All Forum Posts by: Eric Fernwood

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.

Hello @Chris John,

Thank you for the kind words.

We are engineers who take a data science and process-oriented approach to real estate investing. Our methods reduce clients' anxiety and we teach them how to analyze and select properties. With the right tools, real estate investing is simple and we have delivered over 480 properties with a >90% repeat business rate.

If you (or anyone) would like to learn more about our methodologies and process, sign up for my Substack (link on my profile page) to receive one blog post a week.

I disagree with the statement on location vs. “how you will invest.” Location is THE most important investment decision you will make. If you choose a bad investment location, you will not have the financial freedom you want.

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 inflation: Inflation continually erodes the purchasing power of a fixed amount of money. What you can purchase today for $100 will require $155 in 10 years if the inflation rate is 5%. The only way to sustain your current lifestyle is if rents keep up with inflation. If rents don't keep up with inflation, your financial independence will be short-lived.
• Persistent: Your rental income will last a long time, ensuring that you do not outlive your income.
• Reliable: You can depend on a steady stream of income each month, even during tough economic times.

I will cover each of these three requirements necessary for lifelong financial freedom.

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 sellers than buyers, prices decline until there is a rough balance between the number of buyers and sellers.
• When the number of buyers roughly equals the number of sellers, prices are static or increase at a slow rate.
• When the number of buyers greatly exceeds the number of sellers, prices increase rapidly.

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 only market condition where prices (and rents) keep pace with inflation is one where buyers greatly exceeds the number of sellers. Under what conditions does this occur?

✅ Rapid population growth.

Income Persistence

If you outlive your rental income, you will be in a world of hurt. So what conditions are necessary for income persistence?

Income persistence is tied to the long-term economic growth of the city. The best indicator is jobs. Jobs are what attract people to move to a city. And, it's not just the jobs they have today. Non-government jobs are short-lived. On average, a company only lasts 10 years. The average life of an S&P 500 company is only 18 years, and falling. So every non-government job that exists in the city will disappear in the foreseeable future. Unless new companies move in and create replacement jobs, your tenants will be forced to take lower-paying service sector jobs. Therefore, income persistence depends on companies relocating to the city and creating replacement jobs.

What are the conditions that attract companies to a city? The primary requirements are:

✅ Low operating costs

✅ Low crime rate

✅ Low risk of a natural disaster

✅ The area must have a sufficient population to maintain economic stability, as well as major highways and a major airport.

Income Reliability

The reliability of your rental income depends on the tenant who occupies it. To have a reliable rental income, your property must be continuously occupied by a reliable tenant. A reliable tenant is someone who consistently pays rent on time, stays for extended periods, and takes good care of the property.

Reliable tenants are the exception, not the norm.

And since you will hold the property for many years, you will need multiple reliable tenants. The best way to achieve this is to select properties that attract people from a tenant segment with a high concentration of reliable individuals. You can identify such a segment through interviews with property managers and research.

When I chose Las Vegas to establish an investor services business in 2004/2005, I spent a significant amount of time researching the characteristics of the various tenant pool segments. I selected a tenant segment with a high concentration of reliable tenants. Some of our 15 year results:

• Over the course of 15 years, there have been 6 evictions with a tenant population of over 1,000 tenants.
• During the 2008 financial crash, our clients experienced zero decrease in rent and no interruptions. While property prices crashed, their rental income was unaffected.
• Our average tenant stay is over 5 years.

After identifying the segment I wanted to occupy our properties, I determined what and where they rented. We then purchased similar properties. To date, we have delivered over 480 properties targeting the same segment, and the performance has been excellent.

The reason you can select a specific tenant segment by buying certain properties is that every segment has specific housing requirements. And, people only rent properties that meet all of their housing requirements. If you buy properties that match all the housing requirements of a specific segment, the majority of applicants will likely come from that segment.

What if you buy a property that does not meet all of the target segment housing requirements? You intentionally excluded this segment from renting your property.

Note that this method does not assume a property type or location. Instead, let the target segment inform you of what they want to rent. In some locations, this could be a multi-family property, while in others it could be a single-family home or condo. The type of property is not important; what matters is maximizing the return on your investment.

Location Selection Requirements

Below are the location requirements we previously determined, along with the metrics for evaluating potential investment cities. Any city that fails to meet any of the following requirements should be eliminated from consideration.

