Aaron Adams, Alpine Capital
Over the years at Alpine Capital, there are frequently asked questions on the subject of Property Management. Some of the top questions are tenant screening, turnover, and vacancy. The following is an overview of these FAQs.
One of the most common questions is about tenant screening. How do you screen tenants and what are your criteria? This is something that has evolved over the years. It started with me having a conversation with tenants and then trying to make a decision about what worked best for us. It has certainly evolved into much more than that now. Anyone who has applied we have pulled their credit, criminal background, and job history. We also look up what their tenant history is as a tenant or as a homeowner. We really scrutinize their credit report. We look for things like delinquent utility bills. If someone does not necessarily have an eviction but has a history of late payments on their utility bills, that is a red flag. What we have done over the last twelve years is when we have an eviction we go back and say, “Was there something in the screening process we could have missed?”
When you think of the number of tenants that we have screened over the years we have really refined our ability to identify a potential problem scenario. We require that our tenants prove three times the monthly rent. So, if you want to rent a house from us for $1,000.00, you have to prove $3,000 a month in income. This can come from a variety of sources, you could get disability, child support, or a job. What we don’t do is let you pay us $12,000.00 in cash. Those have been the times where a criminal element has been introduced, or a family member is paying rent, and then it becomes a problem after the one-year lease. So we want to see income from a verifiable source. We want to see somebody that has been good about taking care of their monthly liabilities like their light bill and their electric bill. We are looking for someone who is stable at their employment. As we have combined all of those screening processes together we have become very efficient and very effective at screening tenants. Our default rate is a low single-digit annual rate. For example, in Indianapolis where we have about 1,600 properties when we get over ten evictions in a month, that is a red flag. That is when we start to get concerned.
People ask, “what is your vacancy rate?” “What does the turnover look like?” What I have found as we have managed properties over the country is that is a direct correlation between the type of property and the neighborhood. We sell properties that are between blue-collar up through middle-class neighborhoods. If you have a two-bedroom home in a blue-collar neighborhood your turnover will be more frequent. Typically, your tenants will go 12, 14, or 18 months then that property is going to turn over. On the other end of the spectrum, we see a lot lower turnover as you get up into the middle-class neighborhoods and so our turnover tends to be less with more bedrooms and a nicer neighborhood. Now that is kind of instinctive and a lot of times people don’t think about that when they are choosing properties. The tradeoff though comes down when you are looking at appreciation and growth. We really try to identify blue-collar neighborhoods that have huge growth potential because of big projects that are happening with the city or big infrastructure taking place. So even though your turnover may be higher on a blue-collar property, you are also going to be seeing a higher appreciation.
You as an investor have to ask yourself when you are looking at turnover:
“What is it that you want to see this cash flow for?”
“What place does it have in my overall investment portfolio?”
“Maybe the cash flow is not more important than overall growth?”
A vacancy is married to the turnover rate. The vacancy rate is usually a direct function of the type of neighborhood the property is in. We have a very low vacancy on homes that have four bedrooms or more. We also see a much lower vacancy on homes that have three bedrooms and a garage or more. We see a higher vacancy as we get into multi-family. One of the kinds of properties that I really don’t like to manage, or own, as an investor is a duplex in the Midwest. I love multi-family properties in higher-density areas like the Eastern Seaboard, New York, or New Jersey. I don’t like duplexes in the Midwest. In my opinion, they tend to not be as desirable for people.
As a landlord that has multiple properties, I hope this has been helpful and has given some insight.