One of my favorite topics of all time.
It seems like most people understand the importance of screening tenants these days. It’s not really up for discussion anymore. I’ve seen lots of different criterias that owners follow but they are all pretty similar and we’ve seen them in plenty of listing descriptions. Two pay stubs showing at least 2.5x the rent, credit and background check, no evictions etc. This is beginner stuff to most of us now.
However, I’d like to talk about four other topics regarding finding and keeping good tenants that I don’t see get brought up as often. If anything, they are worthy of consideration and make great food for thought. Bring them up at your next landlord mastermind or meeting.
How much you charge matters more than you think it does.
It’s really cool how the free market speaks to you, but only if you listen. It has a mind of its own and makes its own rules. We can only follow them. Price is a funny thing in the rental market.
What probably won’t surprise you is that neighborhoods all across the United States have average rent prices. Lackawanna/Luzerne County is no different, rent prices fall into a range of averages depending on location, bedrooms, style, etc. You have a lower range, and you have an upper range.
What did surprise me though, is what happens when you charge prices past the upper range for properties that were clearly, upon 5 minutes of average zillow comparisons, not worth it in the slightest. You would expect inquiries to just drop off, but what I’ve found is that we start getting inquiries from a new demographic of people.
We noticed we were now marketing to a new group of people that didn’t seem to care so much about price to value discrepancy. They clearly didn’t care that the place was overpriced, and didn’t seem to even acknowledge it or question it. The inquiries were flowing in but the average application quality dropped dramatically.
I wonder why that would be? Let’s say, I’m a prospecting renter with a criminal background and I know I have a low chance of getting an affordable apartment in a good neighborhood. I’ve probably been turned down a few times already. Where would I start looking next then?
I might start applying to places that would appear to have lower competition, out of desperation. Perhaps, I would ignore the price altogether and just be happy to be accepted. Do you see how that could influence the average application quality?
I noticed that if I charged higher than average for sub par properties, I got more applications from people that were desperate (desperate for bad reasons), and more willing to forgo price for a place to sleep. Usually, that would turn out to be bad later on because the rent payments would eventually be too much for them to afford anyway.
The moral of the story is this. It’s so simple and yet so complicated. Just because you can technically charge whatever you want for your rental, doesn’t mean you shouldn’t factor in the powers of the market.
If you want to narrow down your marketing efforts to target good, financially intelligent tenants, you need to learn what financially intelligent tenants want. They want a fair deal. If they are smart financially, which would be a win for you as the landlord, they would understand what a fair deal looks like and will avoid places that appear to be an unfair deal. Therefore, you should understand what a fair deal looks like and accept it.
To Judge a Person, Or To Not Judge A Person.
Oh this is a juicy one and it usually pisses someone off so prepare yourself. I’m sorry in advance if this gets deep. The reason for the controversy is because most of us, for some strange reason, assume we are good people readers. That statement can’t be overstated.
You, the reader of this article, probably think you can read a person pretty well right? If you took a sample of the population and polled them, nearly all of them would state that they are good at reading people. Just like you.
Take the same sample group and ask them if they are good at math and you’ll get results that skew in the complete other direction. Why? To the average person, there’s no downside to admitting you’re bad at math.
On the other hand, accepting the idea of being bad at judging people, feels like a defeat. To admit to not being good at reading someone is like willingly calling yourself naive, and most of us don’t want to accept that kind of truth.
The point is, we may tend to assume what we are good at with very little evidence to back it up. With an ability that’s tied deeply to our feelings of self worth, it is even harder to admit or to be aware that we are bad at it (sex is another good one…).
There are fantastic books on this subject. There are all sorts of situations you wouldn’t expect that could increase your likelihood of getting a bad vibe from someone. These situations range from being as ridiculous as just being a rainy day outside to as complex as subtle facial features in a person invoking old memories stored away in your subconscious.
