Targeting Your Market to Maximize Income

dart-board-25780_1280-PDRemember, landlording is a game of probabilities and statistics. By targeting your market, you can maximize profits, that is simple Marketing 101.  If you want to maximize your income, targeting your market is key.

There are good tenants in every category, but you are looking for the highest probability of success, not the needle in a haystack.  Success is defined a tenant that pays rent, leaves the unit in good order, and you make money.

Tenant turnover is your number one expense that you have the most control over.  Tenant turnover expenses include vacancy, legal expenses for forced vacancies, maintenance and supplies to return the unit back to rent-able condition, advertising and the hours spent showing.   You can defer some maintenance, but it is still there.  It will eventually catch up to you.  You cannot avoid interest, taxes, insurance, utilities or many of the other expenses, unless you are going out of business.

If you are in a reasonable, union class neighborhood or above, you should consider that you have a high quality unit, whether or not you are able to charge a high rent is up to you and your marketing program.  You have to have the unit capable to get the high rents, to actually get them.  If you have a great city, great schools, great parks, you will have, overall, a great neighborhood.  The only thing left is how you maintain your own building.  While you may not get $2000 per month, your units should be getting as high of a rent per square foot as any other unit in your City.  Look to other similar quality places as a model to compare to.

There are four distinct types of rental markets.  High quality unit, high quality tenants; High quality unit, low-quality tenants; Low quality unit, high quality tenants; and low quality unit, low quality tenants.  These can be pictured in the following matrix.

High Quality Unit => High Quality Renter => High Profit

Low Quality Unit => High Quality Renter => Medium Profit

Low Quality Unit => Low Quality Renter => Low Profit

High Quality Unit => Low Quality Renter => Lose Money

Tenant Profitability Matrix

High Quality Unit

High Quality Renter

High Profit

High Quality Unit

Low Quality Renter

Lose Money

Low Quality Unit

High Quality Renter

Medium Profit

Low Quality Unit

Low Quality Renter

Low Profit

High Quality Renters.  The typical high quality renter is demanding.  They know they can go anywhere.  They have good career oriented jobs.  Many have a college degree.  They have high credit scores, 650 would be on the lower end of their range.  They may have children, or not.  If they do, they can afford them without any assistance.  They drive nice cars.  They want amenities.  They want laundry in the unit, workout rooms, heated garages, elevators, security buildings, swimming pools.  They want all of the high maintenance cost amenities, and they are willing to pay for them.  They want a nice high quality place, and will get one.

Renting to a high-quality renter is easy.  Getting these renters to sign a lease is the difficult part.  They pay their rent on time, and stick to themselves.  They are not going to do damage beyond normal “wear and tear”.    If you can ‘hook’ them, you can make money from them; lots of money.  But be prepared for them to move out when they buy a house or just decide they want to move to a ritzier area of town.  They may want the flexibility of a month-to-month lease after the first year.  They rent because they want to, not because they have to.  They pay their rent, and leave your place looking like they moved in.  Your turnover costs are minimal.  Whether you get top dollar because you offer the many amenities that a high quality renter requires, or offer incentives to entice them to sign on or stay, you are making money.

Low Quality Renters.  Low quality renters can be characterized by a renter with a low credit score, sub 620.  They are just looking for a place to stay; no major amenities are necessary.  They typically have more children than they can afford, and a lower paying job.  They switch jobs often.  They have jobs, not careers.  They may have several criminal arrests.  They move in other people into your unit and you will then exceed the maximum capacity that your unit was designed for.  They change their contact information regularly, especially their cell phone number.  They are hard on properties, and do not have enough money to put down for the damage deposit.  When they have damaged your unit so they cannot stand it anymore, they move on to the next unit.  They are forced to pay too much of their income in housing expenses, as they do not make enough income.  Their past landlords are always slum lords, and all of their ills are someone else’s fault.

