One thing that is easily overlooked when selecting an investment property is the type of tenant that will be moving in and how it aligns with their investment strategy. This isn’t referring to whether it’s for commercial use, dense residential, etc., but rather it focuses more on tenant quality.
Type of tenant based on location
People surround themselves around like minded people whether this is in business or at home. Next time your downtown, take a look at how many law firms you will see grouped together or drive by a hospital and nearby your fine a professional medical center full of private practitioners. The same applies to your home. Take a look at the types of cars in the neighborhood and watch to see if its predominantly families, retirees, or student based with a singles life style.
Needless to say, different neighborhoods will generally attract different types of tenants. So what type of tenant are you going for? Someone who will stay long term but wants to pay a little bit less on their rent per sqft? Or do you prefer a tenant who stays for a year and then leaves but you get a higher return on sqft?
How about maintenance? Do you want to maintain the property in its best possible condition for the tenant, or get away with minimal repairs and upkeep? Your property can’t stick out like a sore thumb either, but a tenant who moves in a nicer neighborhood will have higher expectations.
Type of tenant based on condition
A property located in a depreciated area can still attract a great quality tenant so long as it is in good condition and the rent is fair. Arguably, the condition and price is more important than the location, although keep in mind that you can only find the best tenant for the area.
Now that you have selected the best location for your property to match up with your tenant, it is time to fix it up. The key here is to know what the tenant’s expectations are. This is influenced by the location as well as the rent value you are seeking. In general, some tenants prefer cheaper rent and are willing to sacrifice some on quality while others don’t mind paying a little bit more to get more. This becomes a balancing game, but the best place to start is to check out the neighboring units and see what they have.
After checking out the neighbors, think what type of tenant are you going to look for. Long term or short term. Someone who will maintain the property well, or someone who will do the bare minimum. The best practice here would be to make your property slightly better than the neighbors. That does not mean tear out the laminate counter-tops to replace with granite if no one else has granite, but be mindful of the type of flooring and day to day fixtures that are there which can be upgraded to help give the property a better feel.
Type of tenant based on price
Let’s face it, no matter what the stock market is doing or how well real estate is, the economy is always in some form of crisis. When pricing a home, you are directly targeting different types of tenants. Property that is priced over market for the area will generally attract those who either did not spend enough time pricing the area or those who know it will be difficult to qualify. In either case, they are not necessarily the “ideal” tenant however, you will generate a higher monthly income which may match your style.
Pricing below market for the area will generally get someone who has done their homework and knows what the area is renting for. You also open up the doors to people who may not have been able to normally afford to live in that area which could turn out to be a great opportunity if they are appreciative of what they are getting. This is a good strategy for someone who is looking to find a long term tenant and someone who will take better care of the property with the understanding that their monthly income will be lower.
What this all means
The type of tenant is based on price, condition, and location. There is no cookie cutter answer as to the best approach since this depends on your strategy. To make it a bit more complicated, these three things are all inter-related to one another and to best line up the tenant you want, it will take some planning in all three areas.
January 6, 2014