Do Good School Ratings Equal Good Investment Properties?
After my first (disastrous) property investment, I learned a crucial lesson: a property is merely a vessel to attract rent-paying tenants. Since the property never pays rent, your focus must be on selecting reliable tenants and buying what they are willing and able to rent. A reliable tenant stays for many years, maintains employment even during economic downturns, pays rent on time, and takes good care of the property.
Some background: Before 2005, I had never researched people's behavior. I began by purchasing datasets and writing code to predict behaviors, but this approach was a disaster. People didn't behave as my calculations predicted. After continuing down this dead-end path for a while, I decided to change direction and study past behaviors. I downloaded ten years of MLS rental data history and built rules based on historical behaviors.
A good researcher never presumes what the results will be. However, like anyone else, I have my own beliefs (which were wrong.) One of these was the importance of schools. Having lived in Singapore, New York City, and the Bay Area, I observed that school quality was often the deciding factor in where people lived. Based on this belief, I "knew" that the best areas to focus on would be properties in the highest-rated school districts.
I discovered that subdivisions with the highest-rated schools had much higher rents and prices. The people who could afford the rent earned enough to be home buyers, not renters. This segment of people typically only rent due to a major life event, like a spouse's death. After about one year, they buy a home. This short tenant stay caused high vacancy costs and made them unprofitable. In contrast, the tenant segment we target stays an average of over five years.
So, I reversed the process. Instead of presuming to know what attracted long-term tenants, I studied the school ratings of subdivisions where people stayed for over five years on average. I discovered that these areas had Great Schools ratings of four or higher for at least one grade level—elementary, middle, or high school.
I was very curious about this, so I talked to a friend who was once a teacher in Clark County. I learned that schools provide education tailored to the local job market. In the Bay Area, students need an exceptional education, like Stanford, to get high-tech jobs. In Las Vegas, schools give students the skills they need to secure well-paying jobs in Las Vegas. For example, a dealer with strong people skills and relationships with major gamblers can earn between $150,000 and $250,000. This job only requires a high school diploma and graduation from a dealer school.
Drawing from this experience and others, I shifted my approach. Rather than assuming what our target tenants would value, I identified subdivisions where tenants consistently stayed for over five years. This data-driven method allowed the tenants to indicate where they were willing and able to rent. I followed their lead, letting their choices guide my investment decisions.
Note that I'm not saying schools are unimportant in Las Vegas. The demographic we target can’t afford to live in areas zoned for the best schools.
You will need to find out what your target demographic values in your market, and buy what they are willing and able to rent. If you want to know how, check out this post.
