All Forum Posts by: Eric Fernwood

It’s November, and it's time for another Las Vegas update. For a more in-depth view of the Las Vegas investment market, DM me for my blog site, which contains more information on investing in general, analytics, and investing in Las Vegas in particular.

Before proceeding, note that the charts only include properties that fit the following criteria unless stated otherwise.

• 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.

Regarding the overall Las Vegas real estate market inventory:

The chart below, provided by 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 remained strong in October. YoY is up 6%.

Rentals - Availability by Month

The number of homes for rent continued the downward trend.

Rentals - Median Time to Rent

Median time to rent increased in October, showing a slower rental market as the holiday season approaches.

Rentals - Months of Supply

Only about one month of supply for our target rental property profile. Demand is greater than supply.

We saw a similar tight supply in sales as well. Now only about one month of supply. This will continue to pressure up the prices.

Sales - Months of Supply

Sales - Median $/SF by Month

Despite increasing interest rates, $/SF is climbing up. YoY is up 3.9%. YTD is up 7.7%. Prices dipped slightly in October MoM, reflecting a back to pre-Covid seasonal trend.

Why invest in Las Vegas?

In short, to achieve financial freedom. However, financial freedom is not simply replacing your current income; it requires maintaining your current lifestyle for life. To attain lifelong financial freedom, you need a city where rents and appreciation outpace inflation.

What causes rents (and prices) to increase?

Supply & Demand

Unlike financial markets, real estate prices and rents are driven by supply and demand. In this post, I will briefly discuss the unique supply and demand situation in Las Vegas.

Supply

Las Vegas is unique in that it is a tiny island of privately owned land in an ocean of federal land. See the 2020 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 $320,000 to $475,000, so the supply of housing we target remains almost the same regardless of how many new homes are built.

Demand

The driver for housing demand is population growth.

The average Las Vegas annual population growth is between 2% and 3%. What is bringing people to Las Vegas are jobs. At the spring job fair, there were over 20,000 open positions. The annual average wage was $65,000, which is our target tenant segment.

Las Vegas has $30 billion in new developments either under construction or planned. This will create thousands of additional jobs, bringing more people to the city and increasing housing demand.

In Conclusion

With a fixed supply of properties in the range of $320,000 to $475,000, a rapidly growing population, and a growing number of jobs, it is almost certain that rents and prices will increase in the foreseeable future.

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

Hello @James Figliozzi,

Low-priced cities are enticing if your goal is not financial independence. Here is the problem.

Financial freedom is more than just replacing your existing income. It's about maintaining your current lifestyle for as long as you live. To achieve this, you need to invest in a location where rents must outpace inflation. If rents do not outpace inflation, no matter how many properties you own, you cannot achieve financial freedom due to inflation continuously eroding purchasing power.

What Determines the Price of Properties?

The imbalance between buyers and sellers determines prices. When there are more buyers than sellers, prices increase until the number of buyers and sellers is roughly equal. Conversely, when more sellers than buyers exist, prices drop until the number of buyers and sellers is roughly equal.

What caused prices to be lower in some cities? A multi-year lack of buyer demand results in cities having low-cost real estate. Simply put, prices rose so slowly that they fell behind other cities.

Prices determine rents. When prices increase, fewer people can afford to buy, forcing more people to rent. The increased demand for rental properties subsequently causes rents to rise. When prices are low, more people can buy, which reduces demand for rental properties, and rents fall.

Why You Can Never Achieve Financial Freedom in Low-Priced Cities

An example will show the problem. Suppose you buy a property in a city where rents rise 2%/Yr (average for many midwestern cities) and inflation is 4%. What will inflation-adjusted purchasing power, compared to today, be in 5, 10, and 15 years? I will assume the initial rent is $1,000 a month.

The formula to calculate future value is:

Using the above formula, I will calculate the future value of the rent in today’s dollars.

