Are Properties in the Best School Districts the Best Rentals?

[Eric Fernwood]

Many people make the mistake of assuming they know what will attract a specific tenant pool segment. I made this mistake as well.

When I was first studying tenant pool segment demographics in Las Vegas, I assumed that properties in the best school districts would be the best rentals. However, what I discovered was that in the best school districts, property prices were higher, and there were fewer rental properties. The average length of tenant stay in these properties is less than two years.

At a minimum, I was looking for a tenant segment that stayed four years because, at two years, your vacancy cost will consume most of your cash flow.

So instead of guessing what prospective tenants want, I turned the process around and determined where and what tenants who stay many years are renting today. I wrote software that determined the average length of tenant stay in subdivisions with a significant number of renters. To my surprise, there were subdivisions where the average tenant stay was less than one year and some subdivisions tenants stayed over five years.

I then studied these people’s income. Most made significantly more than minimum wage but not as much as salaried professionals. The majority of this demographic is government workers or direct income producers for their employers and are difficult to replace, so their jobs would be secure even in difficult economic times.

This proved to be true in the 2008 financial crash. Our clients had zero decreases in rents and zero vacancies. While the market value of the properties plunged, our client’s rental incomes were unchanged.

The lesson is that a rental property is no better than the tenant living in the property.

Rather than making assumptions about what's important to renters, it's better to identify the right tenant segment and purchase properties similar to the ones they currently rent. This approach eliminates guesswork when selecting properties.

Let me know if you’d like details or have any questions.