Good Tenant, Low Yield or Bad Tenant, High Yield: What’s Better?

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There comes a point, I think, when every landlord takes a look at what they own and wonders whether to keep the property or sell it. There are many motivations for wanting to sell a property, but in this post I’m going to talk about trying to decide whether to sell a property that has high yield, but causes a lot of headaches or a property that has low yield, but is essentially carefree.

As I start looking at my portfolio and deciding what I should sell and what I want to keep, I’ve come across this issue myself. When I look at my property, I’d like to see what it yields me in relation to the market value of the property. While most would like to look at the yield they get from when they acquired the property, I think it is also important to see the yield in relation to the market value in case I want to liquidate the property.

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Property #1: Low Yield, but No Headaches

In my case, I have a property that is currently yielding me only 3% in comparison to the market value. This means that I have more of an incentive to sell this property because I could unlock the equity in this property and use it to earn more somewhere else.

Related: The Landlord’s Guide to Effective (& Legal) Tenant Screening

On the other hand, I have had a great tenant in there for the past a year and a half. They have barely bothered me for any repairs, and they’ve always paid on time. In fact, I haven’t even seen them since I signed a lease agreement with them. It is difficult to find tenants like that, and so now I am battling with the idea that it is better to keep them than to sell the property.

Property #2: High Yield, but a Challenge

I also have a property that is yielding me 8%, but always gives me a lot of headaches. The area is not exactly the best, so I don’t think I have the ability to attract high quality tenants. Although I could just screen better, I think finding someone who would stay there would be quite a challenge.

So would it better to sell the property, knowing that perhaps I may not have as great of a chance to find a property that yields that high again?

Time Limitations

I believe one of the major issues as an investor is the limitation of your time. If you are managing by yourself, you can only manage so many properties before you become overwhelmed.

Of course, one of the other alternatives is to find a good property manager. But I personally find it difficult to find a good property manager who’s willing to take on challenging properties to manage (I could never find a good enough manager to manage my fourplex!).

Related: Your Complete Guide to Effectively Handling Tenant Evictions

So I personally believe that it is better to sacrifice high returns for less headaches if you are looking to expand your portfolio. Tenants who cause the least amount of headaches will have a greater value in the long run, as they will keep your property in a good shape and keep it occupied for a long time. When you have a lot of short term tenants, as my experience with my fourplex has shown, it will cause a lot of unexpected expenses and lower your expected return tremendously. Plus it takes a lot of my time to manage and find tenants.

Therefore, I have come to the conclusion that it is best to keep properties that have good tenants even though your returns may not be as high. Sometimes we truly get what we pay for. And sacrificing some yields can lessen the amount of headaches you’ll have in the future and allow you to further expand your portfolio without sacrificing your energy.

What about you? What would you do? Do you think a good tenant is worth a lower yield?

Let me know in the comments!

About Author

Leon Yang

Leon Yang is an active real estate investor in Las Vegas. He is a buy and hold guy who also likes to flip from time to time. His main passion is to traveling to the less traveled places and inspiring others to become financially independent through real estate.

10 Comments

  1. A couple of things come to mind here:

    1. I would definitely sell the property with 3% ROI or else get a cash out refi and invest that money elsewhere. That is the return risk avoiders get with CD’s etc. If you have no risk tolerance you shouldn’t be in RE to begin with.

    2. Put a dollar value on an hour of your time. Then do the math to see if it makes sense to put more time in a property with higher return. Estimate the number of hours will spend on that property in a year and divide by the expected return. Do the same with your low yield property and see which one wins. RE is a numbers game.

    3. If you have reached the stage where you can afford a full service property manager let him manage your good and bad ones. He’ll keep with the bad ones to have your business which includes the good ones. Your time will be freed up to buy more properties.

    4. Pray about everything you do. Lay up treasures in Heaven.

    Hope that helps!

  2. Hey Leon,
    I have a few questions. When you say 3% return are you including the pay down on your mortgage? Or are you saying it is a $50K house that makes you $1,500 per year? I actually consider my mortgage paydown to be my biggest benefit in renting. If it is making me 3% and paying off the mortgage I keep it. I am not getting a pretty high number of rentals for self managing, in fact I am starting to average 20 to 30 hours per week working on rental issues in addition to having a handyman and a full time day job. For me if it is a no problem rental I keep it. You can of course have great tenants who have a house that has problems, first a plumbing issue, then a wiring issue, then a roof problem, etc. By and large though a property that takes very little of my time will be kept over the time consuming ones unless they are extreme cash cows.

  3. Great post – I find these things come down to time. I manage my porfolio alongside a full time job – so stress free tenants are vital. I try and find tenants who are handy and are happy to do smaller jobs themselves. May be for a small reduction in rent or sometimes just to secure a long term let.

  4. I have properties that have a NEGATIVE YIELD !! Why do I keep them? Because they have great tenants and both properties have appreciated in value over $100,000 in tne past four years. The negative cash flow is less than a thousand dollars a year so it is not a bad trade off. All in all, I would take the low yield, great tenant as that usually means higher chance for appreciation. If I have less than good tenants, I want 12% return or more.

    Remember, actual yield can be misleading. If I have a penny and make another penny, I just made 100% yield. While the yield sounds great, you still only made one cent. I own property that I bought with no money down, 100% financed. What is my yield? I dont know, you cant divide into zero. But my TIME involved has a value too, which each investor has to place their own value.

    Therefore, evaluate everything, not just yield, to find the true value of the investment.

  5. Agree with this article….. most of my SFR are low and slow. Granted, my rentals are a tad below market…mostly because tenants stay and pay. My cash flow is now sufficient to hire PM
    at 6%, in 2014. BUT I am not happy , with the PM, they are way more slack than I, and they pad repair bills.
    Last year my paperwork was a nightmare at tax time, so I am waiting to see the bottom line , for this year.

  6. Good post! I too have some of each, some with great renters and one with a lot of turnovers. I would like to sell the hard to rent one but wouldn’t make any money on the sell. The property is in a decent area, nice house just for some reason hard to keep rented- average 2 months a year vacancy.

    Because of my other properties CF, can wait it out.

  7. Good post Leon, I can relate to a lot of the content here. We bought a SFR a few year ago in St. Pete and we have had the same tenant from day one – always pays on time, takes good care of the house and doesn´t annoy us about minor issues. The flip side is that we´re getting a 5-6% net rental return. We also have condos with 7-9% yields, but to be honest, that´s just the paper return – those properties have WAY more vacancy and maintenance issues and capital appreciation would be miles behind what we´re achieving in the single family.

    Managing single families is relatively easy compared to condos, much less time consuming. But it all depends on what risk you´re comfortable with and how much time you´re prepared to dedicate to this part of your life.

    All in all, I´m definitely in the “lower yield, better tenant, better appreciation and easier finance” side of the fence!

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