If you become a landlord, which tenant is the better choice?

6 Replies

Lease option tenant, section 8 tenant, or just a regular month to month tenant? In my opinion, I see benefits to the lease option tenant because they are renting to buy a house which means they will take better care of what could potentially be their home. The section 8 has its plus because landlords are guaranteed rent payments on time every month. Now what about the month to month tenant? What is the benefit to renting to a month to month tenant compared to the other two tenants mentioned?

I prefer month-to-month leases with any low credit score applicant. You are going into a business relationship with someone that does not have a strong financial history and may even be judgement proof; if things don't work out on a month to month lease, in Ohio all you have to do is give a 30 day non-renewal notice. With section 8 or lease options it will probably be more difficult (and expensive) to end the relationship.

Originally posted by @Jill F.:

I prefer month-to-month leases with any low credit score applicant. You are going into a business relationship with someone that does not have a strong financial history and may even be judgement proof; if things don't work out on a month to month lease, in Ohio all you have to do is give a 30 day non-renewal notice. With section 8 or lease options it will probably be more difficult (and expensive) to end the relationship.

Isn't it just as difficult when you do not have steady income coming in every single month when your month to month tenant does not make payments on time every month or when you have vacancies? 

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@Tony Marcelle, I don't like month to month leases unless it is a hot market and I am the one who wants the flexibility to raise the rent or find another tenant willing to pay a higher rent.  

With lease option, make sure you do your paperwork correctly so you don't run afoul of Dodd Frank and other laws that apply equally to seller financing as they do to big banks. I have a flow chart that explains the exemptions, if you are interested.  I usually recommend a true lease with a true purchase option, where none of the monthly payment goes to reduce the principal.  It is relatively easy for a financed buyer to hold you up in court if you try to get them out and they don't want to go, unless you do everything properly leading up to that. 

I like Section 8 because while you have to pass inspections to be put on the list and stay on there, the housing authority basically does your advertising for you.  If the tenant violates the lease terms, you can evict them just as easily as any other tenant.  The income stream is reliable, and the tenants are generally good tenants. If they get evicted, they are ineligible for future benefits for some period of time, which can be devastating, so they try really hard to be good tenants.

The vast majority of tenants want to (and do) pay their rent. In my least expensive eight 1 bedroom units ($475/month), I have 7 tenants that have been there 22 months or longer on m2m leases (the other tenant has been there 7 months). Very few have a credit score to protect which is really the only leverage you have to keep any tenant paying on a lease when they need to move. On a m2m lease, though it's much easier to get out a tenant (when things don't work out from your perspective) without a costly eviction.

For example: I had a 19 year old let drug dealers set up shop in her apartment; I told her those *ssholes weren't going to show up with a moving truck and help her move. Anyway, instead of evicting, I was able to non-renew her: she paid for 15 days, moved in 14 days, left the place nice and hopefully learned her lesson without having a permanent eviction on her record. With a cooperative tenant, I got another tenant in 14 days and had 0 days vacancy.  It's easier to negotiate a win-win deal when both parties know you don't have to 'prove' any lease violation, non-renewing is just not viewed as negatively as threatening eviction and it gives the tenant time to actually get another place. (Her mama and brothers helped her move). My good tenants were upset (understandably) about all the noise (running up and down the stairs) and traffic. I could have lost good tenants if I couldn't have gotten her out quickly.

To further make a lease less attractive, in Ohio, if a tenant breaks a lease you can only collect actual losses, so if a tenant leaves five months early and you rent in three days you can only collect 3 days rent as losses (unless you have like a 60 day buy-out clause which is what many of the big places do but only works if your tenants are not too poor to pay it -- then all you get is a worthless judgement). A Lease contract and a credit score is great leverage when tenants have a credit score to protect. Lower income properties require different incentives. I really think that is why so many landlords fail trying to run properties in poor or working-class neighborhoods, they try to use incentives that just don't apply.

Originally posted by @Denise Evans:

@Tony Marcelle, I don't like month to month leases unless it is a hot market and I am the one who wants the flexibility to raise the rent or find another tenant willing to pay a higher rent.  

With lease option, make sure you do your paperwork correctly so you don't run afoul of Dodd Frank and other laws that apply equally to seller financing as they do to big banks. I have a flow chart that explains the exemptions, if you are interested.  I usually recommend a true lease with a true purchase option, where none of the monthly payment goes to reduce the principal.  It is relatively easy for a financed buyer to hold you up in court if you try to get them out and they don't want to go, unless you do everything properly leading up to that. 

I like Section 8 because while you have to pass inspections to be put on the list and stay on there, the housing authority basically does your advertising for you.  If the tenant violates the lease terms, you can evict them just as easily as any other tenant.  The income stream is reliable, and the tenants are generally good tenants. If they get evicted, they are ineligible for future benefits for some period of time, which can be devastating, so they try really hard to be good tenants.

I feel the same way about the month to month lease. It sounds too risky to me. Sure, you can send those exemptions. That is why I like section 8. If I ever own a rental, my concern is knowing the property will cash flow every month without having to hear excuses from tenants not being able to make payments on time.