✅ Rapid population growth

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

✅ Low operating costs

It’s not how much you gross, it's how much you net. You have to look beyond simple return calculations. You must consider all major recurring costs when selecting an investment location. Below is a comparison between three no-income tax states.

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 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 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.

✅ Low crime rate.

Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list. Companies looking for a new location, they are unlikely to choose high crime cities.

✅ Low risk of a natural disaster

Natural disasters, such as tornadoes, can devastate entire communities, destroying jobs, shopping centers, and housing. When a tenant loses their home, they immediately relocate to an area where they can live and work today. Once people are settled elsewhere, there is little incentive for them to return to the devastated area, which can take several years to rebuild or may never fully recover. So, even if your insurance company rebuilds your property, there may be no renters. However, the debt service, taxes, maintenance, and insurance costs will continue. To avoid such disastrous situations, only invest in locations with low-cost homeowners' insurance. Insurance - ValuePenguin

✅ 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

✅ I will add one more requirement - No rent control. In some cities, you may not have the option to select the tenant with the best financial history. In others, you may not be able to increase the rent fast enough to keep pace with inflation. Other cities make it difficult and expensive to remove non-performing tenants. While these are not direct costs, they can be the most expensive costs of all. Do not invest in any city with any form of rent control.

There will be only a few cities that meet all the above requirements. This is the process I followed and it will work anywhere.

In Summary

In order of importance:

1. Location
2. Tenant segment
3. Property

Hello @Steven Webster

Just because you want to rent your house does not mean it will attract what I call a reliable tenant. A reliable tenant is someone who stays many years, always pays the rent on schedule, and takes care of the property.

Also, some floor plans are extremely difficult to rent. For example, what are called split-level homes in Las Vegas are very hard to rent.

My recommendation is that you contact a good property manager and get their opinion on three things:

• Probable rental rate
• Probable time to rent
• What do you need to change in the house in order to minimize time to rent, and maximize the rent?

Even though you own rental properties, you should still need the advice of a local expert before you decide what to do.

Hello Julien,

I understand your pain with clients not taking action. When we started our investor services business over 15 years ago, we faced the same challenge of 'analysis paralysis'. Over time, we've refined our methodologies to minimize this issue. Here's what worked for us and might benefit you:

• Investors do not purchase real estate. Investors buy reliable passive income streams that grow in value. The dialogue must shift from what you want to sell to what investors want to buy.
• Investors have money, but no time. We decreased the time and complexity for our clients by forming a team of trusted third-party service providers. Our combined services cover the entire investment cycle. However, we remain the single point of contact for our clients; we manage all third-party service providers.
• I interview each new potential client to assess their potential for success. I eliminate individuals who are unlikely to succeed or cannot make decisions.
• We alleviate client fears by teaching them how to invest. Our methodologies, derived from commercial real estate, are easy to understand and reduces their concerns.
• We do not send clients a stream of MLS data sheets and expect them to evaluate and choose properties. We create a property profile tailored to each client's unique goals and situation. We only send properties that match the client's profile and have passed our stringent vetting procedure. We then send actionable analytics, not MLS data sheets. Below is a sample of the information we send.

To become an investment advisor rather than just another realtor drip feed source, focus on what investors want to buy and provide a complete solution in conjunction with a property manager and other service providers. Julien, and any other realtor who is interested, please reach out to me. Let’s discuss how some of our tools and processes can help grow your investor business.

Hello @Dan Deng,

The goal of investment real estate is to provide a reliable passive income. To have a reliable income, you need the property continuously occupied by what I call a reliable tenant. A reliable tenant is someone who stays many years, always pays the rent on schedule, and takes care of the property. Reliable tenants are the exception, not the norm.

A Property Attracts Only a Single Tenant Segment

Each segment has specific housing requirements, and individuals within a segment are unlikely to rent any property that does not meet all of their needs. Additionally, each segment exhibits different behaviors. Conversely, each property only meets the housing requirements of a single segment. Therefore, it is important to understand the behavior of the tenant segment that your property will attract.

My recommendation is you do some research with property managers to determine what you should expect from the segment who is likely to rent your property. If the vacancy rate is too high, I would be inclined to sell the property. If the vacancy rate is low enough that the expected income from your property will cover all expenses and repairs, I would hold onto the property.

Also, you cannot afford to manage the property yourself. While you research the behaviors of tenants likely to occupy your property, I suggest conducting interviews for a property manager as well.