• 5 years: $1,000 x (1 + 2%)^5 / (1 + 4%)^5 ≈ $907
• 10 years: $1,000 x (1 + 2%)^10 / (1 + 4%)^10 ≈ $824
• 15 years: $1,000 x (1 + 2%)^15 / (1 + 4%)^15 ≈ $747

What does this mean?

• In 5 years, the rent will be $1,104, but it will only buy what $907 buys today.
• In 10 years, the rent will be $1,219, but it will only buy what $824 buys today.
• In 15 years, the rent will be $1,346, but it will only buy what $747 buys today.

Las Vegas

I was living in NYC in 2004 when I decided to create an investor services business. After a lot of research, I chose Las Vegas. Why?

Like everywhere else, supply and demand drive prices and rents. What is the current 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. Approximately 90% of Clark County is federally owned. See the 2020 aerial view below.

As you can see, there is very little undeveloped private land remaining, and land in desirable areas costs more than $1 million per acre. Due to the high cost of land, new homes in our targeted locations start at $550,000. The homes our target tenant segment is willing and able to rent cost between $320,000 and $475,000. Therefore, no matter how $550,000+ new homes are built, the housing stock we target remains almost constant. This differs from most cities with virtually unlimited expansion potential, where the construction of new homes limits the growth of rent and home prices of existing properties.

Demand

The driver for housing demand is population growth. The average Las Vegas annual population growth is between 2% and 3%. What is bringing people to Las Vegas are jobs. The spring job fair had over 20,000 open jobs. There are already new projects worth approximately $30B under construction or planned. These projects will create thousands of additional jobs as they come online.

Overhead Cost

You mentioned Texas, Tennessee, Indiana, and Ohio. Below is the state average insurance and property tax for these states and Nevada. The sources for the data are: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

Below are the state averages.

To put this in perspective, below are the average annual costs.

Every dollar you lose to overhead is a dollar less for you to live on.

So, Las Vegas is and should continue to be a great option for financial freedom.

Hello @Jesse Scheidel,

I assume you're looking for a city to purchase real estate in. If that is the case, population growth is only one factor.

Select the investment city based on your goal, which I will assume to be financial freedom.

Financial Freedom

Financial freedom is more than just replacing your existing income. It's about maintaining your current lifestyle for as long as you live. To achieve this, you need a passive income that meets three requirements:

• Rents must outpace inflation: If rents do not outpace inflation, no matter how many properties you own, you cannot achieve financial freedom due to inflation continuously eroding purchasing power.
• Income persistence: Financial freedom requires that your income lasts throughout your life.
• Income dependability: The rental income must continue, even in bad economic times.

The city you invest in determines whether rents outpace inflation and how long the income will last (income persistence). Income dependability depends on the tenant(s), which I will not cover in this post.

Rents Outpace Inflation

In real estate, prices and rents are determined by the imbalance between the number of buyers and sellers. When there are more buyers than sellers, prices rise until the number of buyers and sellers is balanced. On the other hand, when there are more sellers, prices decline until the balance is restored.

Rental rates follow prices. When home prices are high, fewer people can afford to buy, so they rent instead. This increases the demand for rental properties, resulting in higher rents. When prices are low, more people can buy. This decreases the number of renters, leading to a decrease in rent.

The critical driver for rising prices and rents is population growth. If the population growth rate is significant and sustained, rent increases will outpace inflation. So, we have the first city selection indicator.

✅ Significant and sustained population growth.

Income Persistence

Income persistence depends on your tenants remaining employed at similar wages for as long as you live. However, all private sector jobs are short-lived. The average lifespan of a company is about ten years. Even S&P 500 companies only have an average lifespan of about 18 years. So, whether your income persists is not about the present jobs. It is about future replacement jobs.

What conditions are necessary to attract new companies to relocate to a city?

✅ Economic stability. This requires a metro population >1M. Smaller cities tend to be dependent on a single company or market sector.

