All Forum Posts by: Eric Fernwood

Hello @Brandon Seidel,

The decision to sell or keep your Carlsbad rental should be based on the property's likely future performance. If your goal is financial independence, you'll need rental income that can sustain your lifestyle for the long term. In our inflationary world, your rental income must increase faster than inflation. For example, if a basket of goods costs $100 today and inflation averages 5% per year, that basket will cost $163 in 10 years ($100 × (1 + 5%)^10). If your rent increases faster than inflation, you'll have the needed $163. If not, you'll need a job to make the difference. The key question is: Will your (Carlsbad) rent likely increase faster than inflation? The same question should be asked for any replacement rental properties.

Some other considerations:

• While cash flow pays the bills, appreciation is how you grow your portfolio. Based on what has happened over the last 10 years, what do you expect the average appreciation for an existing home in your price range to be for the next 10 years? If selling and replacing with rental properties elsewhere, what do you expect the average appreciation of the replacement properties to be? If the Carlsbad property has higher appreciation potential, it might make sense to keep it until you can find replacement properties that are likely to out appreciate it (AND generate growing rental income faster than inflation.)
• California is a pro-tenant, anti-owner state, which means a problem tenant could lead to an expensive, year-long eviction process. While such nightmare scenarios are unlikely, I think of nightmare evictions like cancer—when it happens to someone else, it's just a statistic. When it happens to you, it is a tragedy. So, this is a risk factor to balance.

Hello @Aurelie Slegers,

Whether you should sell, rent, or do a 1031 exchange depends on how the property is likely to perform in the future. Assuming your investing goal is financial independence, you need a rental income that will sustain your current lifestyle for the rest of your life. Since we live in a world with constant inflation, you need rental income that meets the following requirements:

• The rental income must increase faster than inflation. Every time you go to the store, you pay more for the same basket of goods. If you can buy a basket of goods for $100 today, and inflation averages 5%/yr, how much will you have to pay for the same basket of goods in 10 years? $100 × (1 + 5%)^10 ≈ $163. If your rents increase faster than inflation, you will have the needed $163. If not, you will be forced to get a job to make up the difference. The first question, is whether your rent is likely to increase faster than inflation in the future. If not, you should dispose of the property. The same consideration should be given to any future rental properties you buy.
• How long are tenants likely to stay in your (current) property? For example, we target single-family homes priced between $350,000 and $475,000 in Las Vegas, and our average tenant stay is over five years. Single-family homes priced over $550,000 in Las Vegas have an average tenant stay of between one and two years. With short tenant stays, your vacancy costs may be very high. Consider how long tenants who rent your property are likely to stay. Factor in the estimated time to rent and between-tenant make-ready costs to calculate your potential vacancy costs. Let me share a personal example: The first property I owned was a C-class 4-plex in Houston. Before I purchased the property, I estimated $2,000/month cash flow. Due to vacancy costs and property damage, I LOST about $1,000/month.
• While cash flow pays the bills, appreciation is how you grow your portfolio. The challenge in locations with unlimited urban sprawl is that existing home prices tend to increase slowly. Las Vegas, however, is different—there is very little undeveloped land available for expansion. As a result, undeveloped land in desirable areas costs over $1M per acre. Due to land scarcity and a rapidly increasing population, the average annual appreciation rate for the property segment we target exceeds 10%. Based on what has happened over the last 10 years, what do you expect the average appreciation for an existing home in your price range to be for the next 10 years?

I hope the questions pose some questions that will help you evaluate what is the best option for you.

I created a simplified flow chart that I hope will help you make this decision.

Aurelie, I hope this helps.

Hello @Antonio Bodley

Tariffs will increase the cost of building materials (at least in the short term), with the biggest impact falling on new construction. The reason I say this is because approximately 72% of building products come from Canada, and materials account for approximately 60% of the cost of a new home. How much will a 25% tariff increase the price of a $550,000 new home?

I will assume that 80% of the purchase price ($550,000) is the structure and 20% is the land. So, the structure cost is approximately $440,000 (80% x $550,000). Assuming the build’s profit margin is 10%, the structure cost to the builder is $440,000 x 90% = $396,000. If 60% of the cost of a $396,000 structure is materials, the total material cost is 60% × $396,000 = $237,600. If 72% of materials come from Canada, the cost of the Canadian materials is 72% × $237,600 = $171,072. With a 25% tariff, these goods will cost 25% more, or 25% × $171,072 = $42,768. Therefore, assuming a 25% tariff, the cost of a $550,000 new home will likely increase to $592,768. This will decrease demand for new homes since fewer people will qualify, so fewer new homes will be built, increasing demand for existing homes.

