Starting with the renter first?

Question

Has anyone ever bought a home because they had a renter in mind they wanted to work with?  Especially in this market houses are overpriced, as we all know.  But if you know of a renter with good history, was in their last house for 11 years and being forced to move because the landlord is retiring and kicking them out to move himself in as he sells his other properties, know their job history and income very well, and can potentially get them to sign a 5 year lease, etc, has anyone started with the renter before they had a house to rent to them?

I have actually started talking to them about the type of house they would want to rent and price point and even sending them some listings to gage what they would be looking to move into longterm.  Obviously this severely limits my ability to get a home under market, but in this case if the numbers work, would it be worth buying a home at market value?  Anyone done this before?  How did it work out?

Basic numbers:  From what they want, the house would be about $400-450k.  Putting 25% down, with PITI (possibly an HOA) I would be at about $1800-$2000 a month.  They would be willing to rent for up to $3k a month.  Possibly even talk to them about a lease with an option to buy in 5 years.

Eric Fernwood · Answer

Hello @Jacoby Atako,

My concern is that the property would be specific to that tenant and maybe not be a good match for other tenants. So, when they move out (they will sooner or later) what will you do then?

I do believe in targeting a specific tenant pool. We certainly do and the results have been excellent. The properties are highly desirable to a pool of people so if one moves out it is quickly re-rented.

There is another concern, the tenant pool for properties priced over $400,000 is relatively small. Also, according to our research, the average tenant stay is about 2 years. The turn cost on such large properties is high. A little background on the general Las Vegas tenant pool characteristics might be helpful.

We did a good bit of research on average tenant stay by rent range. What we found is illustrated below.

Below a certain rent, the majority of the tenants stay 1 year or less. Above a certain rent range, the average tenant stay is about 2 years. We actually named the segments based on their average length of stay. See the image below.

• Transient tenants - This segment of tenants are low paid hourly workers. They are the first to be laid off and the last to be rehired in times of financial stress. When you hear about tenants that cannot be evicted even though they are not paying due to the eviction moratorium, this is largely the group they are referring to.
• Permanent tenants - This is the segment we target. With a good property manager selecting the tenant, we've done very well both during the 2008 crash and through COVID.
• Transitional tenants - These people make enough to buy a home but some event has occurred that made renting more desirable. Once they sort out the problem they usually buy a home.

Buying a property that will only attract transitional tenants may not be the safest option. I would buy with a specific tenant pool in mind so I know I could always re-rent the property.

Casey Powers · Answer

I still wouldn’t make any investment moves based on one specific person. If it’s a good investment for other purposes, sure, but don’t get caught up on one specific renter.

Jacoby Atako · Answer

Makes a lot of sense.  Thanks for the input

Michael Robbins · Answer

@Jacoby Atako I would suggest not buying a house with a renter in mind.  Life circumstances change for the landlord and the tenant over the course of a rental property investment.  There are two opposing interests and this can make for a confusing situation.  I would buy a rental property that is in a good location, does not have deferred maintenance (unless you can get it under market), excellent floor plan, something you do not mind keeping for the long haul, and of course provides an adequate return.

Bill B. · Answer

1) $3,000 seems insane in Vegas, any idea what they were paying for their previous rental and what it was worth? What if the market rent is only $2,000, or less?

2) it can work out. I’ve had a few tennants in the past that I knew ahead of time. They told me how much rent they could pay and I told them how expensive a house they could look at. They went through all the available houses in that price range. Walked them and chose a house they loved. I checked it out, approved it, and they moved in to “their house” after purchase. One stayed 5 years, one stayed 7 and one is still there 10 years later.

But that was all about the people. And I set the price based on the rent. Keep it “fair”. Either their rent should be much lower or the house should be much nicer/expensive.

Jacoby Atako · Answer

Yeah, I think you are right.  Still need to find a good investment home anyway.

Jacoby Atako · Answer

@Eric Fernwood

You definitely nailed some of the concerns I had regarding that price point. I prefer to stay in the median home range, and you make very good points about a smaller tenant pool.

There's such opportunity with these renters I'll have to get creative, maybe a master lease opportunity lol.

Jacoby Atako · Answer

@Casey Powers

Yeah that's just they're budget. I was hoping to get closer to $2400+, maybe another $200 if there's an option to buy.

Casey Powers · Answer

$3k sounds well above market rent. Why would they do that, especially long term? If anything, buy based on numbers working at market rent, not the hope that someone will stay and overpay long term.

Jacoby Atako · Answer

@Kurt Brauner

You're the man Kurt. Makes a lot of sense. Thanks for the inside.

Starting with the renter first?

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