✅ Low overhead costs: Overhead costs are readily available at the state level, which is a good first pass.

To demonstrate the process, I will compare the overhead costs of Texas, Florida, Arkansas, and Nevada. The sources for this information are Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

The main recurring costs for investors are insurance and property taxes, which are below.

To put these into perspective, below are the state averages for a $400,000 property.

• Texas: $2,536 + $400,000 x 1.80% ≈ $9,736
• Florida: $2,207 + $400,000 x 0.89% ≈ $5,767
• Nevada: $1,144 + $400,000 x 0.60% ≈ $3,544

Every dollar you lose to overhead is less for you to live on.

✅ Low crime rate: Companies will unlikely choose a high-crime city to set up a new operation.

✅ Low risk of a natural disaster

✅ Pro-business environment

✅ No rent control of any kind. Rent control is a strong indicator of an intrusive government

There is data for each of these indicators, which I will show shortly. For now, the question is how to use these indicators.

An Elimination Approach

Start with the easiest criteria and then eliminate cities based on additional criteria, as illustrated below.

The criteria and sources:

✅ Cities with a metro population greater than 1M. Wikipedia

✅ Significant and sustained population growth. Wikipedia

✅ Low crime rate. Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.

✅ Low risk of a natural disaster - Homeowners insurance rates are a good indicator of the potential for a natural disaster to occur. The higher the rate, the higher the probability of a natural disaster. Insurance - ValuePenguin

✅ Pro-business environment - Google search

✅ No rent control of any kind - Google search

✅ Low operating costs - Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage

You Need an Investment Team

One additional city selection criteria is an experienced local investment team. Podcasts, books, seminars, and websites only provide general information. You will buy a specific property in a specific city, subject to specific local conditions. The only source for the local knowledge, skills, processes, and experience needed to identify, validate, renovate, and manage properties is a local investment team. By working with a team, you also gain real-world investment training.

Jesse, I hope this helps,

…Eric

Hello @Dan N.

When I started investing, the only value realtors provided was sending MLS data sheets for the properties I selected. Once I decided on a property, they facilitated closing. In my opinion, they contributed almost no value.

I do not agree that the order should be to find a good agent and buy where they are located. If your goal is financial freedom, then the investment location is the most important decision you will make.

Financial freedom is more than just replacing your existing income. It's about maintaining your current lifestyle for as long as you live. To achieve this, you need a passive income that meets two requirements:

• Rents must outpace inflation: If rents do not outpace inflation, no matter how many properties you own, you cannot achieve financial freedom due to inflation continuously eroding purchasing power.
• Income persistence: Financial freedom requires that your income lasts throughout your life.

Whether rents outpace inflation and how long the income lasts depends on the city where you invest.

Start with an initial list of potential cities and then eliminate any city that does not meet additional criteria. I started with cities with a metro population >1M.

✅ Economic stability. This requires a metro population >1M. Smaller cities tend to be dependent on a single company or market sector. Wikipedia

✅ Significant and sustained population growth. Use Wikipedia for population growth data.

✅ Low operating costs: The three most apparent costs for investors are income taxes, property taxes, and insurance. Tax Foundation, Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage

✅ Low crime rate: Companies depend on attracting talented workers. Talented workers will not move to a high-crime city. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.

✅ Low risk of a natural disaster: The issue isn't your property. Insurance will cover the cost of rebuilding. The real problem lies in the community: jobs, stores, roads, healthcare services, gas stations - everything has been destroyed. Your previous tenants had no choice but to relocate. Without employment opportunities and essential services, they won't return. Meanwhile, debt service, taxes, insurance, maintenance, and other expenses persist without interruption. The best indicator of the probability of a natural disaster is the relative cost of homeowners insurance. The lower the cost, the less likely a natural disaster. Use this national homeowner insurance cost comparison site to compare insurance costs. Never buy in a state with high-cost homeowners insurance.

