How much is a great tenant worth?

45 Replies

Hello BP community! I am a buy and hold real estate investor in Colorado. I recently had an interesting situation where I would acquire a single family home with a fantastic long term tenant. The tenant is clean, keeps the house in great shape, and pays on time. Unfortunately the tenant pays well below market rates. After running the numbers (factoring in all expenses including anticipated repairs and CAPEX) the property would only cash flow $30/mo. Increasing the rent would force the tenant to leave. So unfortunately the numbers didn’t work for my personal investing strategy and I had to pass. But that begs the question: In order to guarantee a great tenant would you compromise on other aspects of your investing strategy? How much do you value peace of mind? I would love to hear the BP community’s thoughts on this. Thanks Everyone!

Just as curiosity, why wouldnt you purchase it if they planned to stay a while?

I would think a hands off tenant paying your mortgage would be a keeper

@Matthew Pastore ,

A good tenant is worth a lot IMO!    We inherited a tenant who was paying WAYYYY below market value,  but he'd been there 10 years so we wanted to keep him.     We came up with a plan, to slowly renovate and increase his rent each year.      If it's a great opportunity, I'd suggest this!  

@Matthew Pastore you say they are "well below market" but you don't say how far. Would you buy it if it cash-flowed $100 a month? You could increase the rent $70 to reach $100 cash-flow. If the tenants know they are well below market, they would likely be able to swing a small increase in order to stay. Moving is expensive and they may not be able to find such a nice home for the same price.

My general rule-of-thumb is that a good tenant is worth 10% but not much more. Turnover can easily cost a month's rent between maintenance and vacancy. Rather than scare off a good tenant or risk a lengthy vacancy, I'll consider keeping the rent 10% below market to retain them. It's probably a wash compared to turnover but the benefit is that I keep a really good tenant rather than taking my chances with the next one. There's also a very good chance the tenant will stay longer when they're being rewarded for good behavior.

Let's say they were $300 below market. That's $3,600 a year. If you want to give away $3,600 a year just let me know and I'll send you my mailing address! 

I can't say what to do without knowing how far below market it is but it sounds like you should either walk away or buy it and rent it at market rate.

@Joe Marshall great point! For me it comes down to opportunity cost. I have a certain amount set aside for a down payment on a rental property and I want to make sure I get the most bang for my buck. I think there are better deals to be found

@Linda D. I think yours is a great strategy and it may be something I action on in the future. For right now I’m looking at deals with higher cash flow, but there is definitely something to be said about having a worry free tenant!

@Nathan G. Ultimately I did walk away from the deal because it didn’t hit my numbers. I think what you are saying makes total sense. The max amount of rent I could get from that tenant was about 20% below market rates. I invest in real estate on the side and personally I would feel uncomfortable buying the property and raising the rents to the point that would force the tenant to leave. I know that’s not the right “business” answer but I wouldn’t feel right forcing a good person out of their home

Two of my tenants are about $100 below market, each.  Yes, it's a lot of money, but they are both wonderful tenants.  No complaints, clean, take care of the place, very understanding if there is a problem/repair, etc.  They're "buying" me my houses, so I have no plans in the near future to raise their rent.  It obviously doesn't make the most financial sense, but to me, the "hands off" self managing makes it worth it.  

All of my rentals are a little bit below market rent. I do this so I get more interest and can choose the best tenants. To me, its worth losing out on $25-50/month just to have better tenants who will take care of the place and leave me alone.

We have a tenant at $100 below market. Maybe even $150 if we really wanted top dollar. But the family has been there for over 10 years and basically he does labor upgrades if we buy materials, and they are very clean. Never have to chase them down for rent.

Well worth it IMO

90% of tenants are good tenants. Business wise this means that a good tennat is only worth what they pay in rent. If you are subsidising a tenants rent you are not only losing income, the sole purpose of investing, you are also devaluing your property by 10s of thousands of dollars. I believe this is a fantastic business policy for others.

