What factors help you decide to sell a property?

Question

When do you say enough is enough, and decide to sell a property ( and I am not talking numbers/cash flow of course)

I have two triplexes in Las Vegas, and it has been issue after issue with these properties. Repairs, eviction, non paying tenant, long vacancies, the list goes on and on.I can’t seem to put my hand on the issue; I am sure that the location is playing a part ( N 14th Street), but don’t know if the PM company I’m using is part of the problem.

Yesterday I got an email from the PM company that tenants are requesting I install flood lights because of increased gang activity, and car vandalism.I am just worried that things will go downhill for a while economy wise, and although my plan was to buy and hold, I wonder if I will have the stamina to hold on to this property that has all these issues to begin with. How much time do you give yourself to stabilize a property?Should I just get the property ready for sale?

Thanks in advance for your insight and advice.

Malkia Ra · Answer

I chuckled when I got to, "...the list goes on and on.I can’t seem to put my hand on the issue;.." because you've actually identified the issue(s).

It sounds like your rental is chaotic and stressful for you.  The setbacks many landlords can "take on the chin," could drive some of us insane.  I personally feel that with anything in life, if it disrupts your peace, you have to let it go.

This business is not for everyone, and only you can determine if the pros outweigh (and are worth) the cons.  Good luck.

Bill B. · Answer

How many PM’s have you tried? How are you determine their quality?

In more than 20 years I’ve never had a month long vacancy. 90% are less than 2 weeks.

I’ve had one non-paying tenant (skipped last month and had to take rent from security deposit.) and had to start one eviction during Covid. But I stuck to the bread and butter of Vegas rentals, SFR

Either your PM is doing a HORRIBLE job of attracting good tenants and screening out the bad ones. Or your property type/location/price range is only attracting that kind of tenant.

I see 2 basic options. 1) I’ve never used @Eric Fernwood for property management but he posts often and seems to know the market head to tails. Send him a DM with your property info and see if he has opinions, think he can turn it around, or it’s a dog that needs to be sold. 2) if it needs to be sold, and you have a big gain. As you should if you’ve owned it more than 2 years. Do a 1031 in to SFR. They are very low maintenance, very low effort options that may not cash flow as well but will appreciate more and should remove your eviction/no pay problems.

Eric Fernwood · Answer

Hello @Hanaa Abou Ouf,

I will provide my opinion on your property later in this post. But before I do, I want to explain why this particular property is likely to always have serious tenant issues, regardless of the property manager you work with. To explain the problem, I need to first describe the relationship between a property and a specific segment of tenants.

Each Property Only Attracts a Single Tenant Segment

Each tenant segment has specific housing requirements and is unlikely to consider any property that does not meet all of its needs. Below is an example of one segment's housing requirements:

• Rent range: $1,500/Mo. to $1,850/Mo.
• Type: Single-family
• Configuration: 3+ bedrooms, 2+ baths, 2+ car garage, 1,200  SF to 2,100 SF
• Location: North of the river and east of Line Rd.

Below is a profile of a property that will attract people with the previous segment's housing requirement.

• Rent: $1,700/Mo.
• Type: Single-family
• Configuration: 3 bedrooms, 2 baths, 2 car garage, 1,500 SF
• Location: North of the river and east of Line Rd.

Each property only matches the housing requirements of a single-tenant segment. And, there is little you can do to change this. So, when you buy a property you are also getting a single tenant segment. This is why choosing the property first is almost always a bad idea. More on this later.

Las Vegas Tenant Segments

In 2005, when I moved to Las Vegas to establish my investor services business, I spent months studying tenant pool demographics. As an engineer, I conducted extensive analysis. The chart below provided me with the most valuable insight into the three tenant segments.

Almost all the multi-family in Las Vegas are, at best, C-Class. C Class and Many -B Class only attract lower-wage hourly workers and have an average tenant stay of one year. This equates to high vacancy costs.

Vacancy cost is a function of

• Length of tenant stay <<<This is the killer of profits
• Time to rent
• Monthly carrying costs
• The skill of the property manager to select good tenants (a rare skill)
• Construction materials used
• In between tenant renovation cost

Below is a chart including the estimated annual vacancy provision for the three major tenant segments in Las Vegas.

