Tenants

What it is

Tenants are the people living in your rental units. They’re also the main variable in whether the tenant buydown math works. Every month they pay rent, a chunk of that goes to principal reduction, a chunk to your cash flow, and the rest services the cost of holding the asset. If rent stops, all of that stops.

I’ve bought houses in growth neighborhoods, up-and-coming areas. Cap rates are better there, rents versus what you actually paid for the house are better, and you have higher potential for an equity shift. But you can of course buy in nicer neighborhoods, and you’ll probably get a higher-class tenant — that’s the strategy for a lot of people. Trade-off is lower cap rates. You pick your problem.

Why it matters

The first thing to understand is that neighborhood determines tenant quality. You can’t screen your way into A-class tenants in a D-class neighborhood, and you don’t need to screen that hard in a clean B-class neighborhood because the application pool is already filtered by rent level, commute, and schools. Buy the right house on the right block and the tenant math starts favorable.

The second thing: vacancy, maintenance, capex, property management. I always figure about 60% of rents is what I’ll actually collect. That 40% bite is where bad tenants do their damage. A tenant who trashes a unit on the way out, skips the last month’s rent, and leaves you with a $15,000 turnover — that wipes a year of cash flow on one door. Scale that up with a few bad tenants and you go from “portfolio performing” to “what is happening to my money.”

One ugly turnover can erase a year of profit on a single door. Good tenants come from good screening in good neighborhoods — in that order.

How it shows up

I did a walkthrough on a duplex I bought in an up-and-coming area. One side of it wasn’t bad — floors, paint, some plumbing, probably a $10,000-$15,000 turnover. The other side? That smell of cigarette smoke plus mildew plus rat poop plus general musk. We found issues with the electrical, a potential leak in the roof, a stove situation where nobody could figure out where the stove was even supposed to go. I’d say we’re probably at $40,000 between the two units. And I bought the house for $120,000-$130,000, so if I’m in for $170,000 on a house renting for $1,200-$1,300 per side — that’s still a pretty good return.

You manage the walkthrough, you manage the pricing, you manage the expectations — but the tenant situation that comes after is mostly determined by the neighborhood you chose and the screening you do upfront.

Screening baseline: income 3x rent, no recent evictions, references that actually check out, a move-in walkthrough where you document every wall, floor, fixture, and appliance with date-stamped photos. That photo walkthrough is free insurance. Move-out disputes evaporate when the evidence is in the phone.

Related

property management, vacancy, landlording, turnovers, tenant buydown, 31 percent rule, accusation audit