Some property manager 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.
• Never work with a property manager with an in-house repair staff. Property managers make more money from repairs than from collecting rent. Don’t let your maintenance expenses be their financial gain. An in-house repair department is an inherent conflict of interest. All the property managers we work with utilize third-party service providers.
• 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).

If you would like my guide (free) on how to select a good property manager, DM me.

Hello @Cassandra Alessio,

Before starting your selection process, you need to define your goal. For most people, the goal is financial freedom. Financial freedom requires a passive income that meets three requirements:

• Your income keeps pace with inflation: Financial freedom is more than just replacing your current income; it's about maintaining your current lifestyle for life. Inflation continually erodes the purchasing power of a fixed amount of money. What you can purchase today for $100 will require $155 in 10 years if the inflation rate is 5%. The only way to sustain your current lifestyle is if rents keep up with inflation. If rents don't keep up with inflation, your financial independence will be short-lived.
• Persistent: You will not outlive your income.
• Reliable: You need to be able to rely on the rent coming in every month, regardless of the economic situation.

Choosing an Investment Location

The location is the most important investment decision you will make, not the property itself. The question is, "Which city?”

There are too many cities to evaluate all of them so I suggest using the process I followed when I selected a city to start my investor service business. The process begins with a list of potential cities and then eliminates any city that does not meet additional requirements. The steps and resources are as follows:

• Cities with a population >1M: Start with cities with a metro population greater than 1M. Small towns may rely too much on a single business or market segment. Wikipedia
• Sustained and significant population growth: Prices and rents are a function of supply and demand. Demand is driven by population growth. Where there is sustained and significant population growth, the current housing supply will not meet demand so prices rise until the number of sellers roughly matches the number of buyers. Where population growth is stagnant or falling, the current housing supply is sufficient so there is little increase in prices. Rents are driven by property prices. Where prices are low, more people can buy so there is little demand for rentals so there is limited or no rent growth. Where prices are higher, more people are forced to rent so rents increase. In the best locations, rent growth outpaces inflation. Never invest in any location with a static or declining population Wikipedia.
• Low 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.
• Rent control - 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. Use Google search.
• Low operating cost - It's not about how much you gross, it's about how much you net. Every dollar lost to operating costs means one less dollar for you to live on. The two most significant operating costs are property taxes and insurance. Operating costs vary significantly by state, so keep this in mind. Sources for insurance and property taxes: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

At this point, you will have a small number of potential investment cities for further consideration.

One other location criteria I would have is an experienced local investment team. The problem is that 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. 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 seller's listing agent, not by our client.

By working with an investment team, you also receive real world investment training at no cost to you.

If you would like information on how to find and qualify an investment team, let me know.

Cassandra, I hope this helps.

Hello @Sergio Serra

Whether to keep or sell the property is always a challenging question. Some considerations:

You cannot use a 1031 exchange to purchase a personal residence. However, if the property was your primary residence for at least 2 out of the last 5 years, you may be eligible to exclude capital gains up to $250,000 for single individuals and up to $500,000 for married couples filing jointly.

You stated that you would probably have an initial negative cash flow of $500/Mo. How long it will take for rent to increase by $500 depends on the rent growth rate. From what I found, some predict that rent prices for condos in Irvine could increase by as much as 5% per year over the next few years. (Predicting anything beyond yesterday is guessing.) So I can provide a more meaningful answer, I will assume that the market rent for your condo is $3,500/Mo. At 5% rent growth, it will take 3 or 4 years for the rent to reach to increase by $500/Mo.

Because you are weighing the option of selling or keeping the property, I will assume that you don't need the proceeds from the sale to purchase your new home. If that is the case then, do you want to be a landlord?

Being a landlord is difficult and time-consuming, especially in a state like California. If you do decide to rent the property, you need a good property manager. However, good property managers are few and far between. I have worked with investment properties in Las Vegas for over 15 years, and I am aware of only two reliable property managers. Feel free to contact me for a proven process for selecting a good property manager.

Another consideration is that you may want to sell your condo and purchase an investment property in a more investor-friendly location. A lot of investors are selling their properties in California and buying out of state for a more pro-landlord environment.

Sergio, I hope this helps,

…Eric

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

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

• 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. As of today, the inventory is at 2.4 months and is decreasing. In Las Vegas, a balanced market is characterized by six months of inventory, where the number of sellers is roughly equal to the number of buyers. We are in a seller's market.

