skipping out on the rent time and again. Looking back it was 100% my fault for not being more picky about who I rented to and like you said taking the high offer over the better fit. To help ease my pain I was able to sell the house after only 3 years for a 50% gain and parlay that to other ventures that helped grow my portfolio. Therefore not a total loss, but a draining emotional experience that is not for the weak or stupid!
What a great article and good lease agreement link. As in India, many landlords hesitate renting to Single people/Bachelors in olden days, due to nuisance and other issue, I feel its the same despite changing times, territories. Yes, there are some red flags during your screening and as a careful landlord you must be careful. Also with current Covid moratorium, its very difficult to find tenants especially with many people below High-earnng tenant. I had to evict one tenant who took advantage of covid moratorium, stopped paying rent, created nuisance and played many games escaping me, Thanks to Almighty, finally I was able to get rid of him sooner than what feared to be longer time. However with current Covid moratorium giving Very very Cushion of options to tenants, I would carefully caution everyone in this CA tenant friendly state. Its really pathetic they made landlords, small mom pop ones miserable.
David @ Filled With Money says
I remember one graham stephan video where he will intentionally never increase the rental rate for a property if he found the right tenants. His turnover costs were near zero as one tenant stayed in the property for 7 years and kept it to near perfect condition. Convenience and peace of mind is truly something to pay a price for and it is money well spent.
As a first time landlord, we rented out our old home in May amist pandemic. We have 2 young children, who I have to look after full time to avoid daycare and school. We did not want the kids to be around when people tour the home. And my spouse could not take days off work. So the only possibility to show the home was weekends. We have seen demanding people as the ones in your article. Asked for gardener, reduce rent .. etc. We reduced the rent for 300 and found someone who didn’t make exactly make over the top income, but whom we had a good vibe. They have been maintaining our yard extremely well. No mid night calls so far, and rent on time each month
Sam, thanks for the great article. I’ve been renting our starter home (townhouse) since 2012 and been really lucky with the tenants. Since 2012 to 2020, I’ve only had 2 different tenants and just signed a 3 year lease to a new tenant this summer. They were all to a single families. For some reason, these tenants were/are all expats who has no rental history, but they had great salaries with company paying for rental expenses. Since they had no rental/credit history, they were also willing to pay more than the listing price. I don’t see any risk since the rent is paid by their company, but am I missing something or am I just super lucky?
“People who are rich, but bargain hard aren’t people I want to deal with” – While the sentiment on this article is spot on, this statement cracked me up. It is so funny how the human perspective changes depending on what side of an exchange someone is on!
Financial Samurai says
Indeed! A market has both sides. Bargaining upfront is already a sign that there may be more interactions in the future than desired.
I do think it’s important to price your rents competitively so you get a lot of options to choose from for potential renters. Having good tenants is the best thing you can do for yourself, IMO. You made a great call in passing on those guys.
But I think it’s strange that you had to wait an extra week to find good tenants. I’d be curious to know when you’re listing the property for rent, how many leads you’re getting, where you’re advertising, etc. Typically when I get a 30-day notice from a tenant, I list the property within the first week. (Zillow Rental Manager and Craigslist. I get about equal results from both.) I schedule prospective tenants for a walk-through while the tenant is still living there, although I am protective of the tenant’s privacy, so I schedule everyone to come on one weekend day (the tenant chooses the day), and usually all within a 3-4 hour block. If it doesn’t rent up after the first showing, I schedule a second, but that rarely happens.
As a bonus, I’ve discovered that having multiple prospective tenants viewing the property at the same time increases the sense of urgency. If you’re the only guy looking at a place, you might think “it’s nice, let me think about it.” But if you see three other families there who seem interested, it lights a fire under your butt. I tend to get applications ASAP when there are multiple people at a showing. Also, the good tenants tend to look early, because they want to give 30 days notice. So listing it early is key if you want to get good tenants and avoid vacancy.
By doing the above, my typical days of vacancy in between tenants is usually only one or two days (for painters and cleaning crew). The most I’ve ever had for vacancy was about one week, and that’s only happened once because the tenant only gave me about two days’ notice (!!!) before she moved out.
