Is there a correlation between nicer homes and better tenants?
Los Angeles, CA · Member since 2013 · 555 posts · 261 votes
I'm wondering whether you landlords have noticed better qualified applicants after you renovate (or if you have a nicer looking dwelling)-- People with higher income, stable jobs, better ability to pay rent. Are the "richer" people attracted to the nicer looking rentals?
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About 2 years ago, I renovated my rental home out of necessity. The vinyl floor tiles were coming unglued, toilets didn't flush well, vanity was barely attached to wall. Front lawn was just dirt and weeds. It was a dump.
I replaced all the vinyl with ceramic tile, new vanities with granite countertops, new toilets, new grass, all for pretty cheap cost.
My house now looks up to date, but not the nicest it can be.
The problem is, I still have the same kind of crap applicants, i.e they're good people, not pigs thankfully, but they eventually have no money to pay rent. They are the paycheck the paycheck type.
I'm always wondering, where are all the people with enough money?
It could just be the neighborhood. Many people are more concerned with the neighborhood than the features of the property.
If I were renting, I would rather have an ok house in a nice area with good schools than a really nice house in a neighborhood where I was worried about my cars or kids bikes being stolen.
I don't know what your neighborhood is like, but many people live from check to check. Dave Ramsey says that it is 70%. It's sad, but many Americans want to buy stuff now that they can't afford.
It could just be the neighborhood. Many people are more concerned with the neighborhood than the features of the property.
If I were renting, I would rather have an ok house in a nice area with good schools than a really nice house in a neighborhood where I was worried about my cars or kids bikes being stolen.
I don't know what your neighborhood is like, but many people live from check to check. Dave Ramsey says that it is 70%. It's sad, but many Americans want to buy stuff now that they can't afford.
Mike Franco Please read http://www.biggerpockets.com/renewsblog/2013/02/19/tenants-trash-unit/
Hope it helps. Good luck
I think location is more important than condition. Doesn't matter how nice the place is if its not in a decent part of town. Yes, folks with more income can be more selective in where they choose to live. As far as renovation goes, I've found that I can ask a bit more rent, get much more intrest, and it makes a place easier to rent overall.
I think you may want to recieve your Trent screening process. What are your minimum requirements? Credit score, income/rent, work history, criminal record, previous evictions. You should have a written minimum standard, and not accept an applicant who doesn't meet it. You are turning over a huge asset to a stranger, do your due diligence!
location wins. that said, good tenants dont want crap.
i have a great building, university area, but when i let the common area cosmetics go ...apts are fine...its a tough sell. fresh floor, new paint, different
mostly, thats me. i spend time in a showing explaining how we are ' a little behind now' rather than showing off the features.
Neighborhood has much to do with who will live there.
I've had some nicer homes in good areas, that brought well paid and educated tenants, but if they turn out to be jerks, they can be jerks at a more sophisticated level causing as many headaches and problems than some poor late payor. One of the dirties houses I ever had was one with a CPA and a nurse in it. :)
This is a great topic for discussion Mike Franco. I've wondered this same thing for years. My rental units are in lower-middle class neighborhoods and while I do get the occasional deadbeat tenant, my experience hasn't really been bad. We generally haven't experienced any of the horror stories that rental properties are famous for. Given this, I've always wondered how much better (if at all) my experience would be in a higher end area.
It probably has a lot to do with your tenant screening process. While there are never any guarantees, I know there are things that can be done to predict when a tenant will be more responsible.
My hunch is that a person's wealth has very little correlation with their willingness to pay their rent. It's a matter of whether that individual knows how to budget adequately, and whether they will prioritize their rent payment over all the other garbage that people can waste their money on.
Rob K, almost spilled my coffee! I am pretty sure the U is not supposed to be in the name, but maybe I am wrong.
As for the topic at hand, I think there is a correlation with both location and the condition of the property. I believe higher quality tenants will first seek great locations (safe, good schools) and then properties that are in good condition. Finally, they will seek the amenities they would like. While all of these things might help your chances of finding solid tenants, there are bad tenants in every price range, and every neighborhood, so screening is always incredibly important.
I'll also share James Vermillion's view. We have different properties in different areas. The area does dictate the tenant population and expectations, but the state of our buildings/units dictates how we perform in a given area.
viz.
a) Our student properties are a basic level of decore: clean, solid/indestructible, and easy to maintain. We have learned that students, in general, care little about the external appearance of their building, not about high-end finishes within. They do care about amenities (Internet, a deck w/ BBQ) and operating efficiency (limited budget). This year we tried something new and advertised one of our student properties inclusive of a weekly visit from our maid/cleaning service - we had 10 applications in the first day.
b) We have a property in a working class neighbour hood. Here our objective is to be the best building on a mediocre street to ensure we get the pick of the tenant population. No high-end finishes, but all units have dishwashers and en-suite laundry (a big selling feature) and we are close to both a park and grammar school. We are now looking at acquiring the adjacent 8-unit building to push the other end of the tenant population (drug trade, dead beats) a little further down the street {my partner jokes that we should buy a different building at the other end of the street - as it would be cheaper - and explicitly target the other end of the local tenant population ... I'm not sure that I'm ready for that}.
c) Our "young professional building": this is an older building (120 years) in which we are gradually giving a complete upgrade. The building is walking distance to everything (walk score of 92) and on the edge of the "hip" part of town. Here we are using higher end finishes and adding items such as light tubes, electronic apartment monitoring {software my other company is developing} and door locks (tenants can open the door w/ their phone).
