How to Maximize Your Portfolio Rental Income

Community-based rental picking gives you the best returns for your portfolio because some community provides better returns than others, despite vacancy and rent price.

Although multiple factors determine market prices, the most influential ones come from demand factors (Davidof, 2015). We can assume local rent and vacancy rates are significant to rent prices as they have a more meaningful relationship with returns. Standard convention says that getting a property leased right away is important to avoid vacancy. However, emptiness is expected as it takes time for homes to be looked at and create a lease agreement; it is proportional to the audience it attracts. Thus another factor to consider is the return on investment using the rental price to compensate for the vacancy. The model to propose is to consider both rental price and vacancy together and strategically pick the best communities that produce a higher ratio of rent income.

Table 1: Leased and open market rent price in the Green Valley South community. Data was taken between 3/14/2018 to 3/14/2022, 3-bedroom single-family homes, between 1500-2500sqft living space.

Table 2: Leased and open market rent price in the Spring Valley community. Data was taken between 3/14/2023 to 3/14/2022, 3-bedroom single-family homes, between 1500-2500sqft living space.

The table above shows a relationship between the close price (rented) and Days on the Market (vacancy/DOM) in the Spring Valley and Green Valley areas in Las Vegas. The Green Valley South area has more expensive homes and increased days on the market compared to the Spring Valley area. Some would say that a higher rent price would return a more significant return; however, when you calculate the yearly return minus the vacancy, the Spring Valley area has a higher return. See below:

Table 3: Comparison between two communities by median rent, yearly return, loss of rent during the vacancy, and Percent Loss (calculated by taking [yearly return-loss from vacancy/yearly return]).

In table 3, the homes in the Spring Valley area are gaining more of their investment compared to the Green Valley area. The natural tendency to gain more income per dollar is 2.5% higher in the lower rent area. Again, there are many factors I cannot cover here or even analyze. But as it shows, it is enough to suggest about what community to choose over the other.

However, there are limitations to this study, and I would not go off on these statistics as advice. We have not considered potential appreciation, hidden variables, seasonality, market shifts, insufficient data, or statistical confidence. These are just an example of looking for potential investments using a statistical approach rather than outright purchasing homes. As a self-investor, there are tools and property managers (us) that can help guide you to becoming a selective and conscious decision on the best investments!

Sources:

Davidoff, Thomas. “Supply constraints are not valid instrumental variables for home prices because they are correlated with many demand factors.” Available at SSRN 2400833 (2015).