Renting to a low-quality renter seems easy, at first.  They are not fussy.  They sign up for your units very readily, and want to move in right away and start paying rent.  They want to get out of the neighborhood they are living in.  They may receive money from the County to help you sway your decision in their favor.  They know you may be slightly higher price than the other similar apartments, but they also know they will probably not be accepted to rent in those other apartments.  They make barely enough to live on, and will pay a high percentage of their income on housing.  You think you have hit the jackpot with getting a rent higher than you expect, and faster than you expect.  Often, they will not have enough money to pay the damage deposit, and will offer to pay it in installments after they move in.  Charging a high rent to a low-quality renter is easy; being able to collect it is the problem.

The low quality renter will take their toll soon after signing the lease.  If your rent is too high, they will be late with their rent quite often.  They may have more people living in the apartment than should be.  They may not own the cleaning supplies necessary to keep the apartment clean, not even a vacuum cleaner for a carpeted apartment.   They cannot afford to buy a vacuum either.  They have a car that needs fixing and that cost delays paying of your rent.  The damages will add up fast.  Dirt everywhere, broken windows, drawers, doors and door knobs, dirty appliances.  You may start to have mold or pest issues.  You may see insect infestations; cockroaches and bedbugs are common with these renters. They make your common area dirty and do not pick up after themselves.  You other tenants do not want to live near them, and may start to think about moving out.  The list goes on and on.

If you specialize in low quality renters, with a low quality apartment, you can make some money.  Section 8 would be included in this category.  You must keep your rents affordable, less than three times their income.  You need a low maintenance, low cost unit, and you need to manage it that way.   You charge only what a low quality renter can pay and be able to live somewhat comfortable.    You must be a micro-manager, making sure every minor detail of your lease is followed.   Turnovers are low cost as you do the bare minimum.  Cheap carpet, quick turns, fixing only what is absolutely necessary.  You can often get away with having appliances that do not work properly.  You buy used appliances to replace the broken ones.  Fix things that have gone beyond their useful life, rather than replace.  You must overlook the extra effort that you need to stay on top of things such as collecting rent, enforcing lease provisions, and fixing items that left broken might be dangerous.  You paint only when it has to be painted, not when it should be.  Cleaning the carpet rather than replacing it.  Leaving the holes in the doors and walls, or doing a quick fix, even if it is not cosmetically appealing.  You do only the minimal common area maintenance that you can get away with.  You can charge extra fees whenever you can, especially late fees.  You evict quickly, and make the unit turn quickly.  You only fix only what the tenants complain about, not what you know is broken.  By running this type of bare bones operation, you are able to defer maintenance, and pocket some income, for a while.   This type of operation is the proverbial ‘slum lord’.

Money Losing Propositions.  The real money losing proposition occurs when you have a low quality renter, leasing a high quality apartment.  This is a recipe for losing money.  You cannot win renting an apartment to a tenant that cannot afford it, or is a large credit risk.  They will cause more damage, and possibly more insurance claims.  If they came from squalor, they will turn your place into squalor, and not even notice it.  But you will, and your bank account balance will, when they move out.  When your rents are in excess of three times your tenant’s income, and they have a poor credit score, statistically you will lose.  You are better off at the casino.

If you price too high, and the rent is too high for the tenant’s income, this will lead to rent payment issues.  You rented to them because no high quality renter would apply for your unit at the price you were asking.  The carpet and other fixtures in the apartment are easily broken or ruined, and are of a higher quality than a low quality renter can afford to replace.  You apartment becomes dirty, carpet ruined and they do not tell you when there is a maintenance issue.  Your turnover costs are high, due to the cost of replacing or repairing the damage to the original condition.  The only way to make money in this situation is if they stay in your apartment year after year.  Any damages do not have to be repaired until they leave.  Maybe you have to negotiate a lower rent, as you know when they more the place needs major work.  Odds are, with your rent being too high for their income, you are forced to evict in less than a year and have to pay to restore your unit.  You lose money on them almost every time.