In this area we are in the middle/lower end of the buildings - there are a lot of furnished, executive flats here which are rented to government ministers as we are 2-blocks from the legislature - but we are specifically positioning our building for the younger generation (the assistants to the ministers living in the upper-end, furnished apartments).
While I agree you need to be located in an area that is not blighted, having a fabulously updated unit does make a huge difference. I get much better quality applicants on a renovated unit. And pretty-up the yard!!
I have a set of rules I follow when screening tenants, one of which is ALWAYS insist on good references from prior landlords. Whenever I take a tenant that was "living with my sister" or whatever excuse so they don't have a real reference, I am always sorry and get tenants that don't pay eventually. So, that is my first rule. Second rule is that they must have a steady job earning 3 to 4 times the rent and a bank account. The ones with flaky jobs or no bank account - again they tend to be non-payers after a time.
I don't panic after a month of vacancy - don't think that any tenant is better than no tenant, that is just foolish and very expensive. If you aren't getting good applicants, it may be the time of year or your rent is too high. If your rent is too high, you will only attract those people who are having a hard time finding a landlord who will rent to them at all. So - lower your numbers. Go just under the market for your type of unit in the area.
Best of luck!
I can tell you, I am a personal banker and I see how EVERYONE treats their money. Most people live paycheck to paycheck but its not because they get paid too little, they just don't know how to manage their personal finances. I live in an area my bank considers a high value area and I see probably 90% of people live this way. I think the 70% is a little low for my area.
Brandon Hughes It's not how much you earn, but hos much you keep and invest after paying for your life style - agreed!
Brandon Hughes, Ben Leybovich:
Am I suppose to have a lifestyle? I thought it my job to ensure my Tenants have a lifestyle ... or, at least a home that fits their lifestyle, and they, in-turn, fund my kid's post-secondary education.
Roy N. That's the essense of my article - with you completely!!!
Hope it helps. Good luck
Since renovating, my tenants have not trashed the place. But I think it's more because it is now almost indestructible.
But again, the issue is that richer people don't even apply to my place. At $2000 rent, my ideal tenant makes $72000 a year. But I have not received a single application from these kinds of people, ever.
I am already below market. There are plenty of similar $2100-2300 homes in the area that eventually get rented out.
So the issue isn't so much price or location.
I know my home is in a very good location. It's primarily caucasian, retirees, and very low city crime rate. My neighborhood has zero crime. Schools are good too.
The biggest problem I see is that it is 30 miles away from downtown Los Angeles. So no one working there will even consider renting my home.
@Mary Hammett-
I have found that lowering the price attracts less-than-ideal applicants who are lower income and overconfident about paying rent.
I'm loving some of these comments. Yes, buying a house CAN be very exciting....lol.
I am absolutely of the stance that I'd rather buy a 7% cap rate property in a nice area than a 15% cap rate property in a lower income area. I've had nothing but headaches out of the lesser quality tenants and they've cost me a fortune. I wrote about this in one of my blogs on BP (but didn't think we could advertise our own blogs in the forums, maybe I'm wrong...). You always have to ask yourself, who would want to move into a {insert property type here}? If it's a $20k property, even if you put a great rehab into it and really make it shine, who is moving into that even still? Not the highest quality tenants.
And Roy N., absolutely, real estate investing is supposed to be a tool to allow you to have the lifestyle you want. I guarantee you my lifestyle involves zero tenant or property issues! Ok, well a few here and there when I have to answer a question from my property manager, but I never even see my houses. That's what I call lifestyle.
I'm with Ali Boone on the lifestyle! If I cant make the numbers work with professional PM, I am not going to do it. I think neighborhood attract tenants and not properties. My typical rental gets a bout $800-$850 in rent. Most tenants are working class families. I paid $40-$50K for those homes. I see other homes for $80K that may get $900-$950 for rent. I always wonder why people would not pay the extra $100 for living in a house and neighborhood 2X better. But they dont. People feel comfortable in neighborhoods with other people like them I suppose. And paycheck to paycheck $100/month is a real expense (although they probably pay more for their cell phone bill!). The people paying $900+ are a different set and want to live in a different neighborhood and so thats where they go.
And Roy N., absolutely, real estate investing is supposed to be a tool to allow you to have the lifestyle you want. I guarantee you my lifestyle involves zero tenant or property issues! Ok, well a few here and there when I have to answer a question from my property manager, but I never even see my houses. That's what I call lifestyle.
@Hipster:
I was being a little facetious in my response above. Though I have been very hands-on with the first four properties, it's not the long term plan.