I have found out that listing the property just a touch too high results in poorer tenant candidates. A $50 difference seemed to dramatically impact the quality of tenants I was seeing. Usually I can tell within a few days of posting a listing whether I’ve hit the mark or not. If I get about 10-20 emails a day from prospective renters, I’m in good shape. Half of those are unqualified and once I send them my pre-screening email telling them what I’m looking for in terms of credit score and income, the bad half drops off. The good half usually responds and schedules a walk-through. Only about half of those show up, but if I get 5-6 people for a walk-through, it usually results in at least one really qualified applicant who ends up renting the place.
If you price too high, though, you definitely get stuck with fewer applicants, and more of the dregs. The one time I priced too high, I ended up with strong rents but a dingbat tenant with a crappy credit score. I took as large a security deposit as I could for that one, and it turned out fine in the end, but there was a lot of needless B.S. to deal with. She locked herself out of her apartment at least five times, and she partially adopted a wild neighborhood cat that she didn’t tell me about, who she apparently let in the house a dozen or so times, and he chewed all the blinds. Also, because the cat was so used to the old tenant feeding it, the poor new tenants had to deal with a cat yowling outside their door for the first few days until the cat moved on. Sigh. I’d rather rent for $100-150 a month cheaper than absolute top dollar and have my pick of tenants.
Carole Hewitson says
Thank you for this reply to Sam’s great post. I’m in the throes of between tenants right now. I have always just allowed and expected a down month for taking my time to get the house ready, showing, and selecting a tenant. I’d rather lose a month’s rent than deal with drama. I need peace more than money.
I still don’t understand how it works if your current and future tenants all have to be out on the 31st. Where do the new tenants live for the days you’re getting the place cleaned, painted, etc?
If you need peace more than money, it sounds like you’re doing just fine. I’ve been able to make it work without much drama by just setting systems in place and getting the place re-rented before the former tenant vacates.
I don’t require move-ins or move-outs on a fixed day of the month. If a tenant wants to leave on the 6th, or the 15th, or whatever, I’m totally fine with that. I’ll just prorate the rent for that last month. I think being flexible on move-in and move-out dates helps, because some tenants would prefer to have an extra couple of days of overlap at their old place and new place so that they can have a transition period to move their stuff and clean up the old place before turning in the keys. If every landlord insisted on a move-out on the 31st, that would make life more difficult for the tenants and would basically require all landlords to have a dead month in between tenants. I can’t afford that. Or maybe I *could*, but I really don’t want to. I’d much rather pocket the extra $2k in rent and get my ducks in a row before the last guy moves out.
My last tenant moved out on the 1st of October, and I had painters scheduled to come on the 2nd. I collected the keys on the 1st, left a lockbox for the painters that day, and came back the morning of the 3rd to inspect the painters’ work and to do some final cleaning and blind slat replacement, etc. Unfortunately, I goofed a little because I didn’t notice until the morning of the 3rd that the tenant had broken the fan switch and the sink drain stopper was missing. But we made a quick trip to Home Depot and fixed those items while the new tenants were just starting to move in. It worked out fine, and I only lost one day’s rent in the interim while the painters were doing their thing.
Financial Samurai says
During COVID, I didn’t want to host open houses. I had private showings. It was in accordance with the rules and everybody felt safer.
I took my time finding tenants. The property is paid off and I no longer have a sense of urgency. I was determined to find the best tenants possible this time.
But perhaps the $6,500+ price point is relatively slower? What is the price point for your rentals? Demand was higher for my $4,100+ rentals.
A maximum 1 week of no occupancy is excellent during turnover. I don’t think that’s the norm.
Totally fair response. COVID did make things trickier. I had masks and hand sanitizer available and had people kind of go through one family at a time, so they stayed spread out, but I can totally understand not wanting to risk having multiple families at once show up.
I bet you’re right about the price point as well. My apartments are priced in the $1,800-$2,000 range, which is more solidly working class around here. At the higher price point I’m sure you get fewer applicants and less urgency because they probably feel like they have a lot of options available to them. At my price point, it’s kind of the sweet spot between white collar and blue collar, so I tend to have more options available. Glad that your property is paid off and you don’t feel that urgency! That must be a great feeling. :)
Sam, I completely understand the value of time over money as we get older with young kids in our lives. I’m 45 with a 6 year old son and 2 year old daughter so maximizing quality time over money plays into our decisions to make the best moves.
