I love Walmart
If Amazon can’t deliver it or Walmart doesn’t sell it – I don’t really need it. In many communities, Wal-Mart is not only the most economical place for groceries and just about anything else, they are a major employer. In lower and moderate income communities, a full time job at Wal-Mart is a good job indeed.
As an investor, being able to work with a Walmart team member, and other service workers of similar income, is a key real estate investor success strategy. The trick is to have properties to rent that a Wal-Mart Client can afford.
Buying and renting property that I could make money on based on what the majority of the people in my market could afford, completely changed my real estate business. Prior to that I was buying houses I ‘liked’ with little regard for who was going to actually rent them.
When I got started in real estate investing, I like to say I was a victim of Magical Thinking. I really thought that by virtue of being a nice guy, going out of my way to accommodate my tenants, and over improving my properties in an effort to appeal to my tenants’ better natures, I would get rich. I did not get rich. I went broke.
My Brilliant Flash of the Obvious
In late 2009 as I was crawling from the wreckage from my first ill-fated foray into real estate investing, it occurred to me that I had been trying to serve a market that did not exist. The flash that went off in my brain was that I needed to figure out how to serve the market that was there, staring me in the face.
I used to set my rents based on what I thought my properties were worth. Why wouldn’t every prospective tenant be beating a path to my door to rent from me? My asking rents really had no basis in reality and the fact was, very few people in my town could afford the rents I was asking. Until it hit me that the market set my rents, I struggled. Once I accepted the economic reality of where I lived, I began to make money.
What do I Mean by ‘Wal-Mart Client?’
When I talk about “The Wal-Mart Client,” I am really referring to the Best Case Springfield, Ohio rental applicant. Springfield is my home town and where I first got started in real estate investing. Springfield is classic rust-belt working class town with a large number of rental properties and tenants. A ‘good’ job here does not pay much money relative to other parts of the country because we have no shortage of applicants for entry level blue collar jobs.
In my home town we are steadily losing population as our manufacturing base continues to shrink. We cannot count on our properties appreciating in value over time. Cash flow is where we make our money.
Given these circumstances, the majority of the working individuals in our market can afford around $450 a month in rent. As long as our cost structure allows us to charge rent in the $450 range, we can count on a large pool of applicants from which to select tenants.
Our Target Applicant
Our ‘target’ applicant is someone who makes between $350 and $400 a week. A Wal-Mart Supervisor making $8.50 to $10.00 hour and averaging 35 hours a week is a great example of who we want to attract. This person may not make a lot of money, but they work for a very stable company. Many health care, call center, and fast food workers fall into this category as well.
A Bit of Math
$9.00 an hour at 35 hours a week translates to $1365 a month gross income. ($9.00 X 35 hours a week = $315.00 a week. $315 X 52 / 12 months = $1365.00) We look for our applicants to make at least three times the rent amount in monthly income. $1,365 translates to a target monthly rent figure of $455. ($1365 / 3 = $455.00)
Obviously, if you can afford to rent your unit for $400 vs. $500 you will have a better shot at collecting rent 12 months out of the year versus less than 12 months. Worse, you are likely to compromise on your application standards to get a warm body in a unit which can cost you more in lost rent, repairs, and utilities down the line.
Our goal is to buy and maintain property that we can cash flow at these income levels. Furthermore, by expanding the number of applicants we have to choose from, the better chance we have of finding a tenant most likely to pay the rent and maintain the property throughout the lease term.
What is the ‘Target’ Tenant in your Market?
I hope this post makes you think about what the target applicant in your market can afford to pay in rent. While Springfield, Ohio may be an extreme example, at the end of the day every community has a sweet spot. Your job as an investor is to identify it. Once you do that, you will be able to make much better purchase and improvement decisions. Just as importantly, you will know the return you should expect. No magical thinking for you!
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