As a landlord since 2005, I believe in developing a good relationship with my tenants. I treat my tenants as customers and want to provide the best living experience possible. This article provides tips for prospective tenants in a strong rental market.
If you are a landlord looking to find great tenants, this article should also help you make a better decision. Having great tenants really makes a difference in terms of peace of mind and your quest to build reliable passive income.
This article consists of two parts:
- An interaction I had between one prospective tenant and how it all unraveled. The interaction may help both renters and landlords better negotiate a lease. Since attending business school, I've found using real-life case studies to be the best way to teach and learn.
- Tips for getting the rental property you want in a highly competitive market. These tips are based off my experience as a landlord for over 15 years and new things I learned from my latest tenant search.
The Rental Property In Question
After buying a larger house and remodeling it, it was finally time to move in and rent out my old house. I've gone through this process of buying a property to live in for several years, fixing it up, and renting it out multiple times now. It's one of the easiest ways I've found to improve quality of life, wealth, and passive income.
Instead of renting out the entire house, I decided to rent only the upstairs portion. The upstairs consists of two bedrooms, a bathroom, a kitchen, and wonderful views of the Pacific Ocean. Overall, the upstairs is about 1,370 square feet.
The downstairs consists of a bedroom, bathroom, and office across ~600 square feet of space. Further, there is a 300 sqft deck facing the ocean.
The space would be used for the new Financial Samurai office and a place for friends and relatives to stay while visiting. It could also serve as a good place to quarantine just in case one of us gets sick.
In Search For The Ideal Tenant
The easiest way to list a rental property for free is on Craigslist. I estimated rent for the place was somewhere between $4,000 – $4,300 a month. But I wasn't entirely sure until I tried.
Please recall that for five weeks, I had tried to provide subsidized housing and rent out the property to two preschool teachers for between $2,000-$2,400/month and failed. It was a disappointing process, but it was for the best. One of the preschool teachers later decided to resign and move out of the city.
I started at $4,300/month for a week and received no interest. So, I dropped the price to $4,200/month for another week and received some interest. As soon as I dropped the price to $4,100/month, however, demand started flowing in. I had found a market-clearing price that I was happy with.
Interest From A Family Of Prospective Tenants
I focused on one couple with a seven-month-old baby. They were living in a one-bedroom apartment and rightfully decided they needed more space. Because we raised our son from 0 – 2.8 years old in this house and really enjoyed the experience, I thought this couple might be the perfect fit.
When they sent in their application, I couldn't believe the numbers. The mother worked in marketing and made $130,000 a year. The father worked as a dentist and made $170,000 a year.
My immediate thought was: With a combined income of $300,000 a year, why was this couple with a baby renting a 600 square foot, one-bedroom apartment? Did they take frugality to the extreme after reading my post, Why Households Need To Make $300,000 A Year To Live A Middle–Class Lifestyle Today?
I bet there was a good chance they did read the post, but I wasn't going to ask. If I was them, I would have tried to find at least a two-bedroom before the baby was born. But that's just me.
A $300,000 household income equates to $25,000 a month. $4,100 a month in rent equates to only 16.4% of their monthly household income versus 31% – 34% for the average American. Clearly, they could more than afford my place.
I was excited to proceed.
Then The Red Flags Started To Fly
After the initial excitement wore off, however, I began to reflect on some things that made me feel a bit uncomfortable about the prospective tenants.
1) The wife came on time, but the husband was 25 minutes late. As a result, I had to explain the listing all over again to him. The husband also didn't know what my asking price was. He also said the asking price was at the top of their range. At least the wife, who was carrying their baby, was extremely enthusiastic. But he seemed lukewarm and clueless. I felt like he didn't respect my time.
2) Towards the end of their first 40-minute visit, the wife asked if she could see the downstairs portion of the house. I declined since it was my private space. I thought it was bold of her to ask me to show her a space that was not for rent. Would she be as bold after I rented the space to her?
3) Although we had finished remodeling our house, it would still take another three weeks before our washer/dryer system would be hooked up. They asked how often we would be using the laundry in the garage on the ground floor. I told them probably 2-3X a week during the day only since we have a newborn.