I spent 20+ years with heavy travel in my professional life, then in my mid-40s we had a surprise family - which is being a wonderful experience :) A move into real-estate investing has allowed me to spend more time at home with my son - and to develop a software application aimed at building monitoring/management for landlords and their tenants. So, in an opposite sort of way to you, real estate investing is giving me the lifestyle I want at this point in my life :)
However, until my rental revenue exceeds what I can bill professionally, I must still travel a certain amount. I have also reached the point where I'm starting to wear-out my welcome with conventional lenders and have tied-up a sizeable chuck of my cash reserves in down payments. I need to learn/master how to grow the real estate business using OPM if I am going to exceed the 20K/mth revenue goal.
... and that is why I am here :)
Oh ... and it's a pleasure to virtually meet you ;)
The biggest problem I see is that it is 30 miles away from downtown Los Angeles. So no one working there will even consider renting my home.
30 miles from downtown LA? What major employers are in close proximity to your property and what is the average salary? Who is most likely to rent in your area (vs owning a home) and are those the kind of people you want as tenants? What are the vacancy rates for the area? What time of year is the best for filling a vacancy? What type of activities/entertainment is local to your area? I get the feeling that you are investing in a super quiet sleepy suburb similiar to other sleepy suburbs so it doesn't really stand out much.
The bottom line is the higher the rent the better the tenant.
So you don't need to worry about house quality versus neighborhood. The market takes these variables into account when it sets the price.
I've posted this before in some other thread(s), but here it goes again: Neighborhood demographics determine how much rent you can charge (at the high end of rents). Neighborhoods will have certain mean and median household gross incomes. To qualify for a rental, it is quite common to require 3x the monthly for gross income; so the converse of that is that your rent had to be no more than 1/3 of the neighborhood household gross income. Take your pick of mean or median income, depending on statistical distributions and what-not - but that is what the cap on rent will be. But you will have to be lower than that for a few different reasons. One reason: home ownership percentage is somewhere between 60% and 70%, so renters are between 30% and 40%. And you assume that renters will probably have a lower income. And of course the better tenants seek the best value they can find, meaning they get to pick the best units based on features, location and price - and you want to try to get those better tenants.
In the end this is what determines what the "market rent" will be in any area. Don't be fooled by TV shows like "Income Property" where they make it seem like higher end rehabs will guarantee higher rents; that only happens when the neighborhood market rents already support such rent amounts.
I completely agree ... we renovate/rehab targeting a specific strata in the market rent band for the neighbourhood. In our "working class" building we are aiming for the upper-third of the local market and over-deliver on convenience compared to our competition {currently we are the only ones offering en-suite laundry and dishwashers in all units and will be introducing Internet over the summer (don't tell our tenants just yet)}.
Interesting topic. I've got a unique perspective on this since I have several rental properties in several different types of areas.
I have 6 in southern cook county. These are the most difficult ones for me to manage. Yet they also bring in some of the better rents (1300 to 1400). Two are in a below average area. Two more are in a poor area but nice subdivision. And the other two are just so-so.
What I find interesting though is that they are in a county that has incredibly favorable laws for tenants. Evictions are an absolute nightmare.
Now move down to the next county where the area is a little nicer. Rents are still pretty good (also 1300 to 1400) but tenant pool is still average.
Finally, I get to the rentals closer to my area. Smaller towns but nicer area. Rents are lower but tenant pool is excellent. I've only had one problem tenant for collecting rent and that was someone that was up north and I let an elder person help qualify the rest of his family. Won't do that again. The elder person and family fought. And eventually they all moved out and I lost a month's worth of rent.
But aside from my mistake, I've had every bit the best of luck with this area.
Also have 2 in very small towns. Both are decent but when they go vacant, they take longer to fill. Collecting rent is easy.
So overall, based on my experience, if you want it to be easy to collect rent, stay in the nicer areas. I don't have any overly demanding tenants. Believe it or not its the ones in the lesser areas that are the headache for requests, for collecting rent, and for just about everything else.
That said, I have one moving out and they actually gave me the 30 day notice. I was so thankful I thought about giving them an extra $100 - then I got hold of my senses. But it was still a pleasant surprise. Then again they'd been there 3 years and were pretty good payers.
I've mentioned this in other threads, but a lot of excellent tenants have bad credit. A lot of this depends on your standards. I would much rather have a check to check "likeable loser" with a favorable rental history, dead end but stable job, and bad credit than a person with better credit, but had an eviction or court filing by a landlord in their past or someone that moves often.
Some of my best tenants went through a foreclosure or short sale, are scary to look at (if they were getting on an elevator, you would get off), live check to check, but pay their rent every month.
I look at an income of three times the rent and then make sure their are no evictions or even court filings. I'm willing to overlook foreclosure, short sale, delinquent medical bills or student loans, and criminal stuff if it's older and or non-violent.
The tenants with bad credit can't buy a house, so you don't need to worrry about them leaving because of that. Also, if they have a rental history where they were at the same place for many years, that's a good sign. I like the people that don't like moving.
Some people pay their rent every month, but are constantly changing cell phone carriers, cable companies, switching jobs, etc. As long as they pay their rent and don't bother me, I don't care what goes on with their finances or credit.