What I Learned From National Retailers to Decide What and Where to Invest—And How You Can Do It Too

Key Takeaways:

– The author started an investor services business in 2005 and found that most investing literature offered opinions without processes
– National retailers have rigorous processes for choosing store locations and inventory based on financial goals
– To maximize profit in rental property business, understanding the needs of tenants is crucial
– Targeting a specific tenant segment requires properties that meet their housing requirements
– Attractors and detractors are used to target specific tenant segments based on income and behaviors
– Property profile is created based on the characteristics of the target tenant segment
– The methodology of selecting properties based on target tenant segment has resulted in reliable income and low vacancies for the author
– Retail chains make decisions based on financial goals rather than opinions of others
– Following retailer strategies can lead to reliable income in real estate investing.

BiggerPockets:

In 2005, I decided to start an investor services business. I reviewed all the popular investing literature. What I found were self-professed experts offering opinions and no processes. As an engineer, opinions hold little value.

I shifted my research focus to the commercial sector, where I found rigorous processes that resonated with me. I discovered that retail store location selection and stocking methodologies are excellent guides to systematic residential investing.

Here, I will explain how I use methodologies from national retailers to select properties that generate reliable income.

Don’t Reinvent the Wheel

National retailers have spent decades developing and refining processes to choose store locations and inventory. Retailers base all decisions on their financial goals: location of stores, layout of stores, decorations, etc. 

Retailers do not make decisions based on opinions they read on websites or books. They know the demographic of their customers and do what is needed to maximize returns.

For example, in Hawaii, McDonald’s has spam, Portuguese sausage, hot haupia (coconut pudding), and taro pies on the menu. This level of localization was necessary to attract locals to eat at McDonald’s. Once at McDonald’s, they order from the full range of standard items. This is an example of using an “attractor,” which I will talk about later.

Who Is Your Customer?

Operating a rental property is a business where you provide housing services to your customers—your tenants. To maximize profit, it’s crucial to understand your customers’ needs and what they are willing and capable of renting.

If your goal is reliable income, you need a reliable tenant to occupy your property. A reliable tenant stays many years, always pays the rent, and takes good care of the property. And since you will own the property for many years, you will need multiple reliable tenants. However, reliable tenants are the exception, not the norm.

Many people mistakenly believe that all tenants have the same behavior. This is not true. The renter population comprises many segments, and each segment has different housing requirements and behaviors.

For example, as illustrated, there are three primary tenant segments in Las Vegas. Each segment has different behavioral characteristics.

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The most crucial segment characteristic is the duration of their stay. If there are frequent turnovers, vacancy costs can turn what appears to be a cash cow into a money pit. 

So, if you want a reliable income from your rental property business, targeting a tenant segment that stays many years is critical. Among the three tenant segments, the Permanent segment has the longest average tenant stay. These people should be your customers.

How Do You Target a Specific Target Segment?

Each tenant segment has specific housing requirements and are unlikely to rent a property that doesn’t meet all their requirements. Here is an example of a segment’s housing requirements and a property that fulfills these requirements.

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The converse is also true; a property typically meets the housing requirements of just one segment. Therefore, when you purchase a property, the tenant segment the property attracts is fixed, and there is little you can do to change this. Only purchase properties that match the housing requirements of the segment you want to occupy your property.

How can you target a specific segment? By using a combination of attractors and detractors.

Attractors and detractors

Attractors are property characteristics that attract a specific tenant segment. For instance, to target the Permanent segment, invest in properties with rents that match a gross income range of $60,000 to $85,000 (as in the Las Vegas example). Doing so attracts individuals within this income bracket and discourages those who earn more or less.

How do you translate gross income to probable rent? Most people opt to live in the best place within their budget, typically allocating about 30% of their gross monthly income for rent. Therefore, you can calculate the rent range as follows.

  • Lower rent range: $60,000/year x 1 year / 12 months/year x 30% ? $1,500/Mo
  • Higher rent range: $85,000/year x year/ 12 months/year x 30% ? $2,125/Mo

So, if you buy properties that rent for between $1,500/month and $2,125/month, you attract people with a gross annual income between $60,000 and $85,000. At the same time, people who earn more or less than $60,000 to $85,000 are unlikely to rent properties in this range. 

However, not everyone in this income range has the right behaviors for reliable income. Based on our research and experience, only families with elementary school-aged children tend to stay over five years. Singles and couples within this wage range typically stay less than two years, making them less desirable tenants.

