If you have a rental property that is generating positive cash flow and is expected to appreciate in value over time, then you must hold onto it for as long as possible. The problem, however, is you might have tenant issues that make you want to sell.
Being a landlord is not for everyone. After 20 years of being a landlord, I've experienced it all—from late rent payments to property damage to all-night house parties waking up the neighbors. Being a landlord has tested my faith in humanity because some tenants really don't care.
In 2017, I sold my largest rental property after my son was born. It was causing me too much headache because the only tenants I could find were college fraternity brother roommates. This generated tremendous turnover and damage to the home. The tenants were also late paying the rent eight times in a two-and-a-half-year period.
Even though I simplified my life by selling, I also felt like a failure for not being able to hold on. This rental property was supposed to be the cornerstone for funding our early retirement lifestyle.
As a result of my experiences, I am like the CIA when screening each prospective tenant. There is no stone I will not turn over to help ensure the prospective tenant will follow the terms of the lease. I would prefer to wait for the ideal tenant rather than rush a non-ideal tenant in to minimize lost rent.
Your Preference for Tenants as a Landlord Changes as You Get Older
When I was in my 20s and 30s, my number one priority as a landlord was to maximize rental income. I wanted enough passive and semi-passive income to cover my basic living expenses so I could leave a stressful job behind for good. I treated my rental properties as a business, as one should when so much capital is at stake.
Twelve years after escaping my day job in 2012, I'm now 47 and have a different perspective. I'm still looking to receive market rent for my rental properties whenever there is turnover. However, I'm no longer aiming to maximize rental yield over time.
Instead, I'm happy to not increase rents along with the market if I can keep good tenants in my properties for longer. I'd rather have low turnover and harmony than more money.
Having low turnover and harmony helps increase your odds of owning your rental property for longer. And the best way to build wealth is to own appreciating assets forever.
Tenants as Guardians of Your Property
After having kids, it became easier to own stocks, real estate, and other assets for a much longer time than I used to. No longer was I just investing for myself; I was investing for their future. I know in 20 years, when they are working adults, they will wish they could have bought stocks and real estate today. As a result, I buy and hold for them.
One of the key mental shifts I've used to help me own rental properties for longer is viewing my tenants as guardians of my properties rather than consumers. Instead of looking at my tenants mainly as a source of income, I now start to look at them as caretakers.
Sure, my tenants will still scratch, ding, and dent walls and doors. Tenants will still chip countertops and crack mirrors to my dismay. But by having a tenant in your rental property, you increase your chances of saving the property from unknown disaster.
And if you can prevent your rental property from experiencing an expensive problem, you also increase your chances of owning the property longer as well.
A Massive Leak Caused Tremendous Damage
I first started viewing tenants as guardians of my rental properties after a friend went to Lake Tahoe for two weeks during a family ski vacation. This was in 2021-2022 when it was particularly rainy in San Francisco that season.
When my friend got back to her house, she found her kitchen and two bedrooms flooded. There had been a leak in the roof that got bigger due to violent winds. It had also rained non-stop for two weeks.
My friend had to call the home insurance company to assess the damage. It determined the house was uninhabitable, and my friend and her family had to move out to a new home for a year. During this time, they had to rip out all the walls, floors, and appliances, dry out the home, and rebuild again.
If only there was someone living in the house who could have called a roofer or a handyman as soon as they saw the leak. My friend would have avoided so much hardship.
A Silver Lining to the Leak
The silver lining to this mishap is that my friend wanted to remodel the kitchen anyway. So at least she got a “free” kitchen, floors, and walls, thanks to his homeowner's insurance policy. It just cost her the deductible and a lot of headaches with two kids.
This silver lining also reminds me that if you have an old house, it's more worthwhile to get a replacement cost policy rather than an actual cash value policy. Although a replacement cost policy is more expensive, if she had an actual cash value policy, it would have only paid out for the depreciated value of his old kitchen, walls, and floors.
In other words, if you have a new home or newly remodeled home, you might consider getting an actual cash value policy for the first 10-20 years to save money. After 10 years, switch to the more expensive replacement cost policy to get a brand new home paid based on today's new costs if something were to happen.
Tenants Are Your Eyes and Ears for Anything Abnormal
Landlords have generally viewed tenants as damagers of their properties through regular wear and tear as well as the occasional accident. These damages are baked into the cost of running a rental property. Protection from damage can be mitigated through a strong lease, a rental deposit, and tenants getting renter's insurance. Despite all these, conflicts may still come up.
