How much is a great tenant worth?

[Matthew Pastore]

Hello BP community! I am a buy and hold real estate investor in Colorado. I recently had an interesting situation where I would acquire a single family home with a fantastic long term tenant. The tenant is clean, keeps the house in great shape, and pays on time. Unfortunately the tenant pays well below market rates. After running the numbers (factoring in all expenses including anticipated repairs and CAPEX) the property would only cash flow $30/mo. Increasing the rent would force the tenant to leave. So unfortunately the numbers didn’t work for my personal investing strategy and I had to pass. But that begs the question: In order to guarantee a great tenant would you compromise on other aspects of your investing strategy? How much do you value peace of mind? I would love to hear the BP community’s thoughts on this. Thanks Everyone!

[Nathan Gesner]

@Matthew Pastore you say they are "well below market" but you don't say how far. Would you buy it if it cash-flowed $100 a month? You could increase the rent $70 to reach $100 cash-flow. If the tenants know they are well below market, they would likely be able to swing a small increase in order to stay. Moving is expensive and they may not be able to find such a nice home for the same price.

My general rule-of-thumb is that a good tenant is worth 10% but not much more. Turnover can easily cost a month's rent between maintenance and vacancy. Rather than scare off a good tenant or risk a lengthy vacancy, I'll consider keeping the rent 10% below market to retain them. It's probably a wash compared to turnover but the benefit is that I keep a really good tenant rather than taking my chances with the next one. There's also a very good chance the tenant will stay longer when they're being rewarded for good behavior.

Let's say they were $300 below market. That's $3,600 a year. If you want to give away $3,600 a year just let me know and I'll send you my mailing address! 

I can't say what to do without knowing how far below market it is but it sounds like you should either walk away or buy it and rent it at market rate.