Target high quality renters to maximize your income.  Advertise where they look, the internet.  Tenants that do not have a computer are generally not good tenants.  Use multiple websites for maximum exposure.  Avoid hard copy print mediums; you do not want a tenant that does not have access to a computer.  Show your property after work and weekends.  Tenants that can see it during the day are either not working, or shift workers.  Both are not great to have in a multi-family unit.  Avoid smokers.  They make your turnovers more costly, and make the common areas smell.  Price your unit at a point your unit is a better value than any other.  Have a nice place that you would live in yourself.  Do all the maintenance that is required.  Upgrade your unit in-between tenants.

When you have shown your unit several times to high quality renters, and they do not apply, adjust your price.  Move your price to a point it is irresistible, and you will have many tenants to choose from.  Lowering price, increases demand – Period.  Every time.  That is Economics 101.

Let prospective tenants know your criteria, so subpar tenants do not even apply.  You only want the cream of the crop of renters.  Have a high rental standard, and do not deviate from it.  Providing your unit is fit for a quality renter, if you lower your rent, you can increase your standard of who is appropriate to live in your building.  That will help you find a good high quality renter.

If you cannot afford to wait for a high-quality renter, you cannot afford to rent to a low-quality renter.  You are under-capitalized, and it’s only a matter of time before you are put out of business by your own customers.

Be sure to look at my “Coming Attractions” page and see what I have in store for upcoming articles.

What type of renter do you target?  If you are a renter, are you one that a landlord would want?

9 Replies to “Targeting Your Market to Maximize Income”

  1. This is definitely one of your best articles. The matrix is useful when you are an investor like me trying to figure out if he wants to go with “cash cows” or higher end properties. I wasn’t even thinking about how to rate the tenants for these units. I was only considering the property. Thanks for making me think about this in a different perspective.

    1. Thank you for the comments and fine words!

      It’s all about matching the tenants to the unit. A doctor wont live in a dump, bringing in a low quality tenant into a high quality place will end in failure. If you have multi-family properties, you need to have a set income and credit standards, or the higher end people will move away. To keep your place balanced, make sure all people want to live there, not just the lower end.

  2. “Let prospective tenants know your criteria, so subpar tenants do not even apply. You only want the cream of the crop of renters. Have a high rental standard, and do not deviate from it.” Solid advice! I do hope to have some rental units down the road and you’ve convinced me over the past month or two of reading your articles that going for high quality renters is the only way to go.

    1. Thanks again for reading Dave! High quality renters are less work, and they self-manage mostly. You do not need to be a babysitter. You still have to be a landlord, but it is much easier. That is why, in Class A apartments, a 6% cap rate is common. Lower quality units require a 12%+ cap rate.

  3. This is great! Thanks for posting! This is so true. My wife and I have a high quality rental property and we have been able to get high quality renters. I have noticed that our home can get between $1,000-$1,300/month. I have friends that own lower end properties that get $400-$700/month. Rent in our area is cheap compared to much of America. The level of renter is significant. We have a very low turnover with great renters, and my friends usually have lower quality renters. It’s worth it to me to have the higher quality unit.

  4. The four distinct types of rental markets are a very great explanation! My aunt just renovated her rental house and also with the new paints. And now she’s making almost thrice from her rental rate before.

  5. Eric,

    Excellent post here.. You hit on a key subject that I love to discuss – Property Class. However, you included the other piece which is tenant class. You can certainly have a Class A Property and put a Class B tenant in there and vv.

    The wife and I own a few properties across the classes and I like having the variety. Our low end stuff is certainly more profitable, but can come with a few more headaches. Just part of the business.. You have to decide what you like to do, where your strengths are, and then decide where you want to make your money..

    1. Part of a properties classification is the tenants it can attract and that live there. The higher end tenants are generally the most profitable. As well as the low end. What some investors make a mistake is finding a low end property, and managing it like a high end property. Or thinking that an 8% return is enough for a low end property.

      A great investment is taking a low end property and turning into a higher end property. That is most common on larger multifamily properties.

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