Obtaining In-depth Local Knowledge
"Live where you like but invest where you can make money."
In order to determine if a location is suitable for investments you need in-depth knowledge of that location. And you need to start with identifying the right tenant pool.
It is critical to keep a property consistently occupied by a good tenant. 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 of 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 multiple years
Good tenants are not common. Good tenants are the result of targeting the right tenant pool and careful selection by the property manager. In order to have enough applicants so the property manager can select a good tenant, you need to target the right tenant pool.
In our experience you can subdivide tenants by the amount of rent they are willing and able to pay into three groups. While not always true, you can make certain assumptions that are valid a high percentage of the time. See the chart below.
- Transient - The people in segment are primarily hourly workers. They are different than segments 2 and 3 because they live cash based lives. They may not have a bank account, credit card or loans and they tend to have little or no financial history. Without a financial history, there is no effective way to screen out bad actors. Also, since they do not depend upon credit, their actions today have little or no impact on their future. Therefore skips, evictions and damage judgements are more common. In times of economic stress, they are the first to be laid off and the last to be rehired. In my experience, there are relatively few "good" tenants in this segment.
- Permanent - The people in segment are primarily credit based. You can obtain a detailed financial history which includes how often they move and how good they are at paying bills. This is the type of information the property manager needs in order to select good tenants. They tend to follow the "rules" and pay the rent on schedule. This segment knows that a skip, eviction or property damage judgement will hurt them financially for years to come. Most are "permanent" renters, they stay a long time. This is the pool with the highest concentration of "good tenants" and is the tenant pool we target for our clients.
- Transitional - The people in segment are also credit based but they make sufficient income that they would normally buy a home. Typically they will only stay one to two years before they buy a home and move out. With the short stays it is hard to make money with this pool.
How do you determine critical information like the right rent range to target, property type, and configuration from the other side of the country? Talk to local property managers. Local property managers deal with tenants every day. They have a wealth of information. And, not just any property manager will do. Select property managers with the following characteristics:
- They are mid sized for that area. If they are too large, you will not appear on their radar. If they are too small, they will not have the processes, procedures or software to be effective .
- Property managers tend to specialize in specific types of properties in specific areas. You want a property manager that specializes in the geography and type of property you are considering.
Once you have identified 5 to 10 interesting property managers, create a written list of questions. You will ask the same questions of each property manager and write the answers down for later comparison. You will learn a lot about the area from the property managers during this exercise. Below are some example questions.
- How many properties are you currently managing?
- I am looking for properties to attract long term tenants that will take care of the property. If you were looking for such a property what type and where would you buy?
- What is the rent range for such properties?
- What is the average length of time your tenants stay in such properties?
- What is your typical time-to-rent for such properties?
- What advice would you give a new investor buying their first property in this area?
- What geographical area do you service?
- What is your mix of properties (single family, condos, commercial, etc.)?
After talking to several property managers, you will have a pretty good idea about the area, tenant pool, major employers, regulations, etc. Plus, you should have a pretty good idea of what types of properties do the best and where they are located. With this information, you can do some homework on Zillow, Redfin or whatever real estate site you prefer. Look for properties that match what you learned from the property manager interviews. You now have what you need to do some guesstimating on whether the location is worth further investigation. The data you will need includes the following:
- Property price(s)
- Landlord insurance cost - call a local agent
- Management fee - You learned this from the property manager phone calls
- Periodic fees - the property details
- State income tax rate
You can now plug this information into the proper formulas. Below are the formulas we use:
- ROI = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax) / ( DownPayment + ClosingCosts)
- Cash Flow = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax)
The results will enable you to make an informed decision on whether this location makes sense or if you need to look for another location.
If you would like to obtain an in-depth knowledge of the Las Vegas market, contact us. We would be happy to discuss with you the Las Vegas real estate market, as well as arrange a meeting for you to talk with the property manager that we work with.