The mother seemed dismayed and said they valued their privacy, even though the ad clearly stated the laundry would be shared by two units. Further, they weren't renting the entire house.
Time To Sign The Lease
Despite not feeling 100% comfortable with these applicants, after several back and forth e-mails, we agreed that the place would be a good fit at $4,100/month. We decided on a move-in date and I drew up the lease.
Before signing the lease, however, the husband asked to see the place one last time. No problem, as I welcome a final visit before making a big decision.
Everything was going well until he told me again that the place was at the top of their range. He said for this price, they were looking at whole houses. He also said they had come from Iowa where things were so much cheaper.
Then he said they've been really looking to spend only between $3,600 – $3,800. If I could lower the price to $3,800 from $4,100, they would be willing to pay 100% of the utility bill. If not, he asked if I would pay for 100% of the utility bill and 100% of the water bill.
At this point, I was getting annoyed because I thought we had already agreed to the terms: $4,100/month, they'd pay 75% of the electricity bill, 75% of the water bill, and I'd pay 100% of the recology bill.
I told him I thought we had a deal at $4,100, and that I would not accept lowering the price to $3,800.
He came back and said his final offer was $4,000, and he would pay for 75% of the utility bill if I paid 100% of the water bill (~$85/month) and 100% of the recology bill (~$65/month). I had agreed to pay 25% of the utility and water bill because I had the downstairs space, even though the space would only be used for 10 hours a week at most.
Negotiating The Rent And Losing
At this point, he was 50 minutes into his second visit. I told him he was rolling the dice with his offer since I had another interested party. The other prospective tenants came very late into the process, but they were legitimate.
He responded with confidence, “I'm willing to roll the dice.“
The guy was nickel and diming me last minute and I didn't like it. When we agree on terms, we honor the terms. Remember, it wasn't like the couple was broke. They were making $300,000 a year. I felt like I had wasted another hour of my life.
I told him I'd get back to him in 48 hours. I felt bad and it seemed a little too risky to gamble on the other prospective tenants since they had inquired so late. Bird in the hand right?
Therefore, I acquiesced to lowering the rent to $4,000 and paying 100% of the water bill. Overall, this was a ~$200/month concession. I didn't feel great about the deal, but I was hopeful they'd be good tenants.
After about three weeks of interviewing candidates, the market had spoken. I decided to listen. I had already lost five weeks of time trying to convince a couple preschool teachers $2,000 -$2,400/month was a good deal and failed.
One Final Quip
Although I didn't feel great about the deal, at least they agreed to pay for 100% of the utility bill. I was also hopeful they'd be long-term tenants as a family with a newborn.
But then, the husband had to make one last jab over e-mail when we agreed to the final terms. “OK, I'm willing to pay for 100% of the utility bill if you don't have a hidden sauna down there.”
My wife thought the quip was funny, but I didn't since I had been going back and forth for eight days now. I had already provided a concession and I was tired of the process.
Every joke has an underlying meaning. And his joke reminded me that despite making $300,000 a year, my place was uncomfortably at the top of their price range. I didn't respond to his funny.
One Final Demand From The Prospective Tenants
After drawing up the final terms of the lease, I sent it over for them to sign. This is when they said they'd like to push back our agreed-upon move-in date by nine days. Pushing back the move-in date by 9 days meant $1,180 in lost rent.
They wrote, “We'd like to move in on XX/YY because that's the only time we can both take off. I hope you are OK with this compromise.”
There was no compromise because the agreed-upon move-in date was already five days later than what I had told them was my target date for the start of the lease.
I had had enough. This was the straw that broke the camel's back.
A compromise is a two-way street. For them to think that asking for a 9-day delay and a $200/month effective rental reduction was considered compromising, made me fearful of our long-term relationship.
A compromise means both parties give a little to get what they want. So far, all they'd been doing was taking.
If they were this demanding, this annoying, and this emotionally unintelligent, what would happen once they moved in? I feared they would nitpick everything to death and ask me to do things they could do themselves e.g. change a light bulb.