✅ Pro-business environment: Google search

✅ No rent control of any kind. Rent control is a strong indicator of an intrusive government: Google search

After filtering out cities that fail any of the above criteria, you will have a short list of potential cities. The next criterion is the existence of an experienced investment team.

Investment Team

Why is it essential to work with a local investment team? Podcasts, books, seminars, and websites only provide general information. You will purchase a specific property in a specific city with specific local conditions and regulations. Only an experienced local investment team has the local knowledge, processes, resources, and skills you need to be successful. I would consider another city if there is no existing investment team.

Also, working with an investment team usually does not cost more. For instance, we have delivered over 490 investment properties and charged our clients a fee on only four or five, which were exceptional circumstances. In all other cases, our fees were paid by the seller's listing agent, not by our client.

The leader of an investment team is an investment realtor.

Investment Realtor vs. Residential Realtor

While there are usually thousands of residential (or "investor friendly") realtors in a metro area, there are usually only one or, at most, two Investment Realtors.

Residential realtors enable people to buy or sell homes. The process is simple. Homebuyers select properties, and the residential realtor provides access. Once selected, the residential realtor facilitates the offer and the closing process. Some residential realtors occasionally sell real estate that will become rental properties. However, residential realtors provide limited value beyond supplying MLS data sheets.

Investment realtors enable people to buy rental income properties. Investment realtors are always part of a team because only a team of experts can provide all the knowledge, processes, and services needed for you to consistently buy performing properties. As an example, below is the process we follow.

Below is how we work with the property manager to validate investment properties.

How to Find an Investment Realtor

There is a process for finding an investment realtor. It starts with compiling a list of candidates. Get names of realtors from:

• Real estate investing websites (such as Biggerpockets.com)
• Property managers
• Local investors
• Real estate brokers
• Google searches
• Local meetups

Once you have a pool of candidates, the next step is to identify the investment realtor by using a set of interview questions.

Ask each candidate the same questions and record their responses. Below are some sample questions. It is unlikely to find a candidate with the "perfect" response to every question, but they should provide reasonable answers.

• Tell me about your investment team - You're looking for a response like, "I've worked with X property manager for years. We've completed X properties." "I work with several renovation companies...”
• Do you or have you owned investment properties? - If the candidate has not personally owned investment properties, I would reject them.
• How many investment properties did you close in the last 12 months? - Some realtors only sell two or three properties per year. However, this level of sales does not provide enough repetition to develop the necessary processes, experience, and resources. In my opinion, being proficient in this field requires selling a minimum of 12 investment properties per year.
• Did you or your client select the properties? This is an important question. Residential and investment-friendly realtors do not choose properties. Instead, they send MLS data sheets for the properties requested by the client. The client evaluates the properties and selects one or more to make an offer. If you do all the work, the realtor adds very little value. Reject any candidate if the client chooses the property.
• What were your primary selection criteria? - It could be the initial return, appreciation, tenant pool, or something else. You're looking for a plausible answer based on analytics, not opinion or “feelings.”
• How did you estimate rent and time to rent? - They should be able to describe a process like, "I look at recently rented comparable rentals." Another good answer is that they work with a property manager who supplies this information. If they answer Zillow, Redfin, Rentometer, etc., they do not know how to evaluate investment properties. Next candidate.
• Tell me about your renovation process. - You are looking for an answer similar to, “I work with the property manager to determine a list of renovation items. Next, I work with XXX renovation company.”

These should get you started.

Final Words

The most important investment decision you will make is the location. If you choose to invest in a city where rents have not outpaced inflation, no matter how many properties you own, your income will continuously decline until you are forced back on the daily worker treadmill.

Hello @Tyler Lingle,

Great chart.

In this post, I will provide what I hear from my clients and the cost of waiting.