What about the knock-on effect? If new homes become more expensive, there will be more demand for existing homes, which will pressure up the prices of existing homes. If more existing homes sell, the demand for renovation will increase.

As Chris pointed out, there are a lot of factors at play.

Hello @Desiree Rejeili,

The problem with selecting a property type first is that you don't know which tenant segment will be attracted to it. Properties don't pay rent—tenants do. So before buying a property, you need to understand the performance of the tenant segment it attracts. The success of any property depends on whether it attracts a tenant segment with a high concentration of high-performing tenants. A high-performing tenant is someone who stays many years, pays rent on schedule, and takes good care of the property.

For example, in Las Vegas, the tenant segment we target stays over five years on average. Out of a tenant population of over 1,000, we have had only seven evictions in over 17 years.

In Las Vegas (it will be different in most cities), this tenant segment mostly consists of families with elementary school children and a gross annual income between $60,000 and $85,000. Children lock the family in place for extended periods. Our target tenant segment typically only rents single-family homes that meet a significant set of conditions.

Below are brief descriptions of what our target segment is willing and able to rent.

• Type: Single-family
• Configuration: 3+ bedrooms, 2+ baths, 2+ car garages, 1,100 to 2,400 SF, one or two stories, lot size 3,000 SF to 6,000 SF.
• Rent range: $1,900/Mo to $2,300/Mo
• Location: See the map below for the general areas

Any property that does not meet all the above conditions (and over 30 more) may not attract a high-performing tenant.

You can identify a high performing tenant segment for your city through property manager interviews. Let me know if you'd like specifics on how to interview property managers to obtain this information.

The difference between selecting a property type first and hoping it will attract high-performing tenants, versus selecting the tenant first and buying what they are willing and able to rent, can best be illustrated with two examples.

1. You might decide to place a baby clothes store in a specific area because you like that area. However, what if that area happens to be surrounded by a giant 55+ community? The assumption on the location resulted in the business failing.
2. If families with babies are your customer base, you can use demographics research to determine the location with the highest quality and density of your target customers and place your store there.

As always, follow the money, not feelings and opinions.

Hello @Jay Ochoa,

You brought up some good points, which I will try to answer.

Location, The Most Important Investment Decision

Live where you like, but invest where you can achieve lifelong financial independence.

The investment city is crucial since it determines your long-term income performance. To achieve lifelong financial independence, a location must meet several specific requirements.

• Rents must grow faster than inflation to ensure your income keeps up with rising costs.
• Financial independence depends on how the property will perform over your lifetime. ROI and cash flow merely estimate how a property might perform under ideal conditions on the first day of ownership. While 8-10% ROI on day-one is desirable, it's not feasible with today's high interest rates.
• Low operating costs. Every dollar lost to overhead means less money for you. Different locations have significantly different operating costs. Below I will compare Texas, Nevada and Florida.
• Low risk of natural disasters. Natural disasters can destroy communities, leaving you with a vacant property even after the insurance company rebuilds your property. People immediately move away from devastated areas and may never return because local jobs and infrastructure were also destroyed.
• Pro-landlord regulations. In many locations, evicting a non-paying tenant can take many months or even more than one year. While this scenario may seem unlikely, experiencing it can be financially devastating.
• Limited urban sprawl. Urban sprawl occurs when cities continuously expand into nearby countryside. New homes in these areas attract more buyers than older homes in established neighborhoods, resulting in existing home prices and rents increasing more slowly. Over time, this situation gets worse. You can see this in many big cities, where once-highly desirable neighborhoods have become run-down areas with high crime rates.

Operating Cost Comparison

As I mentioned, operating costs vary tremendously by state. Below is a comparison between Nevada, Texas, and Florida.

• State average property tax source.
• Texas and Nevada average insurance source.
• Florida's average insurance cost source

To put this in perspective, below is the estimated annual operating costs for a $400,000 property.

Compared to a property in Nevada, properties in other states require additional cash flow to compensate for their higher operating costs.

• Florida: +$11,311 ($14,636 - $3,325)
• Texas: +$5,712 ($9,037 - $3,325)

The takeaway is that operating costs can have a huge impact on financial independence.

Investment Team

Most investors don't live in a city that meets all the financial independence requirements, so remote investing is necessary. However, whether you invest where you live or across the country, you need to work with an experienced investment team.

The problem is that podcasts, books, seminars, and websites only provide general information. You won't be buying a general property in a general location. Instead, you'll be buying a specific property, in a specific location, in a specific condition that attracts a specific tenant segment. And, you will need a wide range of services and expertise. These are only available from a local investment team.

