Rental Sweet Spot
In any location you are considering, you need to understand the income range of the probable tenant pool and how it defines the price range of viable investment properties. Let us explain.
The maximum rent a tenant can typically pay is approximately 1/3 x their income. So, if your target tenant pool has a medium income of 4000/Mo., then the maximum rent they can reasonably pay is 1/3 * 4000 or about 1300/Mo. If you were to plot demand (the number of tenants who can afford the rent) vs. the amount of rent you would get a curve something like the one shown below. This is called a bell curve due to its shape.
Simplistically, you can subdivide the bell curve based on the rent range. Below a certain rent, the majority of the tenants will be cash based; they may not even have a checking account. Cash based tenants tend to have little or no concern about leases, eviction, skips or property damage judgements. They live cash based lives so they carry no "credit history"; what they did in their financial past has little or no impact on their present or future. Above a certain rental level the majority will be credit based. Credit based tenants tend to respect leases and are less likely to do damage or skip because it will impact their future ability to get credit. And, above a certain rental rate, potential tenants are what we call transitional, they have sufficient income to buy a property so they are only renting because of a specific issue that will likely resolve over time. These types of tenants respect leases but tend to only stay one or two years until they buy a property. These are generalizations and are certainly not true under all conditions. To illustrate these groups, we marked them on the curve below.
The goal of every landlord is to get a good tenant in the property as soon as possible and to keep it rented to a good tenant. Before we continue we will define what we consider to be a good tenant:
- Pays all of the rent on schedule
- Takes care of the property
- Does not cause problems with neighbors
- Does not engage in illegal activities on the property
- Stays for multiple years
Good tenants are the result of effective screening by the property manager. In most cases, effective screening is only possible with credit based tenants. But, even with credit based tenants you need several applicants so the property manager can select the best of the applicants. The best way to have multiple applicants is to have properties that rent profitably in what we call the "rental sweet-spot", which we marked on the curve below. Properties renting in this range attract the greatest number of potential tenants which gives the property manager the highest probability of selecting a good tenant.
Based on our experience, we believe the rental sweet spot in Las Vegas to be between $1000/Mo. and $1400/Mo. Using a free tool that we provide, you can estimate the purchase price of a property that rents for $1000/Mo. and $1400/Mo. Here is the link to the tool. See the video on the page on how to use the tool. Below is a screenshot of the tool with typical Las Vegas values, a 4% return and $1000/Mo. rent.
What the above shows is that the estimated maximum price you can pay for a property in Las Vegas that rents for $1000/Mo. with a 4% return is about $168408. The key word in the prior statement is "estimated". This is optimized for ease of use as opposed to accuracy. Below is the same calculation but for $1400/Mo.
So the price range of properties that will rent in what we believe to be the rental sweet spot is between $160000 and $242000.
This is why we work backwards from the rent to determine the maximum (or break-even) price we can pay for any given property. The break even analysis vs. listing price is one of about 50 tests our software performs on the 10000 to 14000 available properties. Typically, less than 0.1% meet all our investment criteria. To see some sample properties, click the newsletter signup link below and you will see a list of our recent investor newsletters. In each newsletter we include sample properties as well as Las Vegas investment analysis and an investment article.
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