High Risk Tenants vs. Lowering Rent

23 Replies

Just throwing this out there to get some advice/ideas. Here's the situation:

Have a rental property that we priced "somewhat" high. Due to this price, we didn't get many applications. The one application we got has individuals with bad credit so I am a the crossroads of the following option:

  1. Do I rent to those individuals with bad credit BUT require a larger deposit?

------ OR -----

2. Lower the rent and put it on the market again and see how it goes?

Just FYI, I am at the point now where the previous tenant had just moved out and I'm at the point now where the positive cash flow I received from them is being erased each day I hold out. Thanks for any help/advice!

Why waste your time by pricing the rental high? Tenants will shop for the best price.

Joe Gore

@Brandon S. ..If you price it right, the pool of qualified applicants increase. Bad credit with high deposit doesn't mix..It will end up costing you more long term..Patience required for the best qualified applicant...Good luck!

Originally posted by @Brandon S. :
Just throwing this out there to get some advice/ideas. Here's the situation:

Have a rental property that we priced "somewhat" high. Due to this price, we didn't get many applications. The one application we got has individuals with bad credit so I am a the crossroads of the following option:

  1. Do I rent to those individuals with bad credit BUT require a larger deposit?

------ OR -----

2. Lower the rent and put it on the market again and see how it goes?

Just FYI, I am at the point now where the previous tenant had just moved out and I'm at the point now where the positive cash flow I received from them is being erased each day I hold out. Thanks for any help/advice!

What is normal rent for this type of unit in that area and what are you trying to charge? If your property stands out for some reason (newly remodeled, close to some amenity, etc.) then you may be able to charge more, but if somebody can go down the street and find essentially the same thing for less they won't even look at yours until after they've ruled the other one(s) out for some reason (which likely won't happen). Pricing it competitively or doing something to make it stand out from the competition will keep it rented to quality tenants.

Eric Drenckhahn wrote several great blog articles on screening tenants. Very worth reading for someone in your position. Look in the blog section.

Thanks for all the quick feedback all! I think it make sense to price "it right" instead of my aggressive approach. Thanks all! :)

Originally posted by @Brandon S. :
  1. Do I rent to those individuals with bad credit BUT require a larger deposit?

Thanks for any help/advice!

The larger deposit may well be illegal. What do you consider bad credit? If someone has a low score because they've had problems with cable/cell phone companies, gym memberships, medical expenses etc. but have always paid rents I'd consider them. The reason they may be willing to pay higher rents is because the large rental companies allow the credit reporting agencies to make their decisions for them. Slightly damaged tenants CAN be the best tenants because their options are fewer and some are grateful that you can look past the corporate extortion by credit reporting agencies.

Totally agree with Bob. One of my current tenants has a bad credit due to a bankruptcy as a result of medical bills. I rented the house to them and they have been early with their rent every single month. I think the reason for bankruptcy or bad credit is important as well.

But honestly, I would rather have a larger pool of tenants to choose from, so if I were in your position I would lower the rents slightly to attract a larger pool.

I'm in Florida where you can evict people relatively quickly (3-4 weeks) and I take people with bad credit all the time, just no evictions or criminal history. A lot of people have bad credit which is why they are renting but I would be extra cautious in a market where eviction isn't easy.

Since you are in a place like California where it is difficult to evict tenants I would rent to a quality tenant with good credit for a little less money.

Originally posted by @Josh D. :

Since you are in a place like California where it is difficult to evict tenants I would rent to a quality tenant with good credit for a little less money.

What makes you think this?

@Bob Bowling

That it is difficult to evict tenants in California? I've read articles in the WSJ about tenants fighting landlords over raising rents and/or selling their properties for development. My brother lives in San Francisco and told me landlord's horror stories. So I assumed California was very pro-tenant.

If I can evict a tenant quickly I'm more likely to take a chance vs. if it takes me 6-months to evict a tenant I'm only going to rent to the most credit worthy individuals.

"I am more concerned about the return OF my money than the return ON my money." --Mark Twain

Does it really matter how high the rents are on paper if you run the risk of never receiving them at all?

Although higher rents may seem to be an appealing option for you, I wouldn't dare put in a bad tenant in even w/ a great rent deposit. With rentals, as in most aspects of life, you've got to take the long view & see past the euphoria of clearing a higher cash flow right now. The damages, evictions, vacancies, and other costs associated with a bad tenant will almost always far outweigh any short term gain.

Best of luck!

Definitely recommend pricing rental slightly below market. You'll be able to have a choice between tenants. Usually good tenants stay longer, requiring less turnover rehab costs and minimal landlord headaches. Lock in tenants at a high rate only in order to increase NOI for the sale/flip of an apartment building.

@Brandon S. I would lower the rent but keep in mind that lowering the rent doesn't mean you won't get more applicants with bad credit. Someone mentioned it above, you need to dig into the credit report and understand exactly what bills they didn't pay. You might find that it was a medical situation and they racked up medical bills and didn't pay but they did pay everything else (rent, car note, utilities etc.). I have such a tenant and they have never missed a rent payment. Also, credit is just one aspect of tenant screening. You really have to look at the total picture (credit, income, employment history, previous rent history, evictions, criminal background etc.).