For some situations, I like to do quick net worth vs amount involved analysis to see if it’s worth my energy to consider or toss away. For example, just the other day, I was selling a small item on craigslist and someone texted me with a low ball offer which was basically half my firm asking price. Now, I’ve sold many items on there throughout the years so I know in general the people that respond. Some are courteous and good fair deals are made. Others are flakes and tire kickers. With this person, I had a gut feeling he was going to be pain to deal and negotiate with so that was already a red flag. As you said, he tried to bargain (really low) right away.
With the quick and dirty net worth/amount involved calculation, this transaction was basically about 0.000002% of my net worth. So I tell myself…am I going to deal with this guy when all is said and done, it amounts to a fart in the wind? :)
Sure, somethings are indeed important in life regardless of the amount whether it’s a dollar or $10 million. But I’m sure giving up $1,800 a year for you is equivalent to a grain of sand on the beach whereas if you did rent it out to those 4 guys, it would have sucked some precious personal time/hours out of your life while losing a few nights of sleep having to deal with their mismatched and unrealistic expectations.
Financial Samurai says
Hope you’re at least having fun selling stiff online! I never got into that side hustle.
Great article as always and something to relate to….. I am originally from India and have 2 rentals. Privilege and new money can make people super annoying/ disrespectful and it is best to avoid them.
I am in my late 40’s and value time more….. and definitely do not blindly go for more rent and give preference to correct fit.
Sam – One Q, so far I have never had a deductible for repairs…. Is this recommended and should this be the rule rather than an exception ?
Financial Samurai says
It’s up to us landlords to fix things when broken. I don’t think there should be a deductible for repairs. It’s our responsibility based on the lease agreement and the laws of today of providing livable property that’s fully functioning.
Convenience sake, I have my landlord’s contact the fixers directly and then bill me. Especially during the pandemic, it’s much easier and efficient.
I’ve seen several occasions too, when the potential new landlord called the prospective tenant’s current landlord, that individual gave their tenant high marks, just so the tenant would get the new rental and move out.
It’s particularly sad when the tenant in question is a hoarder (and has many pets), and anyplace they live for very long is going to require a restoration project that strips out everything right down to the studs in the walls, before it can be rented again.
I always wondered how a tenant like that was ever able to get another rental. Talking to a distraught landlord while he was having masked crews carry out dumpster loads of trash from his vacated rental house, now I know.
Carole Hewitson says
I learned that the best landlord reference is the one before the current one.
Financial Samurai says
Probably desperate landlords.
Oh wow you dodged a bullet! That group of guys sounds like they would have been a pita never ending nightmare. That’s fantastic you found much better tenants only one week later! Patience paid off there! And definitely seems worth the lower price.
Financial Samurai says
Thanks. It was at times comical their expectations. I had fun looking at the $40,000/month listing and sending it to them to see if it was more suitable :)
Great article and really hit home with me. I purchased 3 single family residence rentals between 2010 and 2012. 2 were short sales and the other happened to be a home that the previous owner bought new and lived in for 32 years. My first few years, I did it all myself, from tenant screening to cleaning. In the early days, I also looked for the most money in the fastest timeframe.
After a couple of subpar tenants (and quite a few good ones) I decided on a hybrid model.
My problem child house went to property management and it has been the most stress free top dollar experience. I still “manage” the other two. One has been rented for 6 consecutive years (on 3 year terms) to incoming hospital residents. Talk about LOW maintenance. These future doctors pay early, are never home and I rarely hear from them.
The last house was rented on a referral from the previous tenant to a social security recipient and her grown daughter/care taker. She’s been there 5 years now and they are fantastic.
The catch is, the homes I continue to manage are priced about $150 or so, below going rate per month. I know on paper I’m leaving money on the table. But I haven’t had to clean, experience a vacancy or put new flooring in. Perhaps I’ve made MORE on the deal with a lower monthly rate?