We have 180+ clients, and when I talk to them, I always ask their opinion concerning the interest rate situation. Below are the most common opinions I’ve received:

1. Interest rates will fall before the 2024 elections. The logic is that politicians always operate in their own best interest. Falling interest rates are their only ability to get elected or reelected.
2. There will be a token decrease by the 2024 elections, but it will be 3+ years before interest rates decrease significantly.
3. Interest rates will decrease when the Federal Reserve no longer pursues a restrictive policy. This typically occurs during a recession, periods of low inflation or deflation, or when the unemployment rate increases. However, none of these indicators are currently evident.
4. In high-demand markets like Las Vegas, as soon as interest rates start to fall, people who have waited for 2+ years to buy a home will enter the market. Increased demand will result in rapidly increasing property prices and rents.

Buy Now or Wait

A question I frequently receive is whether it makes more sense to buy now or wait.

Waiting only makes sense if either:

• Interest rates significantly decrease
• Prices significantly decrease

No one can predict when interest rates will decrease significantly, but it could be in 3 or 4 years. Thus, it doesn’t make sense to wait.

What about prices? Whether prices increase, decrease, or stay the same depends on the city where you invest. For example, since the beginning of this year, the prices of Las Vegas properties in our target segment increased by >9%.

What Is the Cost of Waiting?

An example will hopefully help.

Suppose property prices increase by 5 %/Yr, and it takes five years before rates fall to 5%. What is the cost of waiting?

I will assume a $400,000 property to have numbers to work with. The table below displays the increasing market value from appreciation and accumulated equity. By waiting, you lose over $110,000 in equity growth.

There is another problem with waiting. In five years, prices will be higher due to the 5% appreciation rate, so buying the same property will cost more. See the table below.

Waiting five years costs you:

• Lost equity: $110,513
• Increased down payment due to appreciation: $33,154
• Debt service savings due to lower interest rate: -$39/Mo

What if you purchased today and refinanced in 5 years?

As an investor, it makes the most sense to me to buy now and refinance when rates decrease.

Many hesitate due to the fear of negative cash flow. However, we are still identifying properties with a first-year ROI between 0% and 1%. For cash purchases, ROI ranges from 4.5% to 5.5%.

So, I see no advantage to waiting.

Hello @Hassan Ali,

You can narrow the list of potential properties by knowing what you are looking for.

You can narrow the list of properties to review by defining exactly what you are looking for. It starts by choosing a tenant segment you want to occupy your property and defining what they are willing and able to rent.

The Target Tenant Segment Defines the Property

The only way to have a reliable income is if your property is continuously occupied by a reliable tenant. A reliable tenant stays many years, always pays the rent on schedule, and takes good care of the property. Reliable tenants are the exception, not the norm. You will own the property for many years, so you will need several reliable tenants.

To have reliable tenants, purchase a property that attracts a tenant segment with a high concentration of reliable people, and work with a property manager with the skills to select reliable tenants.

You can identify such a segment through property manager interviews. If you would like sample interview questions, let me know.

Once you select a target tenant segment, identify where and what they rent today. Based on this, you can create what I call a property profile. A property profile has at least four elements:

• Location - The locations where significant percentages of the target segment are renting today.
• Property type - The type of properties they rent today. Condo, high rise, multi-family, single family?
• Rent range - What the segment is willing and able to pay.
• Configuration - Two bedrooms, three-car garage, large back yard, single-story, two stories?

You can give the property profile to your realtor, and they can find conforming properties. This should greatly reduce the number of properties you need to consider.

Hope this helps,

…Eric

Hello @Todd Wood,

The anti-landlord regulations in Portland (and Seattle and California) make it difficult to make money as a landlord. So, a 1031 exchange is your best option, provided you can sell the property for a reasonable price. I do not know the details of selling your property, so I have no comments. Others have accomplished selling their properties, so you can, too.

Financial Freedom

If your goal is financial freedom, then there are two location requirements.

