Posted almost 9 years ago

How Tough Should We Be On Renters?

Having tenants poses a challenge for real estate investors, as we often question ourselves - Just how tough should we be on them??

We are regularly left wondering - when do we deny them or cut them a break? How do we balance occupancy with risk? What about our responsibilities to the community, and the future impact on our businesses and investments down the road?

The BP Effect

There is a lot of debate over the criteria landlords should use in screening potential renters. These discussions have exploded in the past few years as funds and new real estate investors have entered the scene.

Unfortunately, this has also led to a lot of confusion and miscommunication. Some have been stuck with empty units for a long time, after relying on sellers or agents who gave them poor advice on the rents and criteria they could expect. Others have been trading amateur tips and re-circulating rumors they’ve heard about best practices in online forums like BiggerPockets. It’s often the blind leading the blind, especially when what works in one area or phase doesn’t work somewhere else. So, firstly, it is vital to remember that all real estate is local, and it is always changing.

Even big funds can get this wrong. When you don’t know the local market and aren’t really tuned into the reality in local pulse (versus the media), or are out of touch with your demographic, you can really suffer. For example; you may read that the average recent credit score of mortgage borrowers is around 740, and that millions of new jobs have been created and wages are going up. Yet, in another neighborhood you might not find any renters with a 640 or higher credit score. If you are holding out for that mythical 740 figure you may be waiting a long time, all while you are bleeding holding costs and exposing yourself to risk, instead of bringing in cash flow and positive returns.

Data, Experience & Foresight

At NNG we believe that the best decisions are made when local market knowledge, experienced minds, and good data meet.

You’ve got to have the data and facts. You also need to be able to interpret it well.

When it makes sense, we tend to give renters a chance. For example; we might even lease to someone who has had a past eviction. That is if they have proven to be back on the right track, and they are now in a stable financial situation which affords the units we are offering.

It will never be perfect. It is both an art and science, which requires constant measurement, tracking, and tweaking. So far, this has worked out in delivering great returns, with solid rental rates, and high occupancy levels. We track all the factors involved, and see whether to continue to approval based on actual performance, not what an anonymous online commentator threw out on a random forum.

We believe that this approach is also better for the long term. It’s better for the communities we engage in, for the people involved, and ultimately has a positive impact on our investors’ assets and neighboring properties.

In truth, this is all a part of the reason NNG was started – to help people in crisis. It started with housing and mortgages, and helping those in distress. But why shouldn’t that roll over to renters too? This is not a charity, but it is equally an investment in people as property or paper. Every organization in this industry has investors, renters, employees, borrowers, and homeowners that they touch and impact, for better or worse. Why shouldn’t it be for the better?

What criteria are you using; what do you take into account or overlook?