There are some tenant prospects who will never have an issue getting placed in
a rental property. They have great rental history, low debt-to-income ratios, clean
background checks, long-term stable employment, and better-than-average credit
scores. Then, there are other tenant prospects who have the potential to be great
renters, but it may not be immediately obvious based on their rental application.
Perhaps they have limited credit history, high medical debt, or have never rented a
property before.
Making a quality decision around tenant placement
is critical for the long-term performance and value
of an investment property. The greater the net
operating income (NOI), the more valuable (and
attractive) a rental property will become and the
largest source of income contributing to the NOI is
actual rents collected from tenants.
That’s why tenant turnover can be costly for
investors and negatively impact the NOI. When
a tenant vacates a property, there will be costs
associated such as move-out inspections,
preparing/rehabbing the property, marketing
the property, and leasing commissions. Tenant From a property value perspective, the NOI
influences the capitalization rate (CAP rate = Net
operating income / Cost of the property) of a rental
property.
For example, consider an investment property
purchased for $100,000. Assume that property
rents for $800/month ($9,600/year) and has
$2,000/year in maintenance, tax, and insurance
expenses. The NOI for that property would be
$7,600/year. The CAP rate for that property would
be 7.6%.
If that same investment property experienced
a tenant turnover, there would be an additional
expense of approximately $2,500. Assuming 30
days to turn and re-lease the property, there would
also be a rental income loss of $800. The NOI
for this property would then be $4,300/year. The
CAP rate would decrease from 7.6% to 4.3%. This
reduction in CAP rate could make the property a
riskier investment and could reduce the value of
the property.
Average residential tenancy ranges from 2.5 to
3 years (Source: Tenant Planet, Inc.(. Placing the
right tenant in a property can increase the duration
of tenancy and decrease tenant turnover events.
This can also lead to a much more rewarding
tenant-landlord relationship.
Great tenants take pride in the rental property
and do their part to make it a great home for their
family and a stable asset for landlords. Over
time, these things increase the value of the rental
property by maximizing income and minimizing
unplanned expenses.
So, how can landlords spot those not-so-easily
identified exceptional tenants? What sort of
people make great tenants?
THE CLEAR COMMUNICATOR
Good communication is essential to keeping things running smoothly between
landlords and tenants. A clear communicator is consistent and adaptable. They
share information in order to be clearly undevrstood and receive information in
order to understand. Tenant prospects who communicate in a way which builds
mutual trust are more likely to become tenants who communicate clearly around
issues that may arise during their tenancy.
THE TRUTH TELLER
A person who values honesty is likely to be honest, even if the truth may not work
in their favor. Tenant prospects who don’t hesitate to be honest about their rental
history, career status, financial capabilities, etc. are able to communicate both
favorable and unfavorable information. They also exercise respect for guidelines
and decision criteria that landlords put in place. These prospects could become
solid tenants who respect the terms of a lease, appreciate a landlord’s candor and
transparency, and respond maturely when there are disagreements.
THE TOMORROW THINKER
The ability to understand how today’s decisions impact tomorrow is an admirable
trait for anyone. This mentality allows one to constantly evaluate beyond the
present moment. This means thinking critically in complex and confusing
situations, focusing more on quality of decisions and less on feelings. Tenant
prospects who display this sort of forward thinking will connect the dots between
what they see and what potential outcomes could be.
As tenants, these individuals are inclined to proactively respond to a variety of
situations. Maintenance requests will be submitted long before an issue leads to
expensive repair and correction. Changes in their life situation may lead them to
proactively seek payment arrangements for rent before they become delinquent
or are in danger of eviction. Their decisions will be thoughtful and in turn, could
pay off largely for the landlord.
THE PUNCTUAL PLANNER
People who plan ahead are meticulous. They set realistic expectations and are
quick to highlight when something cannot be done on time. They do what they
say they will do when they say they will do it, because they planned it that way.
Prospective tenants who demonstrate this are highly likely to become tenants
who pay rent on time, respond to notices promptly, and seek to proactively renew
their lease. They care greatly about meeting deadlines and manage life with an
awareness of the need to handle business in a timely manner.
THE NUMBERS NAVIGATOR
A person who understands numbers (especially when it comes to financial
literacy) knows the importance of having an emergency savings fund, building
margin within their monthly budget, and prioritizing expenses. Tenant prospects
who have (or are developing) financial acumen are well-positioned to become
tenants who are prepared to pay rent, utility bills, tenant-caused damage fees,
and more. These tenants are crucial for ensuring the rental property stays on
track with income/expense management.
THE CONSIDERATE CONSUMER
A prospective tenant who demonstrates patience with the application process
and respect for the landlord’s team, has a strong potential to be easy to work
with as a tenant. Their ability to consider the needs and workloads of others will
translate well if they become a tenant. They will demonstrate these tendencies
with the landlord, property management team, vendors, and neighbors.
These tenants will give consideration and be more likely to receive it from others.
This person becomes the sort of tenant who can rationally address issues. Even
when they don’t get their desired outcome, they will appreciate the fact that they
were treated with respect. In turn, they will continue to offer that respect to the
landlord.
THE INSIGHTFUL IMPROVER
While no one loves getting constant unsolicited feedback (i.e., complaints), there is
a great amount of value in thoughtful critique accompanied by recommendations
for improvement. A prospective tenant who offers insight into their journey
through the rental process could help the landlord make strategic improvements
in marketing and the tenant onboarding experience. These prospects believe in
being a part of solutions instead of just complaining about a problem.
As tenants, these individuals will work with the landlord or property management
company to make processes such as rent payment, maintenance requests, lease
signing, and lease renewals easier and more efficient. They will find ways to help
the landlord save money while enhancing the level of service - which is a win-win
for all involved.
https://learn.american-apartment-owners-association.org/link/120173/90/
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