All Forum Posts by: Eric Fernwood

Hello Crystal,

I reposted my response below. Hopefully, the images come through. Let me know if you still can not view them.

Hello Greg,

There are many low-cost locations where people can invest (Mobile is a beautiful city.) Where people should invest depends on their goals. If their only goal is immediate cash flow, then there are many options. If their goal is financial security, location choices are limited.

Financial security means that the income must continue for as long as you and your spouse live, which could be 30 to 50 years. Additionally, the generated income must keep pace with inflation because we live on buying power, not a fixed number of dollars. An example will illustrate this point.

Suppose that every time you go to the grocery store, you buy the same basket of goods and today they cost $100. The table below shows the decline in buying power over time, based on the difference in rent growth versus inflation. For example, if inflation is 6% and rent growth is 1%, the rate of buying power loss is 5 %/year.

Assuming a 4% difference between the rate of rent growth and inflation, $100 will only purchase 66% of today's groceries in ten years and 44% in twenty years. This demonstrates that buying properties based solely on their initial return is unlikely to provide the long-term financial security people seek, as rents will not keep pace with inflation. Therefore, I recommend taking a long-term view rather than focusing solely on initial cash flow.

Below are some considerations when choosing an investment location.

• Increasing state and metro population - Property prices and rents are likely to remain the same or decrease if the population is static or declining. It is population growth that causes prices and rents to increase. Therefore, never invest in any city if either the state or city population is static or declining.

• Minimum population size - My cutoff is 1 million people. Smaller cities tend to be too dependent on a single industry or market segment.

• Low crime - The economic growth of a city is dependent on the creation of new jobs. Companies seeking to establish operations avoid high-crime locations. Do not invest in any city that appears on Neighborhood Scout's list of the 100 most dangerous US cities.

• Operating cost - Every dollar lost to overhead reduces the amount available for living expenses. The table below shows the average overhead costs and rates for Florida, Nevada, Texas, and Alabama.

Next, I compared the operating costs for a $400,000 investment property with a $15,000 annual taxable cash flow in the four states.

As you can see, operating costs make a huge difference in net cash flow.

Operating costs have a significant impact on the amount of money available for living expenses. In order to achieve the same net cash flow, a property in Texas would need to generate $6,192 ($9,736 - $3,544) more in cash flow compared to the same property in Nevada.

If your goal is financial freedom, choosing the right city to invest in is the most important investment decision you will make.

Hello @Katie Tran,

I agree completely with your sentiment regarding the importance of investing safely. However, California may not be the most favorable state for investment due to various reasons such as rent control, anti-landlord legislation, high costs, and high taxes.

In this post, I will provide a straightforward process for selecting a city where:

• Rents outpace inflation: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to pace with the cost of living, your financial independence will be short-lived.
• Persistent: Your rental income will last a long time, you will not outlive your income.

What are the consequences of buying in a city where rental rates do not outpace inflation?

An example will illustrate the problem. Suppose you purchase a property with an initial cash flow of $1,000 per month. The rent growth rate is assumed to be 2%, which is a common growth rate, and the inflation rate is 5%. The table below lists inflation-adjusted purchasing power for the first ten years.

After ten years, $1,000 will only be able to buy 61% (100% - 39%) of what it can buy today. So, if you buy in any city where rents do not outpace inflation, no matter how many properties you own, you will soon be forced back to work.

What causes prices and rents to rise or fall?

Supply and Demand

In real estate, prices and rents are determined by the imbalance between the number of buyers and sellers.

• When there are more sellers than buyers, prices decline until there is a rough balance between the number of buyers and sellers.
• When the number of buyers exceeds the number of sellers, prices increase until there is a rough balance between the number of buyers and sellers.

Rents follow prices.

• Higher prices reduce the number of people who can purchase, increasing demand for rental properties and increasing rents.
• Lower prices enable more people to purchase, decreasing demand for rental properties and decreasing rents.

What determines demand?

Population Change

Prices and rents only rise significantly if there is sustained and significant population growth. This is our first city selection requirement:

✅ Significant and sustained population growth.

