Why We Only Target Certain Property Profiles
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Sometimes, clients send properties that look good and are priced lower than the ones we select using our software. In this post, I will explain the process we follow to select properties and other considerations about properties and locations.
The only way to consistently make money is if a “good” tenant continuously occupies the property. A good tenant is someone who:
- Has stable employment in a market segment that is very likely to be stable or improve over time
- Has a credit history with which you can evaluate the likelihood that they will perform
- Pays all the rent on schedule
- Takes care of the property
- Does not cause problems with neighbors
- Does not engage in illegal activities while on the property
- Stays for many years
Good tenants are the exception, not the norm. Good tenants are the result of:
- Selecting the right tenant pool.
- Selecting properties that the selected tenant pool is willing and able to rent.
- A skilled property manager to select good tenants
Our overall process is illustrated below.
First, we selected the Las Vegas market because it met all of our location requirements. Next, we studied the various tenant pools to find one that had a high concentration of good tenants. During our research, we learned that there are three major tenant pools in Las Vegas, which are characterized below.
| Class Name | Property Class | Average Stay (Yrs) | Typical Rent | Annual Vacancy Cost |
|---|---|---|---|---|
| Transient | C to -B | 1 | 750 to 900 | +3,000 |
| Permanent | B+ to A | 5 | 1600 to 2200 | 400 |
| Transitional | A | 2 | 2500+ | +3,500 |
As you can see, the annual vacancy cost for each tenant pool is drastically different. Annual vacancy cost is the amount, on average, you will lose each year to the property being vacant. We target the “Permanent” tenant primarily because of the low vacancy cost. With over 400 properties and 15 years, what have been our results with the Permanent tenant pool?
- Greater than 90% of clients buy more than one property from us
- Average tenant stay >5 years.
- Five evictions in 15 years
- 2008 crash - Zero decline in rent and zero vacancies.
- COVID - Almost no impact
- Eviction moratorium - No impact
- 2022 YoY result: rent increase 17%, appreciation 32%
How Do You Target a Tenant Pool?
You target a specific tenant pool through the properties you select. Over the years, we developed a profile for properties that the Permanent tenant pool was willing and able to rent. Currently, our property profile has about 40 factors each property must match before we even consider it.
Properties that do not conform to our property profile are likely to take longer to rent, have shorter tenant stays, suffer more damage, and are more likely to have non-performing tenants.
Have we worked with clients who choose properties not conforming to your property profile? A few. All owners of these properties believed they found a “deal,” but all were unhappy with the property’s performance. After all, the purpose of a rental property is to generate a dependable passive income. If the property is frequently vacant, tenants do not pay the rent on schedule or lose their jobs during times of economic turbulence, no matter how little you pay for such properties, they are bad investments.
One of the major indicators of a poor investment is school performance. Single-family homes are primarily rented by families. If the schools are poorly rated, the tenant stays are short, and prospective tenants want a low rental rate. Note that we do not use school ratings to select winning properties, but we typically eliminate properties with poor school ratings. What is a poor school rating? Any with a ranking below 4 (on a scale of 10). Especially important is the elementary school.