I personally like compassionate landlords as they make for easy pickings when we seek to purchase properties below market with the intent of adding value through rent increases. The value of a rental property relies on it's present rental income. I will take advantage of other investors poor business practices.

I view them as "hobby landlords" since generating maximum return on their investment is not their primary goal. They place people ahead of profits and make investing so much more lucrative for others.

For all those investors that believe in keeping tenants rent below market. Thank you for making web sites like this possible and adding to making investing so much more profitable for others...

I think having a great tenant in a class C building may mean more than having a great tenant in a great area.  A great tenant in a really poor area is harder to find - and keeping occupancy levels up tends to be more difficult.

Originally posted by @Matthew Pastore :

@Nathan G. Ultimately I did walk away from the deal because it didn’t hit my numbers. I think what you are saying makes total sense. The max amount of rent I could get from that tenant was about 20% below market rates. I invest in real estate on the side and personally I would feel uncomfortable buying the property and raising the rents to the point that would force the tenant to leave. I know that’s not the right “business” answer but I wouldn’t feel right forcing a good person out of their home

 Well first of all you need to be less emotional about the whole landlord tenant relationship. Getting involved onnanemotionanlevelmwith your tenants is really detrimental. That’s my wife’s problem. She wants to know everything about our tenants. 

Second of all it’s not their home. It’s your home and they are paying for the use of the home.

While I agree that good tenants are worth quite a bit it shouldn’t be the case where you make no profit on your property. We have great tenants but I still raise the rent. In fact this year two of the rentals get 200 dollar a month raises. A few others are scheduled for next year and a few others by 2019. 

It’s a business. You need to treat it like one.  I can guarantee you that if you can’t make your rent that tenant isn’t going to just say hey let me subsidize you like you’re subsidizing them. 

Keeping the rent lower than going rate is part of my strategy but if you keep it too low you’ll find yourself 1000 bucks below going rate like I did years ago. All because I had the same well they’re nice people thoughts.  So now I stay about 10-15% lower than going rate. There is no reason for me to stay lower. It’s still lower than what everyone else is charging.  If the numbers don’t make sense don’t buy. Most tenants expect a rent raise at the maturity of the lease or when a new LL takes over. 

 I tell everyone  I rent to. While I really would like to keep you as a tenant and i think we have  a good relationship, I have certain obligations I need to meet. 

@Rob D.

Stop hurting our business advantage, we need as many mom and pop investors as we can get to continue making good deals. :)

If they are happy charging below market rents we ultimately profit.  Even $25 below market adds to our bottom line. What they fail to understand is that finding a good tenant willing to pay market rent is worth 10X that of any good tennat paying below market. 

They simply do not understand or operate as a business. Turn over costs are always the lame excuse used to justify not efficiently operating a long term income property investment. Turn overs always happen so ultimately all they are doing is losing money now and stalling the inevitable.

They lose less today but far more over time. Counter intuitive to long term hold.

@Matthew Pastore Matthew congrats you did the right thing! In my mind we are in this game to build wealth; tenants come and tenants go that's why they rent. I value tenants highly, they are the vehicle to profit and I value profit way more. Never allow yourself to think "if I raise the rent they might leave". If they leave, they leave, it is an opportunity to increase the value of your investment with a higher paying tenant. We don't buy the tenant we buy the building, the tenants are either an asset or an obstacle and you have to make that call.

@Matthew Pastore I am not convinced the tenant would leave if you raised rent to fair market value. Where will they go? They will need to pay fair market value everywhere. Any house similar to yours will cost the same, assuming you are actually at fair market value.

I would evaluate the purchase using real market rents, not current tenant rents. If you acquire the property, just move rent up over two years to fair market. If they can't pay it, then find a new tenant.

