How much is a quality tenant worth?

Question

Howdy Bigger Pockets Members!

It's coming time to renew leases for some of our units and my business partner and I closed on eight more doors in January on two quadplexes in College Station that had way below market rents. 50% of the units are $125-$175 below market rents. Market rents are $800 and some of the tenants are renting for $625 or $675. Most of these tenants are good tenants that we have good relationships with and are fine with them staying at the properties if they choose to. We will be raising the rents slightly when it comes time to renew their leases.

This made me curious as to how much a good quality tenant is worth to other landlords. By keeping tenants in the property you are avoiding the headaches and expenses of filling a vacant unit. So, how much is a quality tenant worth to you? 7-10% below market rents?

Joe Aiola · Answer

@David Schmiediche I couldn't agree more with both @Bruce Lynn and @Jim Cummings. Vacancy is a cash flow killer. This doesn't mean to keep bad tenants to avoid vacancy, but it does mean that good tenants are extremely valuable.

If the price increase is too much for them, try to get creative to where both parties are happy. Depending on your relationship with the tenants and how handy they are, maybe they can help out at the property to offset the rent increase - lawn care, painting, power washing etc. This won't work in every scenario but a good thing to keep in mind.

Best of luck!

David Schmiediche · Answer

@Joe Aiola That is a really good idea! There is a cost to everything either in money or time. If you are "losing" money with lower rents having them offset some of the cost or time needed to run the business is a win-win solution for both you and the tenants.

Bruce Lynn · Answer

I was on a conference call with a great operator of apartments, who is probably much more efficient the we are, and he said he thought turnover cost him $3000 every time he had turnover.  That's with vacancy, leasing costs, make ready.  So he was doing everything he could to keep great tenants.

Estimate what work you would need to do to get higher rents, if the current people leave.

How much downtime would you have with make ready and vacancy?

How long does your average tenant stay?

Then you can work your numbers magic.

Rob Lee · Answer

We have tenants that have been with us for years. We limit the increase to $50/month at the time of lease renewal. We keep the tenants and it saves us the cost of paying our property manager to find a new tenant. Of course, we charge market rent whenever we have a vacancy.

David Schmiediche · Answer

@Jim Cummings Breaking the numbers down to how long it would take to get your investment back does put into perspective how long down the road a vacancy can hurt. Thank you for that insight as well!

Chris Szepessy · Answer

I have a tenant who's been there for the 4+ years. I haven't raised his rent because he takes care of a lot of minor maintenance issues, lawn care, updating some things in the house, etc., just like @Joe Aiola mentioned could probably be done to offset the rent increase. It may not make the most financial sense, but it currently works well for me.

Jim Cummings · Answer

@David Schmiediche. My simple math brain says if the rent is $650 / Month and I raise the rent by $100 per month and I have one month of Vacancy, it will take me 6.5 Months to get back to even. Then when I add the cost of fixup and turnover ($2,000 - $3,000). That is another 20-30 months to recoup and recover.  So, I could be looking at 36 Months to get back on the positive side of a $100 Month rent Increase.

Also, from tenant standpoint a $100 Month from $650 to $750 / Month is a 15% increase. If I'm a $650 month Tenant, I may not be able to afford a $15% Increase.

My personal philosophy is to evaluate the market and tenants and decide what I think they could / would pay without creating a vacancy. You can survey the market to determine IF there are any places your $650 / Month Tenant could find that would rent for less than $700. If not you could probably feel safe raising to $700 or raising to $675 now with an announced intention (included in lease) to go to $700 in 6-8 Months.

Good luck!

David Schmiediche · Answer

@Rob Lee $50 a month is what most investors in College Station have said they are willing to raise below market rents. It is enough to significantly increase the cashflow and is small enough that the tenants don't have a huge financial difference. One investor that is numbers driven told me that he would raise rents to market value and if the tenant didn't renew he would then update the units to get top dollar for the rents and maximize his ROI. This personally isn't how I want to run my business because I believe it can put more stress on the tenants than I personally would want to do. Specifically by raising rents $100 or more. I'm curious what others think of this strategy?

How much is a quality tenant worth?

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