If you have a negative view of your tenants for whatever reason, it may help if you start viewing them as guardians. They are your eyes and ears for anything abnormal that happens. With a change in view, you should feel better the next time you have to interact with them.
There are people who own mansions who actually pay people to mansion sit for them. So in a way, you could view your tenants as providing a free service. But of course, it’s not quite the same.
Besides looking out for leaks, tenants can also look out for potential fires. Water and fire damage are the biggest concerns. By having a tenant in the rental property, a fire can be put out quickly compared to if there was nobody around. Then there are the occasional random natural disasters, like a tree falling on the deck and so forth.
There is a reason why some home insurance companies refuse to insure unoccupied homes or rental properties. They know that things can go very wrong without someone living in the home. Your tenant or guest is the first line of defense against something bad happening.
Guardians of Your Rental Until Your Kids Grow Up
If you want a real estate investing goal, consider owning one rental property for each kid, preferably in the same city as your primary residence. This way, you increase your chances of your kid living close by after college because there's an affordable place to stay.
The rental property provides career insurance in case your kid can't get a high-enough paying job to live independently. If affordable housing is hard to come by, the rental property will provide a place for your kid to stay. Finally, owning a rental property will help pay for your retirement, especially if it's paid off once your kid is an adult.
However, if your kid is still young, as ours are, you might have to wait one or two decades before they are able to take advantage of the rental property. As a result, owning your rental property can be a test of endurance, especially if you have suboptimal tenants who don't follow the lease.
If you can work things out with your tenants or find new tenants once the previous ones finally leave, you can work on viewing your tenants as guardians by telling them so and empowering them. Give them the green light to make any repairs immediately up to a certain dollar amount without your approval. This will help expedite problem-solving and give them agency.
With great tenants, you increase your chances of owning your rental until your children come of age. And like all insurance, you hope your rental properties are not needed to support them.
Good Tenants Can Reduce the Pace of Wear and Tear
Without insurance, a disaster can easily wipe out years of profits for the landlord. Good tenants can stop small problems from getting much bigger.
Given the high value of having a good tenant, it is worth spending extra time screening them carefully. Check multiple references, review all their finances, speak to them multiple times, have them get renter's insurance, and draw up a thorough lease agreement. It's not worth having irresponsible tenants for short-term gain.
If being a landlord isn't for you, I get it. I've been managing rental properties for 20 years and still have my doubts whenever I sign new tenants. Every rental agreement is a leap of faith. The good thing is that everything can be worked out with time, money, and compromise.
As I get older, I'm all about minimizing headaches. As a result, I've been investing more of my real estate portion of my net worth into private real estate funds. Not only do I get to earn 100% passive income and distributions, I also get to diversify away from expensive San Francisco to other growing parts of the country that are cheaper.
Owning rental properties for financial security is a test of endurance. By viewing your tenants as guardians, you can endure longer and become wealthier as a result.
Have you ever considered viewing your tenants as guardians of your rental properties? How else have you been able to elongate the duration of your tenant's stay?
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Hey, thanks for sharing your story! I totally get where you’re coming from. Viewing tenants as guardians is such a smart shift in mindset. It must be a huge relief to have reliable people taking care of your properties, especially with your focus on long-term stability. Your approach to screening tenants thoroughly really pays off in the long run. Keep up the great work!
My goal was to create a symbiotic relationship with my tenants as some of them are saving for a house, some are in retirement and can’t afford a larger living space, and so on.
I have been fortunate to have good tenants, even inheriting good tenants when purchasing a property.
I’m also candid with my tenants about how and why I charge what I do for rent because there’s been a massive “changing of the guard” where older investors are cashing out at high prices and subsequently setting rents at 1% of the purchase price can mean $200-$300 a month more in rent for some existing tenants.
Right now, I don’t live off any tenant’s rent because all the cash flow goes towards improving the properties and I use my W2 to support myself.
Because of this, I also explain to them that I consider my tenants to be fellow investors because, unlike owning their own home, there is little risk that they will lose their housing because of a large repair or maintenance expense and I am working to improve the properties for their benefit.
One issue I have is with water and sewer costs at one of my properties. The local municipality leased their water system to a private company and now the costs are about $100 more per month than similar usage at my other properties. I’ve had 7400 gallon bills (servicing 2 adults and 2 children) that are $320, and the water company ties their rate increases to CPI with a markup, so I have to raise rents more aggressively than I would like just to keep up.
