Is not having/finding tenants a real concern? what do you do if you can't find any?

Question

Nathan Gesner · Answer

This is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc.

I like to start with one significant expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a typical scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.

But there's more!

What if you're a cardiologist with no debt and making $250,000 annually? You could probably afford $20,000 without much impact on your budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical.

What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.

I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cash flow from my current rentals. I also have a $175,000 line of credit ready if something catastrophic happens. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.

The point is, that you should sit down and assess your finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.

Michael Smythe · Answer

@Sarah Ali great question!

Answer is you do all your homework ahead of time.

Can't believe how many new investors buy a rental and then post here asking how do they market it, where do they get a rental application from, do background checks and they also need a lease.

That lack of thinking things through will eventually lead to their failure.

Melinda Lumpkin · Answer

We typically assess the market activity before acquisition and my newer investors aim for properties that are already occupied. That will give them instant cashflow to prepare for potential vacancy and the downtime that it may take to turn the unit. Security deposits soften the blow of tenants that stop paying or vacate before end of lease. We require one months rent as deposit so that gives us 30 days to get someone else in there. If the property is priced right you'd rarely have an issue finding a tenant with this rental market.

Worse case you can furnish it and put the property on Airbnb or peer space as a venue space or STR in between long term tenants.

Using an agent or property management company to at least get it rented could really set you up properly. We can screen the clients and we also have a constant flow of rental leads.

Noah Bacon · Answer

Hi Sarah,

Great questions to ask before you close on your first rental property!

1. Finding quality tenants is certainly a legitimate concern that every investor has had at some point in their career. Doing your due diligence up front will mitigate a lot of your concerns.

The first thing I would do is start analyzing the rental market that you are looking in to get a feel for comparable rental rates. I'd start with looking at 10 properties for rent in your market that would have the same (or very close) bed, bath, square footage, and amenities as the property you have identified. If you don't set the rate dramatically higher than your comparable properties, then your chances of finding tenants will increase.

To mitigate concerns of placing a bad tenant, set your application guidelines as strict as you need to feel comfortable, and STICK TO THOSE GUIDELINES. The number one reason I hear when a landlord has placed a bad tenant, is due to the landlord loosening their guidelines after the property has sat vacant longer than they expected.

2. Save up at least 3 months of reserves before you close. This emergency fund should not only cover you mortgage expenses, but will give you a safety net in case something does go wrong after your tenants move in. I have typically seen in my own portfolio that tenants will put in a few maintenance request early on, and eventually settle in causing a few unexpected invoices. But, your reserves will mitigate the stress of the inevitable maintenance call and have you fix the problem without it coming directly out of your income.

Talk to some local property managers on their screening guidelines and even inquire how long they are seeing their properties sit on market to really sharpen your decision!

Is not having/finding tenants a real concern? what do you do if you can't find any?

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