Taking care of a newborn and a 3-year-old full-time is already exhausting. Add on my desire to continue publishing 3X a week on Financial Samurai can make for a very long day.
The last thing I want is demanding tenants who feel the rent is a little too high for their budget.
Prospective Tenants: The X Factor Is Your Demeanor
Everybody should fight to get the best deal possible. I respected my prospective tenants' efforts to save money.
However, once terms are agreed upon, please stop bargaining. Accept the terms and move forward or reject the terms and find another place.
The husband is like the guy who would complain that his meal wasn't cooked to perfection, even though someone else was paying.
The wife is like someone who wanted to fly first class but was only willing to pay for economy.
Despite their more-than-enough income of $300,000, I told them I didn't think my place was the right fit for them.
They lost the property because they simply got on my nerves. They didn't know when to quit asking and start compromising. I would gladly forgo a month's rent to find tenants with a great demeanor.
They were shocked at my decision, but at least they got to continue saving money on rent.
Tips For Prospective Tenants For Getting The Rental Property You Want
The rental property market is strong where I live because there's a migration of people coming from the east side of San Francisco (downtown) to the west side of San Francisco due to offices being closed. The west side has more space, is less dense, has cleaner air, and lower prices.
If you happen to be looking to rent a property in a strong rental property market, here are some tips for prospective tenants that may help you win in a competitive situation.
1) Come prepared with all the right documentation.
Prospective tenants who really want a property should arrive all the documents needed for renting. Bring a binder filled with: a copy of his latest pay stub, a credit report with a credit score, proof of employment, and a resume.
A prepared tenant shows the landlord that he knows what he wants. The prospective tenant also shows he is organized enough to take care of the property. Most prospective tenants come unprepared. In a competitive market, having all your documents in order is huge.
2) Be careful about bringing your friends or significant others who won't be on the lease.
The more people you bring, the more people the landlord will assume will be staying over at the place. The last thing a landlord wants is multiple long-term guests staying over who are not on the lease. More people living on the property means more liability and more wear and tear.
I highly recommend prospective tenants come alone, especially during the global pandemic.
3) Ask if you should take off your shoes.
By asking the landlord/owner/agent whether you should take off your shoes before entering shows the owner respect. It also shows that you care about cleanliness, which should translate into caring for everything else in the rental.
Prospective tenants showing courtesy goes a long way. Despite seeing both his wife and me with our shoes off, the husband barged in with his shoes on during his first visit. He was inconsiderate and clueless.
4) Smile and make small talk.
Smiling is free. Do it more often if you are happy and like the place. The last thing a landlord wants is to rent the place out to a grumpy person who shows no enthusiasm.
Caring landlords enjoy renting their places to people whom they like. This is simply human nature. Landlords who use property managers care most about getting top dollar. Prospective tenants need to understand who is showing the house: the leasing agent or the owner and act accordingly.
5) Follow directions.
If prospective tenants e-mail me and ask when the open house is, when it’s in bold in the ad, they are raising a red flag. If prospective tenants ask if there is parking, when it says so right then and there, a landlord will wonder what other instructions of the lease a prospective tenant might break.
When the husband arrived late to my open house and then asked how much was rent, it showed me that he and his wife were not communicating properly.
6) Discuss long-term plans.
The more visibility prospective tenants can give the landlord about their long term plans, the better. Landlords usually want long-term tenants in order to minimize the hassle of finding new tenants.
Any rental agreement for less than one year is a turnoff. Ideally, you want to indicate to the landlord that you plan to live in the place for two or more years.
Please note that individual roommates is also less ideal than a family. The reason is because individual roommates will likely have a higher overall turnover rate. Older and wealthier landlords today are willing to forgo higher rent for better tenants.
7) Have a monthly gross income of at least 4X greater than the monthly rent.
If the rent is $1,000 a month, you should probably make at least $4,000. Otherwise, you aren't going to be able to comfortably afford the rent. With anything less, the landlord will worry about your budget. However, you may be able to get away with making less if you show you have a large balance sheet or are willing to pay multiple months upfront.