• Rents outpace inflation. Unless rents outpace inflation, it does not matter how many properties you own; your inflation-adjusted income will continuously decline.
• Rents persist throughout your lifetime.

Rents Outpace Inflation

In real estate, prices are influenced by the imbalance between the number of buyers and sellers. Prices rise when there are more buyers than sellers and decline when there are more sellers than buyers.

Home prices drive rental rates. High home prices deter many from buying, forcing them to rent. This increased demand for rental properties drives up rents. Conversely, when home prices are low, buying becomes more affordable, reducing the demand for rentals and, in turn, bringing down rents.

What leads to the imbalance between buyers and sellers? Population growth. In areas where the population is rising, prices increase, and rents follow suit. When there is substantial and ongoing population growth, rents outpace inflation. So, we have the first location selection metric:

• Significant and sustained population growth, Wikipedia

Rents Persist Throughout Your Lifetime

Your rental income will only continue throughout your life if your tenants maintain similar employment as long as you live. However, all non-government jobs are short-lived. Companies last, on average, ten years. Even S&P 500 companies only have an average lifespan of 18 years.

Thus, your future income relies on new companies establishing operations in the city, creating replacement jobs. What are the conditions necessary for companies to choose a city?

• Economic stability. This requires a metro population >1M. Smaller cities tend to be dependent on a single company or market sector. Wikipedia
• Low operating costs: The three biggest costs are income taxes, property taxes, and insurance. Tax Foundation, Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage
• Low crime rate: Companies are unlikely to invest in high-crime cities. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.
• Low risk of a natural disaster: When a natural disaster hits a city, it destroys jobs, businesses, and homes. This forces people to move to a different city to find work and start over. So, even if your property is rebuilt, there might not be anyone to rent it. Meanwhile, you still have to pay your mortgage, taxes, insurance, and maintenance costs. To avoid this, choose a location with low-cost homeowners' insurance, which indicates a lower risk of natural disasters. Insurance - ValuePenguin
• Pro-business environment: Google search
• No rent control of any kind: Rent control is a sign of an intrusive government that will limit the ability of companies to compete with others in more business-friendly environments. Google search

Selecting a City for Financial Freedom

The process is straightforward. Start with any of the above criteria, then apply all additional criteria, eliminating any that fail any criteria. A good place to start is cities with a metro population >1M. Wikipedia

Once you eliminate cities that fail any of the criteria, only a few will remain. The next criterion is an experienced investment team.

Experienced Investment Team

Why is it essential to work with a local investment team? Podcasts, books, seminars, and websites only provide general information. You will purchase a specific property in a specific city with specific local conditions and regulations. Only an experienced local investment team has the local knowledge, processes, resources, and skills you need to be successful. I wouldn't consider a city without an existing investment team.

A property manager is an essential part of an investment team. A good property manager not only manages the property but also minimizes costs and selects reliable tenants. As to the cost, we negotiated a special rate for our clients, which is 8% of the collected rent, a $500 lease-up fee when needed, and no markup on repairs.

Also, working with an investment team should not cost more. For instance, we have delivered over 490 investment properties and charged our clients a fee on only four or five, which were exceptional circumstances. In all other cases, our fees were paid by the seller's listing agent, not by our client. Thus, there's no reason not to work with an experienced investment team.

Return Rates We Are Seeing

The days of getting pre-approval and closing with the same lender ended when rates crossed 6.5% to 7%. What we do to get the best rate possible is illustrated below.

Once we get a property under contract, we solicit buydown rates from multiple lenders. We then move the loan to the lender with the best rate. Using this process, we are seeing initial returns between 0% and 1%, including all recurring expenses. Rents follow prices, and prices increased >9% YTD for the segment we target, so we expect significant rent increases in the foreseeable future as they did before interest rates exploded in 2022.

Summary

Todd, as long as you can sell your property, you have options. However, be very selective where you buy a replacement property.