Of course keep it all in perspective. Tenant turn over costs may be more expensive than holding rent a little lower. For example, let's say your turnover cost is $2000 for vacancy and rerenting. If you raise rent $20 per month, it will take 100 months to recoup the turn over costs. If you can raise rent by $200 per month, then it is only 10 months to recoup the turnover costs. Just run the numbers to make sure it is worth it.

@Matthew Pastore I tend to agree somewhat with the comment above me. You're making two major assumptions:

1. The tenant would immediately leave if you raised their rent.

2. That there aren't many other great tenants out there who would pay market rent and treat your property with just as much respect.

I think it would be a matter of having a conversation with the current tenant to begin. They likely know full well that they pay well below market rent. If they are 20% below market in our area, you're easily talking several thousand dollars per year.

Without a doubt, there is value in having great tenants, but with proper screening and setting the expectations up front, you can have your cake and eat it too with a great tenant who is willing to pay market rent. The market is the market for a reason and willingly accepting much less than that would be doing your business a disservice.

Jared Bouzek, Lender in CO (#1428276)
720-984-2516
Originally posted by @Thomas S. :

@Rob D.

Stop hurting our business advantage, we need as many mom and pop investors as we can get to continue making good deals. :)

If they are happy charging below market rents we ultimately profit.  Even $25 below market adds to our bottom line. What they fail to understand is that finding a good tenant willing to pay market rent is worth 10X that of any good tennat paying below market. 

They simply do not understand or operate as a business. Turn over costs are always the lame excuse used to justify not efficiently operating a long term income property investment. Turn overs always happen so ultimately all they are doing is losing money now and stalling the inevitable.

They lose less today but far more over time. Counter intuitive to long term hold.

 @Thomas S

Lol. I don’t have a issue with giving a tenant a bit of a break. If they’re good I don’t see a issue giving in a bit on the monetary side. But don’t screw yourself to the point where you won’t make money.  At one time I was that guy who was screening himself because I was worried about people leaving and not finding new tenants. It cost me 60,000 dollars to learn that lesson. That’s why I don’t put up with rubbish   

@Joe Splitrock you’re right. I could have raised the rent to market value on the tenant. They may have to stay because where else could they go? Or maybe they truly couldn’t afford it and have to move and then I’ll get a new tenant who pays market rates. Either way I win right? But that’s assuming that my criteria for winning is entirely about money. For me it’s not. Which is also great news for @Thomas S. ;)

Originally posted by @Matthew Pastore :

Joe Splitrock you’re right. I could have raised the rent to market value on the tenant. They may have to stay because where else could they go? Or maybe they truly couldn’t afford it and have to move and then I’ll get a new tenant who pays market rates. Either way I win right? But that’s assuming that my criteria for winning is entirely about money. For me it’s not. Which is also great news for Thomas S. ;)

I understand that you passed on this property because you didn't want to raise the tenants rent, but another landlord will come along and do what you didn't want to do. In the end, the result is the same. The tenant will pay fair market. By definition "fair market" is fair.

And don't believe for a second that Thomas practices everything he preaches. 

A good tenant is worth their weight in gold.

@Matthew Pastore I'd run from anything that was only cash flowing $30/month unless I could very very easily make that higher. But you stated raising to market forces tenant out and you didn't want to do that so I think you did the right thing. I like what @Nathan G. said, a good tenant is worth 10%. About how much is the current tenant paying below market?

The problem with sacrificing on margin for a "great tenant" is all tenants are still people. While they may be great today they could lose their job tomorrow. They could start dating a "bad boy" who likes to hit holes in walls. We screen for the best tenant we possibly can, attempt to serve them as best as we possibly can, and foster a relationship of mutual respect. 

That being said $30/mo in cashflow sure wouldn't get me out of bed in the morning! 

Ryan Dossey, Real Estate Agent in IN (#RB15001099)

As a property manager I always suggest keeping a good tenant in place even when they are paying below market. It costs so much to turn a property that it can take months to get that money back even with the increased rent.  

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