– The author and their team have delivered almost 500 Las Vegas investment properties worth over $130 million since 2006.
– These properties have experienced an annual appreciation of 15% and annual rent growth of 7% from 2013 to 2023.
– The average vacancy rate for these properties has remained below 2% even during economic turmoils like the 2008 housing crash and the COVID pandemic eviction moratorium.
– The key to reliable rental income is having a reliable tenant who pays rent on time, takes care of the property, and stays for many years.
– Not all tenant segments are the same, and each segment has different behaviors and specific housing requirements.
– When selecting a property, all aspects, including the tenant segment, are set in stone, and it’s important to choose a property that attracts a segment with a high percentage of reliable tenants.
– Property managers can provide valuable insights into which properties attract tenants who stay for many years and can answer questions about property types, locations, rent ranges, job industries, demographics, and rental payment reliability.
– The secret to a reliable rental income is buying properties that attract tenants from a segment with a high concentration of reliable people.
– Working with a good property manager can increase the odds of having a reliable rental income.
Since 2006, my team and I have delivered almost 500 Las Vegas investment properties (> $130 million). The properties had an annual appreciation of 15% and annual rent growth of 7% (2013 through December 2023), and our average vacancy rate stayed below 2%, including during two major economic turmoils:
- 2008 housing crash: Zero decline in rent and zero vacancies.
- COVID pandemic eviction moratorium: No impact.
So why did our clients’ properties perform when most others did not?
The Key to Reliable Rental Income
Income reliability is not a function of the property but of the tenant who occupies it. To maximize your rental income, your property must be continuously occupied by a reliable tenant.
A reliable tenant is someone who:
- Pays all the rent on time.
- Takes care of the property.
- Stays for many years.
Before I talk about income reliability, I will talk about tenant segments.
Not All Tenant Segments Are the Same
People tend to think that the entire population of people who rent is homogeneous and that they all have similar behavioral characteristics. This is not true.
For example, in Las Vegas, there are three major tenant segments. I listed some characteristics of the three segments in the table. The segment’s names reflect their overall characteristics.
As you can see, each segment’s behaviors are different. And it is not just behaviors; every segment has specific housing requirements. People are unlikely to rent any property that does not meet all their housing requirements. The corollary is also true.
When you select a property, all aspects, including the tenant segment, are set in stone. What if the segment the property attracts has a reliable tenant ratio of 1 reliable person in 50 people? The odds of ever having a reliable tenant are low. The result is that your actual rental income is likely to be much lower than your calculated income.
Every property matches the housing requirements of a single-tenant segment. And there is nothing you can do to alter the tenant segment the property attracts.
So, what happens when you select a property? This chart explains it:
If you want to have a reliable income, start by choosing a tenant segment with a high percentage of reliable people. Then, purchase properties that match this segment’s housing requirements, as illustrated in the chart. Once you select a property this way, it will likely be occupied by a reliable tenant.
Interviewing for Income Reliability
How do you find a segment with a high percentage of reliable people?
Property managers work with tenants every day, making them a rich source of knowledge. You can utilize their expertise by asking them questions in a manner they understand and within their field of knowledge. From their answers, you can derive the information you need.
Below are sample questions and the ideas behind them.
What types of properties would you buy if your goal was tenants who stay for many years?
The purpose of this question is to understand which properties attract tenants who stay many years. You are also looking for the property type and configuration.
Where are these properties located?
You are searching for a geographical area to focus your search.
What is the rent range that attracts these tenants?
Once you determine the rent range, you can estimate the gross monthly income range of the renters. Generally, people spend about one-third of their gross monthly income on rent.
What kinds of jobs do they have, and where do they work?
By combining the income range information with the industries in which the segment works, you can determine whether those companies are currently thriving and likely to continue to do so in the future.
For example, during the fracking boom, people purchased rental properties near large fracking fields, only to find themselves with vacant properties when fracking died down. Similarly, if the majority of the segment works at an auto plant scheduled to close in five years, you should consider investing in a different city.