You don't want top price rent in most markets. After weighing turnover and lost rents you do not get ahead.

Stay middle of the road and keep the best tenants long term. Tenants expect the rents to go up but if you go too high they will either move somewhere else cheaper or they will move to a brand new place where they get more for their money.

It's all about VALUE. Quality tenants want a good deal and quality property to live in. Crappy tenants will except anything thrown at them because they don't have much to offer.

Originally posted by @Josh D. :
@Bob Bowling
That it is difficult to evict tenants in California? I've read articles in the WSJ about tenants fighting landlords over raising rents and/or selling their properties for development. My brother lives in San Francisco and told me landlord's horror stories. So I assumed California was very pro-tenant.

If I can evict a tenant quickly I'm more likely to take a chance vs. if it takes me 6-months to evict a tenant I'm only going to rent to the most credit worthy individuals.

@Josh D Yeah, I wouldn't assume anything based on some WSJ articles or stories from your brother. You could ask him who is spending hundreds of millions, dare I say (Carl Sagan voice) billions of dollars on thousands of new residential apartments in San Francisco.

San Francisco does have some units under rent control and a landlord does have to comply with those rules but you don't have to buy a rent controlled property if you think the rules are too onerous. Plus SF is not all of CA or even the Bay Area.

Now this is what you should be concerned with. http://www.huffingtonpost.com/2014/06/02/ryan-kelly-chamberlain-ii_n_5435247.html?icid=maing-grid7%7Chtmlws-main-bb%7Cdl1%7Csec1_lnk2%26pLid%3D483442

I'd say at least 50% of Berkeley tenants store explosives. Why do you think they call it the housing BOOM?

@Bob Bowling

Well the article I read was citing facts from an actual court case and my brother is friends with a landlord who gave him a first hand account of his experiences. Not disputing the fact that people are investing lots of money in California rentals and making a lot of money doing it.

Am I incorrect that the tenant/landlord laws in California tend to be more pro-tenant?

Originally posted by @Josh D. :
@Bob Bowling

Am I incorrect that the tenant/landlord laws in California tend to be more pro-tenant?

I would say yes. I would generally say California tends to be anti bad landlord.

@Brandon S, drop your rent to a little below market, get lots of applicants, screen for the best one, and sign them up. As you are experiencing, nothing kills your cash flow like vacancy. Get somebody good and keep your rents a bit below market so they never leave.

Everyone, thank you for the overwhelming amount of responses! A lot to chew on and think about.

But I'm going to keep the long term in mind and just go below market to get quality tenants that hopefully will NEVER leave! ;)

Thanks again everyone, your inputs are greatly appreciated! :D

Hi Brandon,

I can tell you based on larger property owners that own multiple building of 75 to 150 units each that they do not push top market. As an investor gets older they generally want stabilized yield.

So the rent does go up every year but even after the bump they are still middle of the road. The tenants stay almost forever which keeps turns and headaches down.

There are some markets in the U.S where the market is exploding with rent increases but it's rare and not the norm. Most markets are stabilized with moderate rent growth annually to keep pace with inflation.

Brandon,

Choosing the best tenant might be a mistake in my opinion. I love to rent to tenants with a short sale and/or foreclosure on their record. These are previous home owners. In general, they tend to take better care of your rental than renters. On my ad, I say I would rent to the first person that I'm comfortable with. That way, I won't get sued for not renting to individuals with the highest fico score and highest income. In fact, I don't like to rent to high income earners.

Example: a couple making $125k/year compared to a couple making $250k/year. Rent is $2,500 - $2,800/month. All things being equalled, I would rent to the 1st couple. Based on my experience, the 2nd couple is likely to move much sooner because they can save money much faster and will buy in the earliest possible time. Of course, this is only one man's opinion.

As Michael mentioned above, you can charge above market rent if your unit is superior. Otherwise, only bad tenants are willing to overpay because other landlords wouldn't accept them. Accepting bad tenants is worse than leaving the unit vacant.

Good luck.

@Brandon S. totally agree with your follow-up post of not bringing in the bad-credit resident. No way would that be a good option.

However, in addition to lowering your rent, you have some other options that you didn't list out so wanted to throw them out there:

- do minimal landscaping that costs less than what you would lose on the lower rent - this adds long-term value to your property and keeps the rent at your rate

- do a move-in special that costs less than what you'd lose on the lower rent. The best move-in special is something that adds value to the apt too (i.e. a cutting board so they don't scuff up your counters or a ceiling fan installed in a room)

- find somewhere else to advertise your rents (from another BP post I learned about rentlinx.com and it's a great tool I use every day)

- do a resident referral program - give them money (that is less than the lowered-rent option over course of a year) for someone they refer who signs a 12-month lease

- crazy tip but always have your rent prices end in a $9 - there's a lot of studies that support this and you get the most out of your rent as possible

At the end of the day, if your rent is way higher than everything around you then you'll simply have to lower it. But, there are a lot of ways to close that gap in the mind of the resident by keeping above market rent and adding value to your property at the same time.

@Minh L. - GREAT POINTS! Totally agree with what you're saying. Need to find that right balance based on the pool of applicants I receive.

@Joel Owens Thanks for the tips!

@Joe Fairless Going to try ending in $9! What a slick marketing trick :)

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