Monday, January 30, 2017

How To Determine Market Rents & Judge What Your Tenant Can Afford.

A quick Landlord how to on rents... I would say the best accurate place these days to determine what your place should rent for is:

Rents should be checked on a regular basis as they typically go up every year. But don’t be surprised if your phone isn’t ringing off the hook during the dead of the winter. The worst 3 months of the year to rent a place in our area are December - February. The rest of the year is typically fine with more than enough people to relatively quickly find a good tenant that passes your criteria.

Rentometer gathers their data from ads that were placed on Craigslist. They have a log of several years of rent in any given area so they often can find properties right around yours that were for rent.

One thing they don’t do is determine if it was a multifamily or not. And you should not have the same rent for your 3br single family house as I do for my 3br triplex. Those of you that have single families should have their rent right up next to the red. I rent my multifamily units above market rent so I like to keep them up by the red as well. But most of what you will see towards the green will be a multifamily houses, apartments, or landlords who are behind on the times and are not trying to get a fair rent for their property. 

The prime time for finding new tenants is between the 13th of every month and the 25th. That is the time frame that you find good quality tenants. Those who like to take extraordinary risks look for places form the 25th and the end of the month. That time that everyone else already has a place. That 25th through the end of the month is also full of those who have been having a hard time fining a landlord who will rent to them due to evictions or a string of bad crimes.

Then between the 1st and the 12th or so you have two types. One is the person who is currently being evicted. They are typically the real nice ones that seem to be awesome people as they have to work a lot harder and find a sucker that will rent to them. The other type looking at that time is the tire kicker. They are going to look ALL month long until they find that perfect place. They want more pictures and want you to jump through a whole bunch of hoops to later tell you that they are looking for the Taj Mahal and your place doesn’t fit the bill.

I’m not saying that different types of people don’t fit into all other parts of the month. I’m just talking in generalities that I’ve learned over the years. If you are not getting a lot of good quality leads in the 1st through the 12th time frame, don’t worry about it. No need to drop your rent as that time of the month is bad for quality potential residents. But if you’re not getting good leads between the 13th and the 25th of the month, than there is something wrong. Either your rent is too high for the condition of your property, or you are not keeping your ad renewed on Zillow and Craigslist, you have a bad property manager showing it, or some other random error you have that you will need to immediately get worked out.

Now you’ve found a good potential tenant. Lets determine if this tenant makes enough money to be able to afford to live in your place. I have historically had my numbers right on the bitter edge of what a person can afford. So close to the edge that if something happens such as their car breaks down or they have some other type of unexpected expense, they will get behind on their rent and will not likely be able to get caught back up unless they get assistance from one of the local agencies that help with homelessness prevention.

That right on the edge number is rent equaling no more than 40% of their total monthly income. I have seriously considered changing my number to rent totaling no more than one third, 33%, of their total monthly income. With 33%, a person can typically take a hit such as the loss of a job for a couple weeks from getting fired or being out sick, a car break down, or something else that sets them back. They at that level will be able to brush themselves off and get back on track on their own without assistance. It may take a little leniency on your part to give them time to catch up but they will be able to do it if they are actually trying.

A person isn’t truly comfortable unless their rent or mortgage payment equals or is less than 25% of their total monthly take home pay. Think about this for yourself as well. Add up your own total take home income and multiply it by .25. You will be very comfortable with your mortgage payment equalling no more than 25% of your total monthly take home pay.

When rent or the mortgage is less than 25%, it takes just one weekly check to cover the cost of shelter. It then will typically take one more check to cover all other expenses. You or your tenant will then have two checks a month that are able to go toward savings, vacations, going to the movies, eating out, etc. If a person can not pay their rent and they are in that 25% range, then they either lied to you about their income, or they are extremely irresponsible people that have some sort of drug, gambling or spending problem.

When determining what the total monthly take home pay is, you are looking at the “verifiable take home pay” not their total gross monthly income. You can include things like food stamps as that’s just like cash in the pocket. I would be very careful including income such as child support as that often ends up not lasting consistently over a long period of time.

The 3 formulas look like this on a person that has a total monthly take home pay of $1,900.

For 40% $1,900 X .40 = $760
For 33% $1,900 X .33 = $627
For 25% $1,900 X .25 = $475

The number at the end is the maximum amount of rent that they can afford for each of the formulas. You then determine if your rent is above or below the maximum affordable rent for them. If your rent is above what they can afford than send them away. If it is below than their financials check out and regarding that aspect they will be a good selection. As long as the rest of their background checks out fine.


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