In October, I completed a cash out refi and paid off my best rental. I am now snowballing payments on rental payoff 2, that will also be owned no mortgage in 11 months. My rental refi mortgage will be at 117k and that will be it for rental house mortgages. Market value of the three homes is $900k. Not bad when purchased for around $110k a piece. Having good tenants, at a discounted rate, has been the way to go for me.
Why would you own the rentals outright since you won’t be able to deduct the mortgages?
Because the loans were so low and the rates so good, I felt that the mortgage deduction was a fair trade off for a paid off home. I get the other arguments about lawsuit target and leaving a mortgage, etc etc. But for me, I’m ready to own them free and clear. I traded up big time on my personal residence in Oct. 2 paid off rentals generates enough passive income to pay for my last rental and my new home. So, just simply want to consolidate and simplify.
I typed up a long reply but it somehow didn’t post (operator error on my part I’m sure). The short of it is, the loan amounts and interest rates were so favorable that the mortgage deductions were nice but rather insignificant based on my cost benefit analysis of owning properties free and clear.
In addition, the 3 rentals generate enough passive income to cover the final rental mortgage and a new home (personal residence) I traded up to, in October. I feel like I have plenty of cash in reserve (20% of networth 1.9 mil, fully funded simple Ira, a job I don’t hate (owner small insurance biz) and 3 daughters in their teen years. So yea, I get the argument of holding mtgs forever, to shield against lawsuits, and write offs but I’m looking to simplify as I’ll be 46 in a couple weeks.
Jim, it sounds to me like you’re doing it right. Try to manage yourself if you can, but if you get a problem child property, outsourcing it makes sense.
And I agree with your philosophy on rent. Vacancies are expensive. Lost rent for the time it sits empty, plus the cost of cleaning, painting, etc. Some of those costs can be taken from the outgoing tenant’s security deposit, but the “wear and tear” portion you have to eat. And it’s extra work. I wouldn’t discount the rent TOO much, but making sure you’re competitively priced is important to finding a good tenant who makes your life easier while they’re living there, who generally stays longer, and who makes your life easier when they move out.
Financial Samurai says
Great timing and great tenant durations!
Dave K. says
Great article, I feel your pain, BUT I think you need better systems. I no longer try to do everything. I realize what I’m good at and what I’m not. Once I hit 6 units, it becomes a second job. You’ve done well with real estate, but cleaning a unit on your own doesn’t sound like a fun time, and can be outsourced inexpensively!
I’ve also begun using one real estate agent exclusively who is extremely thorough on his background checks and seems to be a good judge of people. Costs a month rent, but gives me more free time, and peace of mind.
In all my buildings I only allow ONLY for phone calls or emails. Its just too easy for a tenant to fire off a text message when they are in a bad mood, middle of the night for no reason etc.
Tenant turnover has always been my biggest enemy, and is probably yours too. Always lose 2 months rent, plus repairs, time consumed etc. Much rather have a slightly lower than market value tenant stay, than a turnover.
The key after 20 yrs of this is really finding the right people, who stay for 3+ years. Get enough of them it can truly become a very profitable semi passive income stream.
Financial Samurai says
Nice system of no texts. I don’t pick up my phone out of the blue anymore due to spammers. So it’s just email then. I’ll implement. But I’m bad with emails too!
I only have three rentals. I also enjoy cleaning. It’s soothing and gratifying. Maybe it harks from my days cleaning a McDonald’s kitchen for $4/hour. I just listen to a podcast and clean and touch up paint away. Painting is a hobby.
This was a special situation that I may discuss in the future. Normally, I require all my tenants to clean the unit and have a thorough walk-through before leaving and getting their deposit back. Hence, I’m not the cleaner, just the inspector.
Jeff VA says
Doing menial tasks like spackling dry wall, using wood putty to fill in damaged hardwood, etc., is surprisingly calming and provides a good sense of accomplishment afterwards lol.
Financial Samurai says
Yes, just like gardening and watering trees. Have really enjoyed gardening during the pandemic. My wife and I planted about 30 new succulents recently. And in 3 years, they will be a site to see!