Jobs

The number one reason people move to a city is jobs. However, all private sector jobs are temporary. The average lifespan of a company is about 10 years, an S&P 500 company is only 18 years. Unless new companies move in and create replacement jobs, only low-paying service sector jobs will remain. As higher-paying jobs disappear, incomes in the area decline. Cities are funded by property taxes and sales taxes. When the area income falls, property taxes and sales taxes fall. Cities are then forced to cut back on services. As services are reduced, this leads to increased crime rates and lower-quality schools, which in turn causes more people to leave.

What are the requirements for a city to attract new employers?

✅ Low operating costs

✅ Low crime rate

✅ Low risk of a natural disaster

✅ Sufficient population to have economic stability, major highways, and a major airport. This usually requires a population >1M. Smaller cities tend to be dependent on a single company or market sector.

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

City Selection Process

Begin by evaluating cities with a metro population of more than one million. This is the easiest criterion to apply and will reduce the number of cities to be evaluated. After this, apply additional elimination criteria in the order from the easiest to the most time-intensive. This will save time and increase efficiency.

• Cities with a metro population >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
• Low operating costs - The two most significant operating costs for an investor are property taxes and insurance.
  • Property tax rates: State Property Tax Rates - Rocket Mortgage
  • Insurance rates: Insurance - ValuePenguin
• No rent control of any kind: Google search

The result is a short list of potential candidate cities. The next selection/elimination criteria is an experienced local investment team.

Experienced Local Investment Team

Why do you need a local investment team? Everything you learn from podcasts, books, seminars, and websites is general knowledge. But you will buy a specific property, in a specific location, subject to local rules and regulations. The only source for the local knowledge you need is an investment team.

Also, an experienced local investment team already has the skills, processes, expertise, and resources you need to identify, validate, renovate, and manage properties, saving you time, money, and risk.

Working with an investment team usually does not cost more. For instance, we have delivered over 480 properties and charged our clients a fee on only four or five of them, and only in exceptional circumstances. In all other cases, the fees were paid by the listing agent of the seller, not by our client.

By working with an investment team, you also receive a master class on real-world investment training at no cost to you.

Hello @Nikki Nguyen,

I believe what you need is an experienced local investment team, not just an investment realtor.

Everything you learn from podcasts, books, seminars, and websites is general knowledge. However, you will purchase a specific property in a specific city, subject to local rules and regulations. The only source for the local information you need is a local investment team.

Before I explain how to find an investment realtor, it is important to understand the difference between a residential (or "investor friendly") realtor and an investment realtor.

Residential or “Investor Friendly” Realtors

Residential realtors enable people to buy or sell homes. The process is simple. Homebuyers select properties, and the residential realtor provides access. Once a home is selected, the residential realtor facilitates the offer and 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. To an investor, MLS data sheets hold little value. The following compares the contents of an MLS data sheet with the information you, as an investor, need to make informed decisions.

Investment Realtor

Where residential realtors sell homes, investment realtors sell passive income. Almost all experienced investment teams will provide the following services and more:

• Develop a financial profile of properties that will meet your specific situation and goals.
• Working with their team, select and validate conforming properties.
• Present only fully-vetted properties with the necessary information to make an informed decision, including estimated renovation costs - not MLS data sheets.
• Handle the offer and closing process.
• Provide overwatch and keep you informed during the renovation process.
• Provide on-site renovation oversight and keep you informed throughout the renovation process.
• Arrange for professional photos.
• Work with the property manager to transition the property to them and get a performing tenant in place.

Below is a diagram of the process we follow. All investment teams will follow a similar process.

Also, working with an investment team usually does not cost more. For example, we have delivered over 480 properties and only charged our clients a fee for four or five of them, which were exceptional circumstances. In all other cases, our fees were paid by the listing agent, not by our client.

How Do You Find an Investment Realtor?

There are typically thousands of residential realtors in a metro area, but only one or two will be investment realtors. To begin the search, create a list of potential candidates. You can gather names from the following sources and others:

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

Once you have a list of candidates, review their websites to determine their business focus.