Hello @Robert Flores,

Having to look for a property manager 4 or 5 times myself, I developed a process (I was an engineer so can’t help it) to ensure that I will always land with a good one. Below is the process that I followed.

Finding a good property manager starts with knowing what you need.

List Your Requirements

Make a list of the capabilities and services the property manager must have. For example, suppose you plan to buy residential properties on the southwest side of the city. You can eliminate all property managers that focus on commercial or do not cover the southwest.

Find Candidates

Search Engine

If you Google something like "Las Vegas Nevada property management companies," you may get too many hits to be practical. With Google, ranking is more of a popularity/marketing contest than any measure of the quality of service. In a smaller city, a search engine might be a great starting point. All you can do is try and see what you get.

Yelp Reviews

Yelp and similar sites only post reviews by tenants. The tenant is not the property manager's client; the property owner is the client. Therefore, a glowing review by a tenant could be a negative review in the eyes of a property owner. Read reviews through the eyes of an owner, not the tenant.

Networking

Read message boards on Biggerpockets or other real estate investment sites. Connect with people who already have properties under management in the area.

Important: just because someone tells you that XXX is a great management company does not mean they will be a great management company for you. Do your own due diligence.

Narrowing the Candidate List

Once you have a list of property manager candidates, check out their websites. If their website states they focus on commercial and you are planning to buy residential, eliminate them. A few minutes spent on each candidate's website before you start interviewing can save you a lot of time.

Select the best 5 or 10 property managers for interviews.

Interview Questions

Before starting, have your questions written down (no more than 10). Use one page for each property manager. Write their responses to each question. You will learn a lot by comparing responses.

Below are sample questions:

• How long have you been exclusively managing properties? (No part-timers)
• How many properties are you currently managing?
• What is your mix of properties (single-family, condos, commercial, etc.)?
• What geographical area do you service?
• Do you have a staff? Please tell me about them. How many are full-time?
• What is your average tenant stay for properties similar to [your property].
• What is your process for screening tenants?
• What are your most important tenant selection criteria?
• How do you keep owners informed? (monthly statements, website, etc.)
• Do you have a startup fee?
• What percentage of collected rent do you charge?
• Is there an annual fee?
• Do you charge a lease renewal fee?
• Are there other fees?
• Do you have an in-house maintenance staff? (If yes, end the call. You cannot afford an in-house maintenance staff. Maintenance is where property managers with an in-house repair staff make the most money, not rent collection.)
• Do you markup repair costs? (I am OK with a fixed fee, like $20/repair. I will NOT work with a property manager who marks up a percentage of the total repair cost. I do not want the property manager to have any financial incentive to increase my maintenance costs.)
• Do I receive a copy of the original bill from the contractor who performed the work?
• Under what conditions do you contact me for prior approval before authorizing the repair? (Usually based on the estimated cost. For example, for repairs costing less than $300, the property manager will proceed with the work. Above $300, they will contact you for prior approval.)
• How do you collect the rent?
• How do you deliver the rent to me? (direct deposit)
• On what day of the month do you send rent to owners?
• Tell me about the eviction process.
• How long does the entire process take?
• How much does an eviction cost?
• Do you have to go to court often? Is there an additional charge if you have to go to court?
• How many evictions have you had to initiate in the last 12 months?

Additional Considerations

• Selecting the lowest-cost property manager can be your most expensive option. One non-performing tenant will cost you more than several years of the incremental costs of a skilled property manager. Focus on the value delivered, not the lowest cost.
• I prefer medium-sized property managers. The big property managers don’t have time for individual owners. Mid-sized property managers have all the needed software and processes but will still have time to work with individuals.
• The most important skill of a property manager is the ability to select a reliable tenant. Understand their process for screening prospective tenants. Some property managers choose tenants based on FICO scores. A FICO score tells you nothing about how long they are likely to stay and if they take care of the property. Also, a high FICO score can mean they will be buying a home soon and will leave your property after only a short stay. The property manager should use one of the tenant screening services.
• Do not expect investment advice from a property manager. I've worked with many, and none knew how to analyze a property. The best source of such analysis is an investment realtor (NOT an "investor friendly" realtor).

