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 <<
- 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.
