How much is a great tenant worth?
Parker, CO · Member since 2017 · 17 posts · 10 votes
How much is a great tenant worth?
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
8y@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.
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45 Replies
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8y
@Rob D. did insurance cover any of that? Probably not I’m guessing. Did you ever sue them to collect any of that money?
The caveat to good tenants is they aren’t paying to far under market rent. I’d never go longer than 3 years without raising rent.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes8y
One absolute missing in this thread is what are they paying now and what is market? If they are paying $500 and you're talking about raising it to $600 would make them leave, they're already on the cusp. If they are paying $2000 and you're talking about raising it to $2100, that's only 5%. Most landlords do that on a regular basis anyway.
Anyway, what is a good tenant worth? Well, I look at it from my 3 rules:
1. Pay in full, on time, every time;
2. Don't damage my property in any way;
3. Don't cause trouble for/with me, the neighbors, the city, or the police.
Virtually all of my tenants (I screen pretty hard) meet all 3 without any question. I suppose I might just be lucky, or (as I think is the case) most people are decent people and don't have trouble meeting all 3, even renters. From my time working with the public my experience is 90% or so of people do right, all the time, without any prompting. Another 5% do right when coerced/goaded/forced to do so. The last 5% are in prison, or should be in prison. So with some decent, basic screening, you ought to be able to place another tenant that fits the "good tenant" criteria without too much trouble.
Having said all of that: if the property was worth buying, but for the current market rent situation, I would have bought the property and raised the rent - either gradually over a short time for the current tenants, or convinced them to move on and right away with turnover. I've never 'thrown' someone out of a house, but I require anything I buy to be empty on the day I close so I can pick my own tenants; if I did have an existing tenant, I'm not going to subsidize their rent.
Skyline Properties - Parker, CO · Member since 2017 · 17 posts · 10 votes8yFor those interested current tenant pays $790 and market rates for that area are around 1,000-1,100
- 8yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
For me the cost of turnover ranges from a few hundred to a few thousand dollars and is a hassle that I do not need.
So I have no issue letting rent get $200 below market for my finest tenants. So my best tenants will have rents get ~$200 below market and I try to not let it get more than $200 below market (sometimes I have not been diligent raising rents and they get even more below market). However, the tenants that are my worse tenants (and I really do not have bad tenants but some tenants do not keep the home like I keep my home) have their rent kept near market rent. I have 2 such units currently. I raised one of their rents $100 in March which put them at what I thought market rent was for their unit ($1850 for large 2/2 with own yard).
The way I look at it is if I spend $2K on tenant turnover it takes 10 months to be "even" financially but there was also the small amount of effort to fill the vacancy. The part that makes it more worth while is that no matter how well you screen your tenant you cannot guarantee the next tenant will be a best tenant. I had a recent tenant that paid on time and kept the place very nice but complained about everything. She passed all screening criteria. I think she was bipolar. I am glad she is no longer a tenant.
When I want to get rid of a tenant I raise the rent above market rent. The tenant assumes I simply do not know what market rent is and provides notice. I am happy and they typically are less unhappy than if I had simply not offered a new lease.
- Investor · Riverside, CA · Member since 2015 · 280 posts · 111 votes8y
Originally posted by @Caleb Heimsoth:
@Rob D. did insurance cover any of that? Probably not I’m guessing. Did you ever sue them to collect any of that money?
The caveat to good tenants is they aren’t paying to far under market rent. I’d never go longer than 3 years without raising rent.
Unfortunately insurance did not cover it. Even if I sued them I wouldn’t get anything. I guess the pleasure of knowing I won in court but that’s about it. I just wanted them out the fastest cheapest way possible. I offered them their deposit just to get them out. I don’t let rents get too far behind. I don’t mind being lower than going rate but I won’t be more than 15% below. That’s more than fair. And I’m not the only one with rentals. You can go elsewhere just like I can go look for a new tenant.
- Investor · Riverside, CA · Member since 2015 · 280 posts · 111 votes8y
Originally posted by @Matthew Pastore:
For those interested current tenant pays $790 and market rates for that area are around 1,000-1,100
So there 25% below going rate give or take a few bucks. Even if you raised the rent they would be staying as everything else is more expensive.
Either way we can argue all day long about the spread percentages and goodnor bad tenants bottom line isn that’s a whole lotta risk you’re saddling yourself with for $360 a year.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes8y
Originally posted by @Matthew Pastore:
For those interested current tenant pays $790 and market rates for that area are around 1,000-1,100
Ok. That's too big a spread whether they are good tenants or not. That's a 25-30% discount. I feel like 5-10% might be appropriate for great tenants; beyond that I would be looking for new tenants. I have a few multi year tenants that are great that are at 5-10 at this point, which I accept because I have a day job too and low aggravation is worth a couple of percentage points of return. If I was retired or needed the money I would trade the ease for higher return.