Once you narrow the list, the next step is interviews. The purpose of the interviews is to:

• Determine the individual's character.
• Determining their capabilities in identifying, validating, and bringing properties to market.
• Evaluate their team.

Sample 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.”

Nikki, if you would like more information on investment teams or finding an investment realtor, please reach out.

Hello @Roman Randall,

I am assuming that you are managing the properties yourself. If this is the case, you might have the tenant do a Facetime (or Zoom) video. With a live video, you can direct them to areas that look suspicious.

Another option is to have a third party take photos, once a year. This is what the property managers we work with do.

On the 10th month of the one-year lease, the service goes to the property and takes 70 to 100 photos of the interior. They do not test anything, they just capture the condition. They also provide notes, like the house smelled of cigarette smoke. If the lease forbids smoking in the house, then that would require action on the part of the property manager. Also, if there is no pet on the lease and there are food bowls on the floor, you know they do have a pet.

The reason it is done on the 10th month is that, in many states, you have the option of renewing or terminating the lease. I owned a property where the tenant was doing great until their partner moved in. The next time the photos were taken, the interior was obviously getting trashed. We decided not to renew the lease and got another tenant.

This happened with another property. In this case, the owner decided to significantly increase the rent based on the poor interior situation. The logic was that if they stayed, the damage would only increase. With a significantly higher rent, they can afford to do the repairs. If they chose not to pay the higher rent, they would move out.

So, there are other options than seeing the properties yourself.

Hello @Ran Iarovich,

If you have an experienced local investment team, remote investing works. If you do not have a local investment team, remote investing would be challenging.

This begs the question, why invest remotely? This adage sums it up: "Live where you like, but invest where you can make money.”

You asked about overcoming the anxiety and fears of remote investing. I will explain how we address this. First, let me provide some background information about us.

We are a Las Vegas-based investor services business that has successfully delivered over 480 investment properties to more than 180 clients worldwide. Over 90% of our clients are located outside of Nevada and are primarily in California, Portland, Seattle, and Hong Kong.

I know our processes work because our repeat business rate exceeds 90%, and our main source of new clients is referrals from existing clients. This is why I can confidently say that remote investing works, as long as there is a competent local investment team.

Building Trust

For us, the remedy for fear is education, documented processes, and client services. In this post, I will share our processes for alleviating fears.

We start with an initial Zoom meeting where I answer the prospective client’s questions and provide an overview of our processes, software, and analytics. I basically go through our FAQ. The result of this meeting is to schedule the first of two Zoom one-on-one training sessions.

Training

Training our new clients is an essential step in building trust. Many new clients have a fear that real estate is complex and mysterious. However, through our training, they come to realize that investing is straightforward when working with a competent investment team.

Property Selection

Many clients come to us after negative experiences with other realtors, where all they received was a drip feed of MLS data sheets. This left them with the responsibility of selecting and evaluating properties, which is almost impossible for them to do.

We have a different approach. First, we create a profile of properties that will match their specific situation. Then, using our data mining software, we identify individual properties that may match. Before contacting them, we manually evaluate each property, often including a site visit where we take a video of the property. This video includes our assessment and recommendations. Part of our evaluation process involves the property manager we work with assessing the property and providing her opinion and recommendations. We only send the property to the client if it passes our evaluation. We then send a comprehensive report on the property, that the client can quickly evaluate. If they are interested, we provide an offer price range recommendation.

Due Diligence

Once we have a property under contract, we start our due diligence process, which includes:

• We contact multiple lenders to inquire about interest-rate buy-down options. Then, we provide clients with an Excel spreadsheet summarizing all the options. After that, we facilitate the client's loan transfer to the selected lender.
• We arrange all inspections and conduct follow-up inspections if necessary. The client receives the inspection report along with our assessment of the items mentioned in the report, as well as quotes for all renovation items. We then reassess the property to ensure that it still meets their requirements. If it does, we proceed to close. If not, we cancel the purchase and look for another property.

Renovation

After the property closes, the renovation process commences. We have a team member dedicated to overseeing all renovations. She visits job sites every other day to assess the progress and provides a video update to the client. We maintain constant communication with the client to keep them informed of the progress.

