But there comes an amount where the rent exceeds the value of the property. Once that happens, you would think that you would not be able to find a renter. This is not the case.
Economic theory states that as prices go up, demand decreases. This is true. If you do not believe it, cut your rent prices in half and see what happens. You will have people lined up around the block to take your rental.
Solid renters know what they want in a rental. They know what buildings in the area they want to live, and what amenities they want. They will know the walk score of a place, how close it is to their work, how much arts and culture are close by.
Quality Renters Know Value
A solid renter picks their home based on location, and also on value.
The value is based on what they can afford, and the ‘substitution theory’ in that paying more or less will substitute different features and amenities. Nowhere in their equation is any thought to the fact that their application for housing might get rejected. They know they can throw a dart at the map and choose the closet apartment if they wanted to.
I define a solid renter as someone with at least 3.5x the rent in income. This is someone with at least an average credit score, somewhere north of ~650. Their last 10 years on the criminal side will only have a couple of parking tickets, and likely not even that. They will not have any evictions. All past landlord references, for what they are worth, are positive.
Low Quality Renters Have Less Choice
The low quality renter has a completely different attitude.
They need to live where they can. They do not care about amenities; they care about move in date. Something is making them move, and it is not their job, or the lack of an art gallery close by. They need to move because they are probably being forced out.
As a landlord, you can specialize on these renters. They are in a tight spot, just as many sellers are when investors scoop up foreclosure properties. These are distressed renters. They need to move, and say they are willing to pay.
Their criminal backgrounds might not be as good as you would like, and their credit score less than par, but they are not choosy. They need a place, and generally need it fast. They will move into a place that is not maintained, or cleaned.
Make no mistake; these are high risk class C or D tenants. Like any investment, you need to get a return based on the extra risk these tenants present. You need a higher rent than a typical class A or B tenant. Even if your rent is 100% paid by a government authority, you are taking on more risk.
Does Higher Rent Mean More Profit?
A class C or D tenant will be more work, and you should get at least an additional 10% higher rent with them.
On a $1,000 a month rental, that’s an extra $100 that goes right to the bottom line. All of your other expenses stay the same, except possibly maintenance and legal fees.
If you are looking to sell, higher rents mean a higher sales price. Whether or not you will be more profitable is the $64,000 question. Low quality tenants generally mean less profit. Can you cover your increased maintenance costs and added expenses with the higher rent?
If you have a property manager, the lower quality renter is more wok for the PM. It is more calls, more chasing down rent, more work to turn the unit. But it is a higher commission for the PM. I often think that people hire a PM have so much trouble with renters because of this very reason. The PM is maximizing their own revenue and getting a lower qualified renter to move in. It is more work to find the ‘sweet spot’ of the correct rental price than take in a less that qualified renter. They make more, and you are probably making less.
So, if you really want higher rents and are OK with a higher risk for higher returns, raise your rents. If you want the slow, steady and boring approach to profits, make sure your rents are aligned with the market, and you hold out for quality tenants.
Have you ever raised your rent too high, and saw a decline in tenant quality? Have you ever seen a rental you wonder how the owner ever rented a dump like that?