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.
Final Thoughts
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.
