Good Tenant, Low Yield or Bad Tenant, High Yield: What’s Better?
There comes a point, I think, when every landlord takes a look at what they own and wonders whether to keep the property or sell it. There are many motivations for wanting to sell a property, but in this post I'm going to talk about trying to decide whether to sell a property that has high yield, but causes a lot of headaches or a property that has low yield, but is essentially carefree.
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As I start looking at my portfolio and deciding what I should sell and what I want to keep, I’ve come across this issue myself. When I look at my property, I’d like to see what it yields me in relation to the market value of the property. While most would like to look at the yield they get from when they acquired the property, I think it is also important to see the yield in relation to the market value in case I want to liquidate the property.
Property #1: Low Yield, but No Headaches
In my case, I have a property that is currently yielding me only 3% in comparison to the market value. This means that I have more of an incentive to sell this property because I could unlock the equity in this property and use it to earn more somewhere else.
On the other hand, I have had a great tenant in there for the past a year and a half. They have barely bothered me for any repairs, and they've always paid on time. In fact, I haven't even seen them since I signed a lease agreement with them. It is difficult to find tenants like that, and so now I am battling with the idea that it is better to keep them than to sell the property.
Property #2: High Yield, but a Challenge
I also have a property that is yielding me 8%, but always gives me a lot of headaches. The area is not exactly the best, so I don’t think I have the ability to attract high quality tenants. Although I could just screen better, I think finding someone who would stay there would be quite a challenge.
So would it better to sell the property, knowing that perhaps I may not have as great of a chance to find a property that yields that high again?
I believe one of the major issues as an investor is the limitation of your time. If you are managing by yourself, you can only manage so many properties before you become overwhelmed.
Of course, one of the other alternatives is to find a good property manager. But I personally find it difficult to find a good property manager who's willing to take on challenging properties to manage (I could never find a good enough manager to manage my fourplex!).
So I personally believe that it is better to sacrifice high returns for less headaches if you are looking to expand your portfolio. Tenants who cause the least amount of headaches will have a greater value in the long run, as they will keep your property in a good shape and keep it occupied for a long time. When you have a lot of short term tenants, as my experience with my fourplex has shown, it will cause a lot of unexpected expenses and lower your expected return tremendously. Plus it takes a lot of my time to manage and find tenants.
Therefore, I have come to the conclusion that it is best to keep properties that have good tenants even though your returns may not be as high. Sometimes we truly get what we pay for. And sacrificing some yields can lessen the amount of headaches you’ll have in the future and allow you to further expand your portfolio without sacrificing your energy.
What about you? What would you do? Do you think a good tenant is worth a lower yield?
Let me know in the comments!