Further, during the pandemic, landlords are now more afraid of tenants who decide to stop paying rent completely due to the moratorium on evictions. Many landlords still have mortgages, insurance, and maintenance bills to pay.
8) Show at least 10X the monthly rent in liquid savings.
It's up to you as to whether you want to show any of your financials during the application process. But the more you can show, the better. Having at least 10X the monthly rent in cash or liquid securities is a good goal to have. Your goal is to allay a landlord's fear of untimely rental payments or no rental payments.
9) Don’t arrive at the very beginning.
With every single open house I’ve hosted since 2005, 70% of the interested parties come at the very beginning. As a result, you don't get as much air-time as you should with the landlord.
Instead, consider coming in the middle of the open house window so you can build a bond if you like the place. Coming towards the end of the open house is not ideal since the landlord will by then be probably tired.
During the pandemic, the landlord will likely make an effort to host private 1X1 showings for safety reasons. Therefore, please come within your allotted window and be courteous of how much time you spend. Chances are the landlord has arranged another showing right after you.
10) Don't joke about money.
When it comes to making a financial decision, don't joke about money. You never know how the other side will take the joke, especially over written communication.
A landlord wants to know you have more than enough financial means to pay the rent on time. Don't let doubt creep into your landlord's mind. At the end of the day, this is a business transaction.
11) Follow up over e-mail.
If you like the property, I can’t emphasize enough how important it is to follow up over e-mail, thanking the landlord for hosting and reiterating why you think you are a perfect fit. After solid financials, all a landlord wants is a tenant who will take care of the property as if they owned it themselves.
12) Don't be annoying.
Perhaps above else, don't be annoying. Annoying people get more annoying over time. All landlords fear tenants who are hard to deal with.
Being a landlord can be a real pain in the ass, especially if you have low tolerance for dealing with inconsiderate people. Therefore, as a prospective tenant, you need to figure out the landlord's personality and greatest concerns.
13) Have renters insurance.
One of the main worries a landlord has is liability. A landlord doesn't want to be responsible for theft or damage to a renter's personal belongings. Therefore, landlords get a homeowners insurance policy. At the same time, veteran landlords require renters to get a renters insurance policy.
A prospective tenant who tell the landlord that he or she will get a renter's policy if he or she is accepted is music to a landlord's ears. This shows the landlord that the prospective tenant understands liability and cares about peace of mind as well.
If you're looking for a homeowners insurance policy, you can also look at rates on PolicyGenius for free. Pricing is relatively opaque, so PolicyGenius helps consumers get the best deal possible.
A Good Relationship Matters
If you are a tenant, having a great landlord who is responsive and fixes things when broken is wonderful. If you are a landlord, having a tenant who pays on time and takes care of your property is ideal.
The last thing either party wants is to feel resentful of each other. Therefore, a good landlord/tenant relationship is paramount. If I knew I'd always have amazing tenants, I'd rank owning physical rental property even higher in my passive investment rankings.
As for my tenant situation, thankfully, I was able to sign with the other prospective tenants soon after I passed on the old prospective tenants. So far, they've been great and I'm hopeful everything will work out just fine.
The older and wealthier you get, the less you'll want to be a landlord. You may eventually want to hire a property manager. But remember, it can be a pain to manage a property manager as well.
Invest In Real Estate To Build Wealth
I find investing in REITs and real estate syndications to be much more enjoyable. Sure, I give up control, but I also save a lot of time and hassle.
I've got $810,000 invested in real estate syndications across the country so far since 2016. So far, so good as I get 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 to invest in for passive income. For most investors, investing in a diversified fund is probably the best way to go.
For those of you who like to invest in individual deals, check out CrowdStreet. CrowdStreet focuses on real estate projects in 18-hour cities, those cities with potentially faster growth and better valuations. CrowdStreet is also free to sign up and explore.
The value of owning rental properties has gone way up because its cash flow is more valuable. With interest rates staying low and more people spending more time at home, I believe owning real estate is the right move to build more wealth for the future.
Landlords, have you ever rejected prospective tenants who looked great on paper? If so, why? Do you think that annoying people will always get more annoying over time? Note: some figures and details have been changed for privacy.