Final acceptance is performed by a three-member team. The property is only accepted if it is ready to rent. Next, we schedule a professional photographer to take the marketing photos. Finally, we manage the handoff to the property manager.

Ongoing Relationship

Our relationship does not end at this point. Clients know that we want them to contact us if they have any concerns and we will take responsibility for resolving them. Our continued oversight not only makes the client comfortable, it also enables us to evaluate third-party performance.

In Summary

With the right processes in place, clients do not need to physically come to Las Vegas. In fact, many of our clients have never visited Las Vegas. Regarding the closing process, if you are located in the US, we can arrange for a mobile notary to come to you. For clients outside the US, you have the option to sign documents at any US embassy or consulate.

Ran, if you work with an experienced investment team, there is minimal risk. Even if you are investing locally, you still need to work with an investment team. The problem is that everything you learn from podcasts, seminars, books, and websites is general information. You will be purchasing a specific property in a specific location, subject to specific local rules and regulations. The only reliable source for this type of information is a local experienced local investment team.

You might think working with an investment team would be expensive. That is not the case. We have delivered over 480 properties and only charged clients a fee for four or five of them, which were exceptional circumstances. In all other cases, our fees were paid by the listing agent, not by our client.

If you would like more info on how to select and qualify an investment team, DM me.

Ran, I hope this helps.

Hello @Jason Molina,

Las Vegas is an excellent rental investment location. The short version of why I say this:

• Las Vegas is running out of land. The amount of privately owned undeveloped land in the Las Vegas Valley is less than 20,000 acres. The annual consumption rate is about 4,000 acres. Due to high land costs, new homes in our target areas start at $550,000. Our target investment property price range is $320,000 to $475,000, so new construction does not add to the housing supply for our target segment.
• Las Vegas has attracted and continues to attract significant business investments. This creates large numbers of jobs. At the last job fair there were over 20,000 open positions with an average annual wage of $65,000. This is the segment that contains the most reliable tenants that we target. Jobs attract people. Las Vegas's annual population growth is between 2% and 3%.

The combination of an almost fixed supply of properties and a continually increasing population almost guarantees that prices and rents will rise.

Mid-Term Rentals

Unlike short-term rentals which are primarily occupied by vacationers, mid-term rentals are primarily occupied for business purposes. For example, traveling nurses. Also, the need for mid-term rentals for some segments is independent of the economic situation. Additionally, mid-term rentals are unlikely to violate county, city, and most association rules and regulations because they are rented for a minimum of 30 days.

Target a Single Segment

There are potentially many different segments you could target. However, our experience is that it is best to focus on a single segment. The segment that is of particular interest to us and our clients is traveling nurses. Research indicates that travel nurses typically receive an initial 13-week contract and often receive extensions. In addition, traveling nurses are usually single and between the ages of 20 and 30. Therefore, smaller and lower-cost properties are likely the best option.

Location

Another important consideration is the proximity to hospitals that employ significant numbers of traveling nurses. There are two hospitals in Las Vegas that meet this requirement, and they are about 15 minutes apart. Buying a property between these hospitals will attract nurses who work at either hospital.

Management

The majority of our clients are remote investors. So, we worked with a management company that would handle midterm rentals at an affordable price.

Markets Change

Our recommendation is to purchase a property that would be suitable for both long-term and mid-term rentals. This approach provides a fallback position in case the market changes.

We did a detailed study on mid-term rentals in Las Vegas a couple of months ago. If you (or anyone) are interested in a copy, DM me.

Jason, I hope this helps.

Hello @Amanda Shilling,

We've worked with over 180 investors over the last 15+ years, delivering more than 480 investment properties. The majority of our clients live in California; only 8 or 9 live in Las Vegas. Also, we’ve completed over eighty 1031 exchanges, the majority from California. So, you are not the first to be looking out of state.

In the rest of this post, I will explain why so many investors choose to invest in Las Vegas

Why Las Vegas?