If you are interested, I can provide a process for finding and validating an investment team.

Summary

• Choose an investment city that meets all the requirements I listed.
• No matter where you invest, work with an experienced investment team. They will provide a master class in real-world investing.

Jay, I hope this helps.

Hello @Devin James,

The US will likely not face population decline in the next decades due to immigration and longer life spans, even if birth rates decline.

However, national averages have limited relevance to individual cities. Cleveland, Ohio, offers a stark example of population decline. From its peak of over 914,000 residents in 1950, the city's population fell to 750,000 by 1970 and plummeted to about 372,000 by 2020—a 50% decrease since 1970. This dramatic decline stemmed not from birth rates but from issues with city government, crime, and cost of living.

During the same period, the population of the Las Vegas metro area has grown dramatically since 1970. In 1970, the population was approximately 273,000. By 2020, it had surged to over 2.3 million, representing an increase of more than 740% over the same period. This also had little to do with national birth rates.

As investors, we should focus on city-level performance, not national averages. Focus on cities with both significant, sustained population growth and consistent appreciation of existing properties. These two factors serve as strong indicators of a city's long-term economic outlook.

Hello @Oren Dadon, (go Technion!)

Not all investment locations are equal. You need to consider many factors when selecting an investment city including operating cost and long term performance.

Operating Costs

Below is a comparison of insurance and property tax rates for three states without state income taxes.

• State average property tax source.
• Texas and Nevada average insurance source.
• Florida average insurance cost source

To put this in perspective, below is an estimate of annual operating costs for a $400,000 property.

Compared to a property in Nevada, properties in other states require additional cash flow to compensate for their higher operating costs.

• Florida: +$11,311 ($14,636 - $3,325)
• Texas: +$5,712 ($9,037 - $3,325)

The takeaway is that operating costs have a huge impact on your ability to achieve financial independence.

Long Term Performance

The goal of real estate investing is financial independence. Financial independence means more than just replacing your current income—it requires generating enough income to maintain your lifestyle throughout your life. This requires a rental income that rises faster than inflation. In cities with urban sprawl, rents won't increase rapidly enough to meet this requirement. Why?

Urban sprawl is the uncontrolled spread of cities into nearby rural areas. Below are links to Google Earth time lapses showing examples of urban sprawl.

• Fort Worth
• Phoenix
• Memphis
• Houston
• Orlando

Where there is urban sprawl, rent and price increases of existing homes are capped by newer homes. This is because people will usually choose newer homes, which limits price and rent growth of existing homes. Even if you buy a new home, your property will soon no longer be in the "new" area and appreciation and rent increase will stagnate. The buying power of your rental income will decrease due to inflation.

Where can you buy properties where prices and rents will outpace inflation? Only cities with physical barriers to expansion will see existing properties perform well over the long run. As an example, below is an annotated 2022 aerial of Las Vegas. There is little undeveloped land today in metro Las Vegas. Raw land in desirable areas starts at $1M per acre. The result is that rents and prices of existing properties continue to increase because there is no ability to expand.

Conclusion

Real estate investing is a long-term investment. When selecting an investment city, you need to consider long-term factors like rent growth, appreciation, and operating costs.

It's March, and it's time for another Las Vegas update. For a more comprehensive look at the Las Vegas investment market, please DM me for a link to our blog. There, you'll find detailed information on investing, both in general and specifically in Las Vegas.

Before I continue, note that unless otherwise stated, the charts only include properties that match the following profile.

• Type: Single-family
• Configuration: 1,000 SF to 3,000 SF, 2+ bedrooms, 2+ baths, 2+ garages, minimum lot size is 3,000 SF.
• Price range: $320,000 to $475,000
• Location: All zip codes marked in green below have one or more of our client’s investment properties (click to enlarge).

What we are seeing:

The chart below, from the MLS, includes ALL property types and price ranges.

Rental Market Trends

The charts below are only relevant to the property profile that we target.

Rentals - Median $/SF by Month

Rents increased MoM, in line with our expectations. YoY is up 3.5%.

Rentals - Availability by Month

The number of homes for rent had a significant decrease MoM, in line with our expectations.

Rentals - Median Time to Rent

The median time to rent continued to decrease rapidly in February, now around 27 days. This is in line with our expectations for this time of year.

Rentals - Months of Supply

Only about 1.2 months of supply for our target rental property profile. This low inventory will continue to pressure up rents.

Sales - Months of Supply

There are about 1.3 months of supply for our target property profile. A 6 months supply is considered a balanced market. This limited inventory will likely continue to drive up prices.

Sales - Median $/SF by Month

The $/SF had a marginal increase MoM. YoY is up 6.1%.

