I Want a Rental. Who Should I Rent To?

The most important part of renting is figuring out your demographic and what are the advantages and disadvantages to them.  If you’re new to investing, you’re probably looking under $400,000.  Since you’re looking for a combination of monthly cash flow and long term appreciation, you’re probably trying to stay in the strongest long-term value areas.  For San Diego County that would be the coastal neighborhoods: Carlsbad, Encinitas, Solana Beach, Del Mar, Carmel Valley, etc.  The challenge is that in these places it’s unlikely you will find a detached single family home under $400,000.  Therefore, your demographic renter needs to be someone that feels comfortable in a twinhome, townhome, or condo.  Generally that means you renters are:

1.  Military

2.  Young Professionals

3.  Small/Growing Families

4.  Students

Each of these demographics have there own positives and negatives and it’s important to get to know them before signing the lease.

1.  Military: the biggest advantage in my opinion is that they tend to be very reliable.  The money that is being paid out for rent is specifically given to them from the government as their housing allowance.  Therefore, they will always have rent money.  Also, it’s easy to handle problems if things aren’t working.  A simple call to a CO (Commanding Officer) explaining the issue and seeking his/her help will usually solve the problem.  The downsides are that at a moment’s notice they may be deployed and legally they are allowed to exit the lease agreement without penalty (rightfully so since they work so hard for us).  The only other disadvantage is that you may have to deal with a younger demographic that may not be as responsible as others (I had a young military man tenant pee all over his own couch when he got drunk recently — not sure this is the ideal tenant).

 
2.  Young Professionals: the advantages is that they often don’t require much space and may even room with one or two friends.  I know other landlords have had difficulty with this demographic because the job market is still tough and even though many young professionals are highly educated, their resumes are still mostly blank and they’re the first to get laid off in cut backs.  Plus, usually once they enter into a serious relationship the prospect of living in a small space or with friends isn’t as desirable.  Furthermore, if renting to an unmarried couple who is living together (particularly for the first time), there can be real challenges in the relationship and if someone leaves it can often leave the remaining party unable to cover rent.

 
3.  Small/Growing Families: in my opinion, usually the best tenant to have.  Usually moderately established and in an age range that is generally focused on family well-being more than individual satisfaction.  This usually makes for a quality tenant and one that may be around long-term.  They are often focused on school districts and proximity to parks, etc.

 
4.  Students: the nice thing about students is that you know that they will always need a place and usually won’t have a problem with them not being able to pay (since most students either have loan money or their parent’s money since they aren’t working and going to school).  The disadvantage is that students generally aren’t interested in renting the summer months (they want to rent September to May) and you often have to deal with multiple people to collect rent.  When I was in college in the early 2000’s, my girlfriend at the time lived in a 2BR condo with 6 girls.  They were respectful and good tenants, but being the landlord and potentially collecting 6 different checks makes for a headache (and a lot of estrogen in your condo).  The only other issue you often find with student tenants is that they are living in their college years and drinking and parties are a part of the lifestyle.  Certainly you can screen out the frat boys but you need to expect that there will be some wear-and-tear more than other tenants.