The goal of real estate investing is financial freedom. However, financial freedom is more than just replacing your current income; it's about maintaining or improving your current lifestyle for life. To have lifelong financial freedom, you need a passive income that meets three requirements:

• Rents must outpace the cost of living: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to pace with the cost of living, your financial independence will be short-lived.
• Lifelong: You will not run out of money during your lifetime.
• Reliable: You will receive the rental income every month, even when the economy is doing badly.

Whether rental income can outpace the cost of living, as well as how long the rental income will last, depends on the city in which the property is located. The reliability of your income is dependent on the tenant, their value in the eyes of their employer, and the resilience of their employers during economic downturns.

In this post, I will only discuss how Las Vegas meets the requirements for rental income that outpaces the cost of living and why it will provide a long-lasting income.

Rapid Appreciation and Rent Growth

The imbalance between sellers and buyers drives prices. If there are more sellers than buyers, prices will fall until the number of sellers is roughly in equilibrium with the number of buyers. Conversely, if there are more buyers than sellers, prices will rise until the number of sellers is roughly in equilibrium with the number of buyers. How fast prices rise is dependent on how imbalanced the number of buyers vs. sellers is.

How do rising property prices affect rent prices?

• Higher property prices reduce the number of people who can afford to buy a home, forcing them to rent. This, in turn, increases demand for rental properties and drives up rent prices.
• Lower property prices make it possible for more people to purchase a home, reducing the demand for rental properties and causing rents to decrease.

In order for prices (and rents) to increase at a rate faster than the cost of living, there must be significantly more buyers than sellers. This is the result of sustained and significant population growth. What is the current population growth situation in the Las Vegas Valley?

Las Vegas has an average annual population growth rate of 2-3%, which may increase due to recent news that Las Vegas is now the top city in the US for people relocating due to job opportunities.

Why are so many people moving to Las Vegas? Jobs. The Las Vegas Valley spring job fair had over 20,000 open jobs, which is a large number for a city the size of Las Vegas. These jobs will attract more people to move to Las Vegas, all of whom will require housing. This will increase demand for housing and will drive up prices and rents.

Why can't Las Vegas build more homes to meet the demand for housing? There is limited private raw land for expansion. About 90% of Clark County is federal land. In a study I did in 2019, I determined that Las Vegas only had about 22,000 acres of undeveloped land. The average rate of raw land consumption exceeds 4,000 acres per year. Consequently, available raw land is being rapidly depleted, and soon the only option for expansion will be redevelopment. This has already begun in certain areas of the Las Vegas Valley.

Below is an aerial view of the Las Vegas Valley from 2020. The brown-colored areas on the map indicate federal land, and as you can see, there is little undeveloped land left. Additionally, significant growth has occurred between 2020 and the present day, which means that even less land is currently available for development.

Raw land in desirable areas costs over $1 million per acre. Due to the high cost of land, new homes in these areas start at $550,000. The properties that attract our target segment cost between $320,000 and $475,000. So, no matter how many new homes are built, the number of homes in the $320,000 to $475,000 price range will not increase. Therefore, the number of properties that attract our target tenant segment is almost fixed.

Lifelong Income

Your financial independence depends on the long-term economic growth of the city where you invest, with jobs being the critical factor. However, it's not just about the jobs your tenants have today because all non-government jobs have a limited lifespan. The average lifespan of a company is 10 years. Even an S&P 500 company has an average lifespan of only 18 years. This means that every non-government job your tenants have today will eventually come to an end. Without new companies moving into the city and creating replacement jobs, only low-paying service sector jobs will remain.

What is the future job outlook for Las Vegas? Today, there are new projects worth approximately $30 billion that are either under construction or planned. These projects will create thousands of additional jobs in the future.

Another major source of future jobs is companies moving out of California. Below is a chart showing the top 10 destinations for companies leaving California. I see no reason why the trend of employers leaving California will change in the future.

The rapid pace of job creation is expected to continue for the foreseeable future, resulting in a bright long-term job outlook for the Las Vegas Valley. Sustained economic growth will ensure that your rental income lasts for a long time.

