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.