Stability with my tenant roster has been key to my success. I do everything possible to create a win/win arrangement so they stay and renew. My longest-tenured tenant has been with me for 12 years, and I have several others that are approaching 10 years! I do increase rents at every renewal but try to stay just under market rates. Turnover would kill my ROI on getting more money and introduce an unknown entity. I do bi-annual ‘proactive maintenance inspections’ on the homes to lay eyes on them and look for things that are wearing out before they break. I also pay for an annual spring cleaning/tune up of the HVAC system and provide 12 months of HVAC filters to the tenants (I buy them in bulk online). Over the years I’ve had numerous tenants leave for one reason or another only to come back to me hoping to rent from me again. Sadly, most landlords are lazy, unresponsive and not caring.
Yes!
I explain to my tenants that most landlords factor in a 5% vacancy rate when budgeting, but that I prefer to keep my rents 5%-10% below market thereby “giving” the 5% to the tenant rather than the economic waste that comes from turnover.
How do you decide to buy residential properties over triple net commercial properties?
I just buy homes I want to live in, live in them, and then rent them out when I have the funds or desire to live in a new home. Over 30 years, you can build a 3 to 6 rental property in Portfolio, quite easily to fund your retirement.
Do you know if you enjoy living in the home, other people will too. You also know the intricacies of the home and where to fix.
I live with commercial real estate investments to professionals through private real estate funds like Fundrise and public REITs.
Got it. We have a mix of residential and commercial (triple net and non-triple net). Learnings so far: (1) commercial profit margin (monthly rent) is 2X+ that of residential; (2) triple net is hands-off and little worry compared to residential which causes constant stress when something needs maintenance etc.
Thus, for us moving forward, we prefer commercial triple net.
That may be the strategy to reduce the risks of squatters. You have lived in the rental property yourself, it is your previous community, you kind of have a better idea of what types of people are attracted to the community, and may have a better chance of screening them besides paper applications. On the other hand, those types of tenants may move on faster to buy their own homes so the turnover rate may be higher. It may be riskier to have rental properties in communities you don’t live in, although that is what a lot of landlords are doing. That may require more time and energy to manage the rentals.
One of the first things I teach my tenants is how to turn off the shut off valves to the toilets, sinks, and the main cutoff outside the house where the water supply connects to water company.
I’ve heard of mansion sitters and house managers before. It sounds like a silly, surreal role, but I can see how it is actually quite a useful job. It can provide the homeowner peace of mind, security (if the person is trustworthy of course), and someone to coordinate with vendors to get things fixed. So I can see how proper tenants can provide a similar value if they are reliable and attentive.
An interesting concept Sam. However, this would be very much dictated by the types of property you rent out. Back in the late 90’s we decided to go the property route but before we did we looked at demographics and property types. In the end we targeted DINKY’s. Dual income no kids yet. Generally they stayed for 2-5 years, often introduced us to the next tenant and looked after the places. For our part any issues were fixed swiftly and when something broke it was updated. We aimed at a symbiotic relationship. Other friends went high returns down market. Higher returns they achieved, but one infamous tenant ‘Wiffy Spliffy’ was found in the ensuite bath tub in the garden. This was something we avoided. In the modern world there are two new problems with investing in houses. In many countries there is a growing concept of ‘housing is a human right’. This brings many meddlesome policies which are causing all manner of unforeseen consequences mostly negative for owners. Here in the States we have a similar problem with work force housing policies. In the so called ‘land of the free’ town councils are rolling out policies such as rescinding short term letting for owners. Whilst concurrently zoning town areas for ‘locals’ and others. These are all policies akin to changing the rules of monopoly half way through the game. In summation investing in housing is becoming ever more complicated. Tread cautiously. Make when you buy.
Thanks for sharing. This is a worthwhile perspective to consider as we’re actually thinking about selling our rental property for a number of reasons, not the least of which is the headache of dealing with tenants.
For folks with vacant vacation homes and the like, there are actually a lot of cool smart devices now that can help detect leaks, standing water etc. Not as good as someone being there, of course, but better than nothing…
Ah yes, good reminder on the leak detector valves and automatic shutoffs! I should look into that for travel purposes. We have Amazon Prime automatic light switches, cameras, sensors, and August automatic locks. So neat to control all through the phone.
Yup. They smart flooding detectors too that you can put on your floors in case the flooding isn’t coming from your pipes (rain, water backup etc)
Then you just need a backup plan in case your WiFi goes out