Summary

Las Vegas offers unique advantages for investors due to its combination of land shortage, sustained and significant population growth, and a rapidly expanding economy. This combination almost guarantees:

• Your rental income will outpace the cost of living.
• You will not outlive your rental income.
• As your equity increases rapidly, reinvesting it into additional properties can significantly reduce the total capital required to acquire the multiple properties needed to replace your current income.

Amanda, please reach out if I can help.

Hello @Hou Chia,

When selecting an investment location, it is important to consider all operating costs, not just state income tax. This includes both direct and indirect costs.

Direct Costs

The most significant direct costs for real estate investing usually are insurance and property taxes. For example, below is a comparison of overhead costs for three states that do not have a personal income tax.

Sources for insurance and property taxes: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

To show the impact of taxes and insurance, I compared overhead costs on a $400,000 property. (Remember that these are state averages, and individual cities may impose additional taxes.)

What does the difference in overhead costs mean to you as an investor?

To achieve the same level of cash flow as a property in Nevada, you would need to generate a higher cash flow in Texas and Florida to offset their higher operating costs. How much?

• To compensate for Texas' higher operating costs, a property in Texas must generate $5,700 ($9,194 - $3,494) more in cash flow annually than a property in Nevada.
• To compensate for Florida's higher operating costs, a property in Florida must generate $2,123 ($5,617 - $3,494) more in cash flow annually than a property in Nevada.

Indirect Costs

There are multiple indirect costs, below are a few.

• Rent control of any kind: Some states and metro areas have implemented various kinds of rent control. Rent control may prevent you from increasing the rent fast enough to keep pace with inflation. It may limit your property manager's ability to select the best tenant. It may make evictions of non-performing tenants difficult or impossible. Never invest in any city with rent control.
• Crime: A rental property is no better than the jobs around it. And, it is not just the current jobs. The average lifespan of a company is ten years, and an S&P 500 company only has an average lifespan of 18 years. Every job your tenants have today will disappear in the foreseeable future. Without new companies moving into the city and creating replacement jobs, the only jobs left will be low-paying service sector jobs. Companies wanting to set up new operations will not choose high-crime cities. Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.

Other Considerations

Financial freedom is more than just replacing your current income; it's about maintaining your current lifestyle for life. To have lifelong financial freedom, you need a passive income that meets three requirements:

• Rents must outpace the cost of living: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to outpace the cost of living, your financial independence will be short-lived.
• Lifelong: You will not outlive the income.
• Dependable: You will receive the rental income every month, even when the economy is doing badly.

Rents outpacing inflation and lifelong are a function of the city where you invest. Income dependability is determined by the tenant segment you target, which I will discuss in another post.

• Rents outpace inflation: Prices and rents are determined by supply and demand. When the population is growing, there are more buyers than sellers, causing prices to go up. When the population is not growing or decreasing, there are more sellers than buyers, so prices stay the same or go down. Rents are affected by property prices. If property prices are low, more people can afford to buy homes, so there is less demand for rentals and rent prices don't increase much. On the other hand, if property prices are high, more people have to rent, so rent prices go up. In the best areas, the population is growing fast enough that prices and rents increase more than inflation. Never buy in a city with a stagnant or declining population. Wikipedia
• Significant population: Cities with a metro population >1M: Smaller cities may rely too much on a single business or market segment. Also, larger cities tend to be more stable economically during economic turbulence. Wikipedia
• Low disaster risk - When a tornado or other natural disaster strikes a city, it destroys the entire community, including jobs, shopping, retail, and everything. Tenants won't wait for the community to be rebuilt in a few years, they'll move immediately to a location where they can work and live today. However, your mortgage, taxes, insurance, maintenance, and other expenses will continue without interruption. The cost of homeowners insurance is the best indicator of the likelihood of a natural disaster in an area. Choose a location with low-cost homeowners insurance because they have the lowest risk of natural disasters. Insurance - ValuePenguin

Hou, I hope this helps.

Hello @Lei Li,

You will buy a specific property in a specific city within a state. So, I recommend focusing on the city level. As there are too many cities to evaluate, I recommend selecting a city based on your financial goals. In this case, I will assume your goal is financial freedom.