Robert, if you have questions, let me know.

Hello @Carlos Ptriawan,

A few comments:

“next few years appreciation would be 2-3% only per-Freddie Mac/Zillow/etc”

2-3% is a reasonable expectation for a national average. However, you do not buy a nationally average property; you buy a property in a specific location. In growing cities like Las Vegas, land shortage combined with rapid population growth and continuing large capital inflow mean that the appreciation rate will be much higher than the national average. 5% is a conservative estimate. YTD appreciation for the property segment we’ve targeted for over 16 years is >9%.

“it's almost impossible to beat 6% CD as average large public company earning yield is only 5.5%”

I did not compare CDs to public companies. I compared CDs to investment real estate in a city where prices continue to rise rapidly.

“When calculate the gain, make sure to substract 6-7% for real estate commision.”

Real estate is a long-term investment; there is no reason to sell. I will live off the cash flow from my properties as long as I live. When I die, they will go to family members. Why would you sell a performing asset that only does better over the years?

But let’s just say you decide to sell it in 5 years. Using the above example and subtracting 7% realtor commissions, your equity gain will be:

$587,090 x (1-7%) - $460,000 ≈ $85,994.

Your total gain, including cash flow, will be: $85,994 + $115,000 ≈ $200,994

This is still way better than a CD.

So, I do not agree with your comments.

Hello @John Peter,

I view investing in CD and real estate as being very different. An example will show what I mean.

Suppose you buy a $460,000 CD (or HYSA or T-bill) and a $460,000 rental property. What will be the five-year gain if the CD pays 5% and a rental property appreciates at 5%? (Our YTD appreciation is >9%, so 5% is conservative.)

CD gain:

Assuming a 35% marginal tax rate:

• Year 1: $460,000 x 5% x (1 - 35%) + $460,000 ≈ $474,950
• Year 2: $474,950 x 5% x (1 - 35%) + $474,950 ≈ $490,386
• Year 3: $490,386 x 5% x (1 - 35%) + $490,386 ≈ $506,324
• Year 4: $506,324 x 5% x (1 - 35%) + $506,324 ≈ $522,780
• Year 5: $522,780 x 5% x (1 - 35%) + $522,780 ≈ $539,770

Total gain: $539,770 - $460,000 ≈ $79,770

Rental property gain:

• Year 1: $460,000 x (1 + 5%) ≈ $483,000
• Year 2: $483,000 x (1 + 5%) ≈ $507,150
• Year 3: $507,150 x (1 + 5%) ≈ $532,508
• Year 4: $532,508 x (1 + 5%) ≈ $559,133
• Year 5: $559,133 x (1 + 5%) ≈ $587,090

Total gain: $587,090 - $460,000 ≈ $127,090

However, this represents only capital (equity) gain. You'll also receive cash flow from the property. Let's assume the cash flow from the property is 5% after all recurring expenses—a common (starting) figure among our client’s properties. To be conservative, I’ll assume there's no rent growth. However, appreciation and rent growth are driven by population growth. If there is appreciation, you will have rent growth.

• Year 1: $460,000 x 5% ≈ $23,000
• Year 2: $460,000 x 5% ≈ $23,000
• Year 3: $460,000 x 5% ≈ $23,000
• Year 4: $460,000 x 5% ≈ $23,000
• Year 5: $460,000 x 5% ≈ $23,000

Total cash flow in 5 years: $23,000 x 5 ≈ $115,000

The tax savings will probably shield the cash flow from taxes. Therefore, it will essentially be tax-free. So, the five-year gain from the property, including equity gain and cash flow: $127,090 + $115,000 ≈ $242,090

So, I do not see investing in a CD comparable to an investment property.