Why invest in Las Vegas?

The goal is to achieve and maintain financial freedom. Financial freedom goes beyond simply replacing your current income—it's about sustaining your lifestyle for life. To accomplish this, you need an income that outpaces inflation. Otherwise, you won't have the additional funds necessary to cover the rising costs of goods and services.

What causes rents (and prices) to increase?

Supply & Demand

Unlike financial markets, real estate prices and rents are driven by supply and demand. What is the supply and demand situation in Las Vegas?

Supply

Las Vegas is unique because it is a tiny island of privately owned land in an ocean of federal land. See the 2022 aerial view below.

Very little undeveloped private land is left in the Las Vegas Valley, and desirable areas cost more than $1 million per acre. Consequently, new homes in these locations start at $550,000. Homes that appeal to our target tenant segment range from $350,000 to $475,000, so the supply of housing we target remains almost the same regardless of how many new homes are built.

Demand

Population growth drives housing demand and price and rent increases. Las Vegas's average annual population increases by 40,000 to 50,000 per year. What attracts people to Las Vegas? Jobs. Ongoing construction projects valued between $26 billion and $30 billion fuel employment opportunities. The most recent job fair featured over 20,000 open positions.

In Conclusion

While nothing is guaranteed, the combination of population growth and limited land for expansion virtually assures that prices and rents will continue to increase.

Thanks for reading my post. Reach out if you have questions or would like to discuss investing in Las Vegas.

Hello @Derek Green,

If you plan to fix and flip houses, you can ignore this post. If you plan to fix and rent, please read on.

The goal of real estate investing is financial independence. Where you invest is therefore the most important decision. The city determines all long-term income characteristics, including:

• Whether rents of existing homes increase faster than inflation. This is crucial for maintaining financial independence—if you invest in a city where rents don't outpace inflation, your purchasing power will decline and you will have to go back to work to supplement your income.
• Operating costs. Every dollar you lose to operating costs is less for you to live on. Below, I compare the overhead expenses of three states with no state income tax.
• Whether you or the government controls your business, you need a pro-business and pro-landlord legislative environment.
• Crime - High crime levels and long-term economic growth do not go together.

Operating costs vary tremendously by state. Below is a comparison between Nevada, Texas, and Florida.

• State average property tax source.
• Texas and Nevada average insurance source.
• Florida's average insurance cost source

To put this in perspective, below is an estimate of annual operating costs for a $400,000 property.

Compared to a property in Nevada, properties in other states require additional cash flow to compensate for their higher operating costs.

• Florida: +$11,311 ($14,636 - $3,325)
• Texas: +$5,712 ($9,037 - $3,325)

The takeaway is that operating costs can have a huge impact on financial independence.

Remote Investing

Live where you like, but invest where you can achieve and sustain financial independence.

Most investors don't live in cities that meet all the requirements for financial independence. Therefore, the real question isn't whether to invest remotely—it's where and how to do it safely.

Once you've selected a city that meets the requirements, you'll need an experienced local investment team to minimize risk. While books, seminars, podcasts, and websites offer valuable general knowledge, ultimately you're investing in a specific property in a specific city. This requires deep local expertise. Only an experienced local team can provide the local market knowledge and resources essential for success.

Hello @Jake Andronico,

Whether new construction is a good option depends entirely on your target tenant segment. In investment real estate, everything depends on having reliable tenants occupy your property. Reliable tenants pay rent on schedule, stay for many years, and take care of the property. Reliable tenants are the exception, not the norm. However, there are tenant segments with a higher concentration of reliable people than others. Success depends on buying properties that attract this segment.

So, reverse the approach. Instead of focusing solely on the property and hoping it attracts reliable tenants. Start by identifying a tenant segment with a high concentration of trustworthy people. You identify this segment by interviewing property managers. Once you know what and where this segment rents today, buy similar properties. This approach dramatically reduces the dependence on luck and opinions.

This approach mirrors how national retail chains select stores and localized offerings. They don’t pick a store location and hope customers will come. Instead, they identify their target customers and open stores near them. They also adapt to local preferences. For instance, McDonald’s offers spam and poi in Hawaii and wine in France.

Does new construction make sense? It depends on the tenant segment you want to attract. We've focused on the same tenant segment in Las Vegas for over 17 years. New single-family homes in desirable areas start at $550,000, but our target tenants can only afford to rent properties priced between $350,000 and $475,000 today. While new construction might seem appealing with its lower maintenance costs and move-in-ready condition, these properties typically attract tenants who stay just one to two years. In contrast, our target tenant segment stays an average of over five years. So, new construction is not a viable option in Las Vegas.