Financial freedom is more than just replacing your current income; it's about maintaining your current lifestyle for life. To have lifelong financial freedom, you need a passive income that meets three requirements:

• Rents outpace the cost of living: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to pace with the cost of living, your financial independence will be short-lived.
• Income persistence: Your rental income will last a long time, which means that you will not outlive your income.
• Income reliability: You can count on receiving the rental income every month, even when the economy is doing badly.

Rents Outpace the Cost of Living

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 and rents increase. If there are significantly more buyers than sellers, prices and rents will rise quickly enough to keep pace with the cost of living. Rapid rent and price growth only occurs when there is sustained and significant population growth. Which is our first city requirement.

✅ Significant and sustained population growth.

Income Persistence

Lifelong financial freedom depends on the future economic growth of the city where you invest. The best indicator of a growing economy is job creation. What are the conditions that attract companies to establish new facilities in a city?

✅ Low operating costs 

✅ Pro-business city / state regulatory environment 

✅ Low crime rate 

✅ No rent control of any kind 

✅ Sufficient population to have economic stability, major highways, and a major airport. 

✅ Low risk of a natural disaster

Income Reliability

The reliability of your income depends on the tenant who occupies your property and their job. I will discuss income reliability in another post.

City Selection Requirements

Below are the location requirements we previously determined. If a city does not meet all requirements, eliminate that from further consideration.

✅ Significant and sustained population growth.

Sustained, significant, population growth. Never invest in any location with a static or declining population Wikipedia

✅ Low operating costs

It's not about how much you gross; it's about how much you net. When selecting an investment city, it's important to take into consideration all major recurring costs. The largest operating costs for investors are property taxes and insurance. Below is a comparison of property tax and insurance costs for three states that do not have a personal state income tax. Sources: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

To illustrate the impact of taxes and insurance on net rent, I compared the cost of property taxes and insurance on a $400,000 property in the three states. (Remember that these are state averages, and individual cities may impose additional taxes.)

What does the difference in overhead costs mean to you as an investor?

• To compensate for Texas' higher operating costs, a property in Texas must generate $5,700 ($9,194 - $3,494) more in cash flow annually than a property in Nevada.
• To compensate for Florida's higher operating costs, a property in Florida must generate $2,123 ($5,617 - $3,494) more in cash flow annually than a property in Nevada.

✅ Pro-business city / state regulatory environment

A good indicator is the State Business Tax Climate Index. High state business taxes are a strong indicator of an anti-business environment.

✅ Low crime rate

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

✅ No rent control of any kind

The fastest way is a google search such as, “Is there rent control in Las Vegas Nevada?”

✅ Sufficient population

Only invest in cities with a metro population greater than 1M. Small towns may rely too much on a single company or market segment. Wikipedia

✅ Low risk of a natural disaster

Natural disasters like tornadoes can destroy entire communities. The devastated community may take years to recover, or it may never fully recover. When someone loses their residence or job in a disaster, they immediately move to a location where they can live and work today. So, even if your insurance company rebuilds your property, there may not be anyone to rent it. However, you will still be responsible for paying the mortgage, taxes, maintenance, and insurance. The cost of homeowners insurance is reflective of the risk of a major natural disaster. Therefore, do not invest in any location with high homeowners insurance rates. Insurance - ValuePenguin

In Summary

Start with all US cities with a metro population >1M (Wikipedia). Then, I would vet each city against all the other listed requirements. Eliminate any city that fails any metric.

I would add one more requirement: an experienced local investment team.

Local Investment Team

Everything you learn from podcasts, books, seminars, and websites is general knowledge. But you will buy a specific property, in a specific location, subject to local rules and regulations. The only source for the local knowledge you need is an investment team.

Working with an investment team usually does not cost more than working with any other realtor. For instance, we have delivered more than 480 properties and only charged our clients fees for four or five properties, which was due to exceptional circumstances. In all other cases, the fees were paid by the listing agent of the seller, not by our client.

Also, by working with an investment team, you receive a master class on real estate investing at no cost to you.