Skyline Properties - Member since 2016 · 13k+ posts · 12k+ votes8y
Every one of my tenant is a good to great tenant. Unlike many other landlord I get rid of every tenant that is not good simply because I have learned that you pay now or you pay more later. Avoiding the inevitable is a very costly business practice.
Money is everything to my business and a personal priority to me in making business decisions. Maximising returns insures I can afford to treat all my tenants the best I can.
In all the time I have owned rental properties I have increased all my tenants rent by the maximum I could every 12 months without fail. In all that time I have never had a tenant tell me they were moving as the result of a rent increase.
Inherited tenants are free agents. Stay or go but if you intend to stay you should expect to pay your fair share. Why should your other tennats be expected to carry their dead weight.
- Chesterfield, MO · Member since 2018 · 5 posts · 0 votes8y
Always work to keep a quality tenant in place if able. At the end of the day it's all about the numbers, but the numbers should be considered carefully with regard to the risk of losing the tenant in comparison to turnover cost.
As an investor or property manager you will be greatly served to "know" your tenant, know their situation and know the market rents. I always look for a win-win that shows the tenant we want to keep them and what the top scale rent should be, then find a meeting place in the 60% range that allows the tenant to feel as if they got a deal and you also made the increase needed.
The majority of our long term tenants who swore they would have to move, stayed. Why, because they felt we were looking out for their best interest, gave them a fair increase in comparison to the competition and realized that they would have all the stress and expense of moving, in addition to a higher rent price....the latter is always easier.
For an acquisition decision, it really comes down to the market rent the property can generate. It would be great to buy a property with a long term tenant, but that would never determine the acquisition cost on a single family home...buy the home based on the numbers and if the tenant can't pay to make the numbers work, find a new tenant!
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Market rent is not a precise number...it's a small range. I can make a case for not pushing good long-term residents to the top of the range but I can't make a case for keeping rents below that range. There are plenty of good residents that pay market rent...you don't have to choose one or the other.
- Real Estate Investor · East Brunswick, NJ · Member since 2017 · 94 posts · 71 votes8y
A great tenant will really help you sleep at night knowing that your mortgage is being paid off, and the house is being taken care of.
Depending on HOW below the market average you are, you could always increase the rent by a small amount every year. If your tenant is aware that they are paying well below, they may be understanding of incremental increases. You will never know, if you never have the conversation.
While it doesn't sound like the ideal situation, you can save yourself a lot of time, money & potential grief dealing with the tenant turnover process by keeping a great tenant in your rental.
- Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes8y
@Matthew Pastore I think there should be a balance between keeping a good tenant and allowing that good tenant pay below market rate rents.
Think about it, who says there isn't a great tenant out there who would pay market rate and be as awesome as the "good tenant".
One would never know leaving in that tenured tenant. In these situations, we balance it based on the tenant and the market rate rent.
- Member since 2016 · 13k+ posts · 12k+ votes8y
"One would never know leaving in that tenured tenant"
Hobby landlords do not want to know. They do not make their decision on market rent they make their decision on avoidance of having to actually manage their business. For the vast majority of landlords the risk of turnover has zero to do with cost and more to do with fear of having to do their job. Truth be told it is not a business decision to lose money it is a personal decision. A business decision would be to charge market rent, move forward, pocket the profits. Whether a tennat decides to leave based on a rent increase or pays below market and leaves eventually anyway the only difference is how much income you lose for as long as they stay, Turn over cost is identical. Risk/cost of turnover has become the standard excuse for avoidance.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes8y
Originally posted by @Mike Dymski:
Market rent is not a precise number...it's a small range. I can make a case for not pushing good long-term residents to the top of the range but I can't make a case for keeping rents below that range. There are plenty of good residents that pay market rent...you don't have to choose one or the other.
This, right here. Theoretically, market is an infinite scale from negative ("I'll pay you $X to live here") to positive ("The rent is One Billion Dollars" in Dr. Evil intonation) - but for purposes of this discussion, 'market' is generally the price range at which you can reasonably expect to rent the unit quickly, to a qualified, excellent tenant. This figure is always moving and depends on so many things as to make reaching a firm number impossible - it all depends on what you have, how much you want, and who's available to rent at that particular point in time at that particular geographic location. My experience talking with other landlords is that the price they sent for renting their unit often reflects their own particular sense of value and self-worth:
People who think poorly of themselves, their talents, or their products often set rates far lower than they could reasonably get - sometimes by talking themselves out of what they have ("Oh, who would want to rent here, this area is terrible, the house is so beat up, etc"). Same thing goes for people who are extremely lazy by nature, and are not willing to endure any effort or sacrifice to maximize their product's potential.