So, how do you attract families with elementary school-aged children? By purchasing properties that match their housing requirements.

For instance, our research indicates that single people and childless couples typically rent condos, townhomes, and small single-family homes. When they opt for a single-family home, it usually has two bedrooms, a one- or two-car garage, and a small yard.

Families with elementary school-aged children typically rent single-family homes that have three or four bedrooms, a two-car garage with at least 1,200 square feet of space, and a yard that’s over 3,000 square feet (so children can play in the yard).

Another key attractor/detractor is location. Singles and couples usually want to be near the “action” and are not likely to rent in suburban areas popular with families with children.

How can you identify attractors and detractors for your target tenant segment? Through property manager interviews.

Property profile

Once you identify the attractors and detractors for your target tenant segment (your customer), you can create what I call a property profile. A property profile is a physical description of properties that will attract your target subsegment and deter others. Your property profile consists of at least four characteristics:

1. Location: The locations where significant percentages of the target segment rent today.

2. Property type: The type of properties they rent today. Condo, high-rise, multifamily, single-family—the type does not matter. Only a reliable tenant matters.

3. Rent range: What the segment is willing and able to pay.

4. Configuration: Two bedrooms, three-car garage, large backyard, single-story, two stories, yard size, SF, etc.

Once you have a property profile, you can provide this description to any real estate agent, and they can find properties that match.

However, property selection involves far more than just the four characteristics listed. I also summarized what you must consider in the diagram.

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Does This Work?

This map shows where the majority of our client’s properties are located. Note that I did not choose the locations, property types, configurations, or rent ranges. I found the tenant segment with the right behavioral characteristics for reliable income and bought what they were willing and able to rent. It really is this simple, and the process will work anywhere.

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Here are the results of over 16-plus years of using this methodology:

  • 2008 crash: Zero decline in rent and zero vacancies.
  • COVID-19 pandemic: Almost no impact.
  • Eviction moratorium: Almost no impact.
  • Our average tenant stays over five years.
  • We’ve had six evictions in the last 16 years with a tenant population of over 1,000 tenants.
  • From 2013 through 2023, the annual appreciation and rent growth rates were over 15% and 7%, respectively.

Final Thoughts

Retail chains make decisions based on their financial goals, not the opinions of others. These goals dictate store locations, configurations, and the merchandise they stock. If you want reliable income, follow retailer strategies rather than adhering to others’ dogma.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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Property Chomp’s Take:

Are you looking to invest in rental properties but unsure of where to start? Have you been overwhelmed by the opinions of so-called experts and unsure of how to proceed? Well, I was once in your shoes, until I discovered a systematic approach that changed the game for me.

Back in 2005, I decided to start an investor services business. I was tired of hearing conflicting opinions and wanted something more concrete. As an engineer, I value processes over opinions. That’s when I turned to the commercial sector for inspiration.

I found that national retailers have perfected the art of selecting store locations and stocking inventory based on rigorous processes and financial goals. This got me thinking – why not apply the same methodology to residential investing?

In order to maximize profit and generate reliable income from rental properties, it’s crucial to understand your customers – your tenants. Just like retailers cater to the needs of their customers, landlords should target specific tenant segments that are likely to stay long-term, pay rent on time, and take good care of the property.

By identifying the housing requirements of your target tenant segment and purchasing properties that align with those requirements, you can attract the right tenants and avoid frequent turnovers. This means less vacancy costs and more reliable income in the long run.

But how do you identify the right target segment and create a property profile that attracts them? By using a combination of attractors and detractors. Attractors are property characteristics that appeal to a specific tenant segment, while detractors deter others. By focusing on the right location, property type, rent range, and configuration, you can create a property profile that attracts your ideal tenants.

I’ve been using this methodology for over 16 years, and the results speak for themselves. Despite economic downturns, pandemics, and eviction moratoriums, my properties have remained resilient with minimal impact. My tenants stay over five years on average, and eviction rates are extremely low.

If you’re looking to take your market research to the next level and make informed decisions based on data and processes, I highly recommend following the footsteps of national retailers and adopting a systematic approach to residential investing. By focusing on your target tenant segment and creating a property profile that aligns with their needs, you can set yourself up for long-term success in the rental property business.

So, why reinvent the wheel when you can learn from the best in the business? Follow the lead of national retailers, focus on your customers, and watch your rental properties thrive.

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