Hello @Timothy Miller,

Where you should invest depends on your long-term goals. I will assume your goal is achieving financial freedom for the rest of your life.

Financial freedom is more than just replacing your current income; it's about maintaining your current lifestyle for life. To have lifelong financial freedom, you need a passive income that meets three requirements:

• Rents must keep pace with inflation: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to pace with the cost of living, your financial independence will be short-lived.
• Persistent: Your rental income must last a long time, ensuring that you do not outlive your income.
• Reliable: You must be able to depend on your income every month, even during tough economic times.

How rapidly rents increase and how long the income will last depends on the city where you invest. Income reliability is a function of the tenant who occupies your property. I will not talk about tenants in this article.

Rapidly Rising Rents

In real estate, prices and rents are determined by the imbalance between the number of buyers and sellers.

• When there are more sellers than buyers, prices decline until there is a rough balance between the number of buyers and sellers.
• When there are more buyers than sellers, prices increase until there is a rough balance between the number of buyers and sellers.

Rents follow prices.

• Higher prices reduce the number of people who can purchase, increasing demand for rental properties and increasing rents.
• Lower prices enable more people to purchase, decreasing demand for rental properties and decreasing rents.

The level of demand is determined by population growth. If population growth is significant and sustained, rents will rise fast enough to keep pace with inflation. If the population is declining, stagnant, or increasing slowly, there will not be sufficient demand to rapidly increase prices or rents.

So, we know the first requirement for selecting a city:

✅ Significant and sustained population growth.

Income Persistence

The only way for your income to persist is if your tenants remain employed at jobs paying a similar wage. The problem is that most jobs do not last.

All private sector jobs are temporary. If new companies do not move into the area and create replacement jobs with similar wages and skill requirements, eventually only low-paying service sector jobs will remain. As higher-paying jobs disappear, incomes in the area decline. Cities are funded by property taxes and sales taxes. When the area income falls, property taxes and sales taxes fall. Cities are then forced to cut back on services. As services are reduced, this leads to increased crime rates and lower-quality schools, which in turn causes more people to leave.

What are the requirements for a city to attract new employers?

✅ Low operating costs

✅ Low crime rate

✅ Low risk of a natural disaster

✅ Sufficient population to have economic stability, major highways, and a major airport.

Putting It All Together

The process I described can be used to quickly eliminate cities that are unlikely to meet all the listed criteria. Start with cities with a sufficient population. Then, eliminate any city that does not meet any of the additional criteria.

We now have a criteria list for evaluating cities. I summarized the criteria below and provided the source for the necessary information. Start with cities with a sufficient population, and evaluate each city against all the criteria. If a city fails to meet any of the criteria, remove it from the list.

✅ Sufficient population: cities with a metro population greater than 1M. Small towns may rely too much on a single business or market segment. Wikipedia

✅ Significant and sustained population growth: Never invest in any location with a static or declining population. Wikipedia

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

✅ Low operating costs: Good indicators of a pro-business climate include:

• Property taxes: State Property Tax Rates - Rocket Mortgage.
• State average insurance cost: Insurance - ValuePenguin
• State income taxes: Tax Foundation

✅ Low risk of a natural disaster: The cost of homeowners insurance is the best indicator of the likelihood of a natural disaster in an area. Choose a location with low-cost homeowners insurance because they have the lowest risk of natural: Insurance - ValuePenguin

Next Step

After vetting all the cities against the above criteria, you will have a shortlist. The next level of elimination will be based on subjective considerations. For example, if there are two cities that pass all the criteria and one is 1,000 miles away and the other is 50 miles, I would likely choose the closer city.

In reality, it doesn't matter whether your property is located in your neighborhood or across the country. If you have a good investment team in your chosen city, you may never need to visit it. In our case, we have successfully delivered over 480 investment properties to more than 180 investors worldwide. How many of our clients visit Las Vegas each year? Only two or three, and they are not there to look at their real estate.

Conclusion

Instead of listing cities, this post outlines a process for selecting a city that will meet two out of the three criteria necessary for financial freedom.

Timothy, I hope this helped.