Conversely, big ego people, ones that think they, and everything they touch, is gold, often set rates far higher than they can reasonably get - and then raise hell about the tenant pool, other landlords, tax cuts, and everything else under the sun when the unit sits there vacant, forever. Same goes true for people who value image and the idea of things more than functionality ("I think gold-plated stoves are something any decent person should want").
You need to strike a balance. In general, your goal should be to get maximum value out of your investment relative to the time, effort, and resources required to get that value. Every investment will have a rapid skew, with possible return on the Y axis and time, effort and money on the X axis, where no time/resources/effort = no return, and maximum time/effort/resources = some cap on return. Your goal should be to hit the top of that skew, which is maximum return relative to resources required. Getting back to the OP, if a good return on the unit is $1100, and he's only getting (if he bought) $800 now, he should definitely raise the rent, as it requires very little additional time/effort/money to get that $1100. If he was at $1000, he might already be at the top of that curve relative to effort required.
Skyline Properties - Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
BP members also have vastly different standard turnover costs. Many members withhold portions of security deposits where applicable, pre-lease units, have little to no vacancy, don't pay lease-up fees, use hard surface flooring, only pay a few hundred dollars to paint a unit (if even needed), and then swap out a rotating lock set....whereas other members have thousands in vacancy and repairs.
- Investor · Spokane Valley, WA · Member since 2014 · 175 posts · 94 votes8y
I am actually in a similar boat. I just purchased a duplex in November and chose to keep the tenants even though market rents were well below. My reasoning was that i spent almost everything i had rehabbing the other side (Which i was moving into) and so have a sure thing already there was almost necessary. But more than that they paid on time, had been there 7 years, took care of the property and did their own minor repairs. I am about to sign them into a 1 yr lease raising the rent from $900 to $1050, and while i was (And still am) fairly happy with that succesful increase, the market rents here are between $1200-$1450 for comparable 4bd 2ba units. I would have to put a minimum of $15k in that unit to get it up to those rents though and so I chose the path that was more safe/sure thing.
I'd like to think I am making an educated decision in doing so, but i also have to wonder is it the side of me that is burnt out from a long stressful remodel and not super excited to go through it again just yet that is weighing in on the decision?
We're signing the new lease this weekend and I am still of the mindset that i'm making the right call as even $15k with a rent increase of $300 more a month would take 5 yrs to recoupe. (not including increased value etc). But lately there is a significant increase in rents in the area and it is tempting to jump in on that opportunity despite the associated risks.
just my .02
- Member since 2016 · 13k+ posts · 12k+ votes8y
Shane if the unit needs 15K in Reno to get to top of market then your rent at $1050 probably is market as is. Nothing wrong with that pricing. Make sure you raise the rent every year to keep up with inflation regardless of the condition of the unit. Bare minimum market rents rise annually by at least the cost of living index. Use the annual index as your rent increase bench mark each year.
Piece of advice...if you are signing a lease now make it a M2M, they are not going anywhere and if they are good tenants they should have no problem with a M2M auto renew lease that either party can terminate with legal notification. This way you can decide on your own when you want to Reno the unit rather than have them in control of your property.
- Investor · Spokane Valley, WA · Member since 2014 · 175 posts · 94 votes8y
Originally posted by @Thomas S.:
Shane if the unit needs 15K in Reno to get to top of market then your rent at $1050 probably is market as is. Nothing wrong with that pricing. Make sure you raise the rent every year to keep up with inflation regardless of the condition of the unit. Bare minimum market rents rise annually by at least the cost of living index. Use the annual index as your rent increase bench mark each year.
Piece of advice...if you are signing a lease now make it a M2M, they are not going anywhere and if they are good tenants they should have no problem with a M2M auto renew lease that either party can terminate with legal notification. This way you can decide on your own when you want to Reno the unit rather than have them in control of your property.
HA! I think my jaw just hit the floor.... I thought for sure out of everyone that you were going to be the one to be the one to tell me the error of my ways... Yup, didn't see that one coming...
That being said, thank you I hadn't thought of that. I know they were pretty worried they were going to get the boot as they were on a M2M and didn't want to have to move so I went with the year lease to help balance the $150 rent increase.
The unit isn't in bad shape, but it hasn't been renovated since it was built in 1978. So it would need to be "modernized" to compete with those rents.
Thanks Thomas!
- 8yAlexander FelicePro MemberGuy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
A GREAT tenant is worth.....market rate for your property
How could they possibly be worth more?
great tenants aren't that rare, they are the rule not the exception. With all the tenant jerking-off in this thread I'm concerned about a surge in broken wrists.
;)
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