The Tenant Pool Defines Everything

Dimitar Belchev - Unsplash

I am occasionally asked, "What is the best property type to buy?" If your goal is a dependable passive income, you want to buy properties that "good" tenants are willing and able to rent. My definition of a good tenant is someone who:

  • Has stable employment in a market segment that is very likely to be stable or improve over time
  • 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:

  • Targeting the right tenant pool.
  • Selecting properties that your target tenant pool is willing and able to rent.
  • A skilled property manager.

How do you target a specific tenant pool? By selecting properties that they are willing and able to rent. You determine the physical characteristics of these properties by studying what your target tenant pool has historically rented. What you need to determine is:

  • Rent range - Usually close to 2/3 of gross monthly income.
  • Needs - Three bedrooms, one bedroom, three car garage, one story, two story, etc.
  • Wants - Features that the target tenant pool finds highly desirable.
  • Location - Each tenant pool segment clusters in specific areas; they are not spread out over the metro area. See the map below showing the locations of our client's properties. Notice the clustering. Also, we did not chose any of these locations, our target tenant pool choose the locations.

Once you determine the target segment's housing characteristics, you can develop a physical description of properties they are willing and able to rent. See the image below.

The target tenant pool segment defines everything; what you think is a better property type is irrelevant. The target tenant pool even determines what you should renovate.

Summary

Location is the most important investment decision. Once you choose a location, select a tenant pool segment with the highest concentration of good tenants. Next, determine what this segment is willing and able to rent. You can then derive a physical description of the properties you need to buy.