There are some tenant prospects who will never have an issue getting placed in a rental property. They have great rental history, low debt-to-income ratios, clean background checks, long-term stable employment, and better-than-average credit
scores.

Then, there are other tenant prospects who have the potential to be great renters, but it may not be immediately obvious based on their rental application. Perhaps they have limited credit history, high medical debt, or have never rented a property before. Making a quality decision around tenant placement is critical for the long-term performance and value
of an investment property. The greater the net operating income (NOI), the more valuable (and
attractive) a rental property will become and the largest source of income contributing to the NOI is actual rents collected from tenants.

That’s why tenant turnover can be costly for investors and negatively impact the NOI. When a tenant vacates a property, there will be costs associated such as move-out inspections, preparing/rehabbing the property, marketing the property, and leasing commissions. Tenant turnover costs can range from $1,000 to $5,000, with an estimated average being about $2,500 per turn (Source: Roofstock).

From a property value perspective, the NOI influences the capitalization rate (CAP rate = Net operating income / Cost of the property) of a rental property. For example, consider an investment property purchased for $100,000. Assume that property rents for $800/month ($9,600/year) and has $2,000/year in maintenance, tax, and insurance expenses. The NOI for that property would be $7,600/year. The CAP rate for that property would be 7.6%. If that same investment property experienced a tenant turnover, there would be an additional expense of approximately $2,500. Assuming 30 days to turn and re-lease the property, there would also be a rental income loss of $800. The NOI for this property would then be $4,300/year. The CAP rate would decrease from 7.6% to 4.3%. This reduction in CAP rate could make the property a
riskier investment and could reduce the value of the property. Average residential tenancy ranges from 2.5 to 3 years (Source: Tenant Planet, Inc.).

Placing the right tenant in a property can increase the duration of tenancy and decrease tenant turnover events. This can also lead to a much more rewarding tenant-landlord relationship. Great tenants take pride in the rental property and do their part to make it a great home for their family and a stable asset for landlords. Over time, these things increase the value of the rental property by maximizing income and minimizing unplanned expenses.

Tenant selection is one of the most critical decisions a residential landlord will make. This placement influences the net operating income (NOI) and value of the investment property. Putting the right tenants in place will increase the likelihood of having:

• On-time rent payments
• Hazard-free rent increases
• Proactive reporting of maintenance issues and more.

Sometimes it may be necessary to enhance the tenant screening process beyond an application. Landlords should look further to determine if a tenant prospect in the “MAYBE” category can be moved to a “DEFINITE YES.”