There is another significant issue with the tenant segments who occupy low-cost housing. Typically, low-income workers have easily replaceable skills and are the first to be laid off during times of economic uncertainty. They are also the last to be rehired. Therefore, if your property targets low-income workers, there is a high probability that your property will have extended vacancies during economic downturns.

I could continue but I think you can see where this is going.

Selecting a Property the Right Way

The only way you will have a reliable income is if your property is continuously occupied by what I call a reliable tenant. A reliable tenant is someone who stays many years, always pays the rent on schedule, and takes care of the property. Reliable tenants are the exception, not the norm. Also, you will hold a property for many years and during that time you will need multiple reliable tenants.

Getting and keeping a reliable tenant in your property is dependent on two things.

• A property that matches the housing requirements of a tenant segment with a high concentration of reliable tenants. You can determine this segment through multiple property manager interviews. Let me know if you would like more details on this topic.
• Working with a property manager who is skilled at selecting reliable tenets. I've been in the investment real estate business in Las Vegas for over 15 years. I’ve worked with many property managers. Of all the property managers I've worked with, I only know two who are skilled at selecting reliable tenants. One of the two is the property manager we work with.

So the process of selecting an investment property is to first identify a tenant segment with a high concentration of reliable tenants. Once you identify this segment, determine where and what they currently rent. Then, buy similar properties. It is really that easy.

This process works in any location and requires no guessing or luck. In one location, the tenant segment with a high concentration might be attracted to single-family homes, while in another location it might be multi-family properties or high-rise condos. The type of property doesn't matter; what matters is rental income reliability.

The Difference the Tenant Segment Makes

To illustrate the difference a tenant segment makes, below are the 15+ year performance characteristics for the tenant segment we target.

• We have delivered more than 480 investment properties, each targeting the same tenant segment. As a result, we have a lot of experience and knowledge of this particular segment.
• Our average tenant stays over five years.
• We've had six evictions in the last 15 years (over 1,000 tenants).

How does this segment perform in terms of income reliability?

• 2008 crash - Zero decline in rent and zero vacancies.
• COVID - Almost no impact
• Eviction moratorium - Almost no impact

My Recommendation for Your Situation

There is frequently a large gap between what you should do and what you can do. I do not know your financial situation so your options may be limited.

My recommendation, if you are financially able, sell this property and buy a property that attracts a reliable tenant segment. Whether you should sell or do a 1031 depends on your equity position.

Hanaa, reach out if you have questions.

Bill B. · Answer

I do suggest SFR are much better investments in Las Vegas. They tend to be newer, with  slanted tile roofs, with stucco siding, in better neighborhoods, and you don’t have shared walls. They are also purchased mostly by non-investor, owner occupants so you get more appreciation and are easier to sell.

If you find a post from Eric you’ll see a green highlighted are showing most of his tenants are southwest, west and some northwest. Personally I’m west, northwest and north as southwest was still vacant when I started. I use Brian Hartsell @ key properties but he’s not on BP and I don’t know if they do small multi.

Joe Villeneuve · Answer

Property value gains from appreciation equaling the original equity at purchase and when the cumulative CF equals the cash I put into it...the DP.  From that point forward, I'm losing money.

Hanaa Abou Ouf · Answer

Thank you Eric for your detailed response. I will definitely reach out with questions. Best, Hana

Michael Smythe · Answer

Seems like you bought in a rough area of town!

Read below:

Many investors believe/have unrealistic assumptions and often apply those assumptions to the wrong property classes.

In our OPINION (always verify yourself!):

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenants: Majority will have FICO scores of 680+.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenants: Majority will have FICO scores of 620+, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should often be used to also cover nonpayment & evictions.
Tenants: majority will have FICO scores of 560-600, many blemishes, but should have no evictions in last 2 years. Verifying previous 2-years of rental history very important!

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenants: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Hanaa Abou Ouf · Answer

@Bill Brandt I have only tried one, but keep hearing/reading about how difficult it is to find a good PM. I get a sense that the area of the property is a major factor. I will reach out to Eric; thank you for the suggestion.

So are you suggesting that single family homes are better investment in Vegas?are there specific areas that you recommend I start looking into?

What factors help you decide to sell a property?

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