Please tell me about the typical tenant who occupies these properties.
What you were looking for is the demographic. For example, we target young families with elementary school-aged children. This demographic has an average stay of over five years. This also drives the property type and configuration.
For example, in Las Vegas, this demographic almost exclusively rents single-family homes with a two-car garage, three bedrooms, and two or more baths.
As a group, how reliably have they paid the rent? How often do you have evictions with this group?
It is not how much money you make on paper. What matters is how much you actually receive.
This list of questions is not comprehensive, but it should provide a good starting point.
The secret to a reliable rental income is buying properties that attract people from a tenant segment with a high concentration of reliable people. And if you work with a good property manager, the odds are high that you will have a reliable income.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
Property Chomp’s Take:
Hey there! Today, I want to share with you some insights and strategies that my team and I have used to deliver consistent and reliable rental income for our clients in Las Vegas. Over the years, we’ve managed to maintain an average vacancy rate below 2% and have seen annual appreciation of 15% and annual rent growth of 7% for the properties we’ve handled. Even during major economic downturns like the 2008 housing crash and the recent COVID-19 pandemic, our clients’ properties remained unscathed. So, what’s our secret?
The key to reliable rental income lies not in the property itself, but in the tenant who occupies it. To ensure a steady stream of rental income, it’s crucial to have a reliable tenant who pays rent on time, takes care of the property, and stays for an extended period. However, not all tenant segments are the same.
Contrary to popular belief, the population of people who rent is not homogeneous. In Las Vegas, for example, we’ve identified three major tenant segments, each with its own unique characteristics and housing requirements. Let me break it down for you:
1. The Transient Segment: This segment consists of individuals or families who frequently move around due to various reasons such as job changes or lifestyle preferences. They typically rent smaller, more affordable properties and have a higher turnover rate.
2. The Mid-Term Segment: These tenants are looking for stability but may not be ready to commit to long-term homeownership. They seek larger properties that can accommodate growing families or provide more comfort. They tend to stay for a few years before moving on.
3. The Long-Term Segment: This segment comprises individuals or families who prefer renting over homeownership. They seek stability and are more likely to stay in the same property for many years. They typically look for single-family homes with specific features to suit their needs.
Now, here’s the catch – every property is naturally inclined to attract a specific tenant segment. You can’t change the segment a property attracts, so it’s crucial to choose a property that aligns with a tenant segment that has a high percentage of reliable individuals. This way, you increase your chances of having a reliable tenant and, consequently, a steady rental income.
To find a tenant segment with a high concentration of reliable people, you can tap into the expertise of property managers. Property managers interact with tenants daily and have valuable insights. Here are some questions you can ask them to guide your decision-making:
1. What types of properties attract tenants who stay for many years?
2. Where are these properties located?
3. What is the rent range that attracts these long-term tenants?
4. What kinds of jobs do they have, and where do they work?
5. Can you tell me about the typical tenant who occupies these properties?
6. How reliably have they paid the rent in the past? How often do evictions occur with this group?
These questions will help you understand the demographic, income range, and stability of a specific tenant segment. By combining this information with economic factors and future prospects, you can make an informed decision when selecting a property.
Remember, the goal is to invest in properties that attract tenants from a reliable segment. Working with a knowledgeable property manager can greatly increase your chances of achieving a reliable rental income. Their expertise and experience in the local market can guide you towards properties that are more likely to attract long-term, reliable tenants.
So, if you’re looking for a reliable rental income, start by understanding the different tenant segments in your area and aligning your property choices accordingly. By doing so, you’ll be well on your way to building a successful real estate investment portfolio.
And that’s a wrap! I hope you found this article helpful and gained some insights into achieving a reliable rental income. Remember, the key lies in understanding your tenant segment and making informed property choices. Good luck on your real estate investment journey!