Long story short, most of us are born being naturally bad at reading others, and instead we evolved to make quick judgments in order to survive. Most of us confuse reading people with judging people. Judging someone is more like a snapshot whereas reading someone is an ongoing process where you, the people reader, are aware of your faulty software and frequently question it. You can’t trust your gut to be right about a person when the software in our heads we use to read people is riddled with bugs.
Therefore, I am of the opinion that judging someone to get a feel for their likelihood of being a good tenant is a bad idea. Instead, I would much rather focus on the data they provide me and try to decrease the chances of my biases getting in the way.
I pick tenants the same way I pick stocks, devoid of all emotion and purely on the data. Call me cold. If they have 7 years of rent receipts showing on-time payments for the same rent amount, why the hell do I even need to meet that person? Most people don’t change their patterns, and I’d be stupid to bet against this person making a change in behavior that drastic.
Judging a person creates another opportunity to be wrong and should only be relied upon when no data is available. If I have no rent receipts or rental reference, all I can do is rely on my people’s radar. However, it’s a last resort, not a first option due to its inaccuracies.
To conclude, in my opinion, the people that read people best, are those that are aware of our inability to do it accurately and can adjust for the bugs. However, most of us don’t even know that our software is full of bugs, and that’s a recipe for disaster when using it to pick tenants.
Use the data instead for more reliable outcomes. The tendency to be wrong will always be lower when using past data versus your feelings.
Location, Location, Location. You can’t overlook the neighborhood.
Just because the ROI is higher in an adjacent neighborhood doesn’t mean you should ignore why that might be. Sounds obvious right?
In a perfect world I find a pretty linear relationship, the higher the ROI the higher the proposed risk.
I think this is such an important relationship to consider. We see it everywhere and should take notice, no? Stock index funds tend to be a slow way to build wealth but the risk is low, so money managers recommend it to newer investors. Startup tech companies are incredibly risky to invest in but the potential return could be absolutely life changing. Treasury bonds are about as safe as it gets and yield some of the lowest returns. The pattern we see is that the higher the ROI, the higher the risk, and vice versa.
So when we see higher ROI’s in neighborhoods that seem a little too good to be true, it’s likely because the risk is higher. How does this risk translate into tenants? I find that when I market a property in a rougher neighborhood, the average applicant quality is just so much lower, and the likelihood of finding reliable tenants decreases dramatically.
It’s obvious when we think about it. Good people want to be around other good people, and rough neighborhoods develop reputations for being places where bad people congregate. Therefore, you would expect lower quality applications.
In my opinion, I would rather take a lower return for less headache. Don’t get caught up in maximizing ROI and instead maximize your freedom. More freedom equals more time to create new revenue. Take a step back in order to take more steps forward.
You’re in the customer service field whether you like it or not.
Did you know that companies create entire departments dedicated to customer success? They hire support teams dedicated solely to making sure customers have dedicated one on one support, as well as onboarding specialists to make the buying process feel seamless.
Sounds expensive? It is, and it contributes quite a bit to a company’s overhead, but if they don’t have it, they’ll never outcompete those that do. Why? Because at some point, customer retention becomes just as important, if not more important, than acquiring new customers. Creating a product that is desirable and difficult to break away from is the secret to millions (Hello Apple Products).
What does this have to do with finding and keeping tenants? Whether you know it or not, you are running a business, and you are selling a product. That product is living space, and those tenants are your customers. They receive your product and pay you money for it. What many of us do is forget that tenants are customers and without ensuring their success, you’ll have a harder time keeping them, just like any other company with customers.
You would be surprised at how much easier it gets to manage tenants when you treat them like customers. You could do this in the easiest of ways. Offer a promotion for a free home clean for consistent on-time payments. Leave a small gift behind when tenants move in, and a personalized note. You get the idea. Small things matter and contribute to better relationships. The best companies understand this (Chick Fillet anyone?).
The art of tenant finding is a mysterious one and I’m sure I’ll learn more as time goes on. It’s far from a perfect science. However, I hope these four topics expand your horizons on what it means to find good tenants. If anything, I’m sure you respect the complexity. As always, keep us in mind if you have questions with your tenant rental process.