Rental Market Trends

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

Rentals - Median $/SF by Month

August saw rents drop slightly, conforming to past seasonal trends. YoY is flat.

Rentals - Availability by Month

The number of homes for rent continued the downward trend.

Rentals - Median Time to Rent

Median time to rent maintained at ~20 days, indicating steady demand.

Rentals - Months of Supply

Only about 0.8 months 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 0.8 months of supply. This will push up the prices.

Sales - Months of Supply

Inventory for our target market continues to fall.

Sales - Median $/SF by Month

Despite increasing interest rates, $/SF is climbing up.

Las Vegas Rental Market Outlook

I believe that rents (for our target segment) will increase by an average of more than 8% over the next 5 years. Below is my reasoning for this conclusion:

• Real estate prices and rents are determined by supply and demand. Population growth is the driving force behind housing demand. When there is sustained and rapid population growth, demand increases rapidly. As a result, prices and rents rise rapidly. 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 for people relocating due to job opportunities.
• Why are so many people moving to Las Vegas? Jobs. But how many jobs are available? The spring job fair in Las Vegas had over 20,000 open jobs with an average annual wage of about $65,000. As more people move to Las Vegas, demand for housing will increase. Our target tenant demographic includes individuals earning in the range of $60,000 to $75,000. Therefore, an increase in demand for housing will particularly drive up demand and rental rates for the segment we are targeting.
• Future job growth: New projects worth approximately $30 billion are either under construction or planned. These projects will create thousands of additional jobs and attract more people to Las Vegas, further increasing the demand for housing. This demand will primarily be in the tenant segment that we target.
• Fixed inventory - There is little undeveloped land left for expansion in the Las Vegas Valley (see aerial view below), and 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. Therefore, building more new homes priced at $550,000 or higher will not increase the inventory of homes in the $320,000 to $475,000 price range. Therefore, the number of properties that attract our target tenant segment is almost fixed. The result will be rising prices and rents.

• The chart below illustrates the annual rent increase rate by year. The rate at which rents increased relative to 2021 depends on the year the property was put into service. The conditions that created this rent growth have not changed so I expect the trend to continue.

•  Inventory levels in our targeted sector are unusually low. Currently, there is less than 1 month's worth of inventory. This is significantly below the six months of inventory considered to be a balanced market. I believe that high-interest rates are discouraging potential sellers from entering the market, as they would be trading their current ~3% interest rate for a 7%+ rate on their replacement home. When interest rates decline, buyers who have been waiting to buy a home for years will enter the market and the increasing demand will dramatically increase prices. As prices increase, fewer people can afford to buy a home and will be forced to rent, which will drive up rental rates.

In Conclusion

Las Vegas has a unique combination of a rapidly rising population and a (almost)fixed housing supply, which almost guarantees substantial long-term increases in rent and housing prices.

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

Hello @Jae Bok Lee,

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 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.
• Long lasting: 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.

Now that we have defined the requirements for achieving lifelong financial freedom through passive income, we can determine the necessary criteria that a location must meet.

When Rents Keep Pace With 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 sellers than buyers, prices decline until there is a rough balance between the number of buyers and sellers.
• When the number of buyers roughly equals the number of sellers, prices are static or increase at a slow rate.
• When the number of buyers greatly exceeds the number of sellers, prices increase rapidly.

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.

There is a lag of 1 to 5 years between price changes and corresponding changes in rents. What is the primary reason for the lag? Leases. Leases generally last for one year or longer, meaning that changes in prices take time to affect rents. The direction of prices today is a leading indicator of changes of future rental rates.

The only market condition where prices (and rents) keep pace with the cost of living is when the number of buyers greatly exceeds the number of sellers. Under what conditions does this occur?

✅ Significant and sustained population growth.

Income Persistence

Your long-term financial freedom depends on the future economic growth of the city. The best indicator of a growing economy is job creation. What are the conditions that attract companies to establish a new facility in a particular city?

✅ Low operating costs

✅ Low crime rate

✅ Low risk of a natural disaster

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

Income Reliability

Income reliability is dependent on the tenant who occupies your property and the companies where they work. I will discuss income reliability in another post.

Location Selection Requirements

Below are the location requirements we previously determined, along with the metrics. Any city that fails to meet any of the following requirements should be eliminated from consideration.

✅ Rapid 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 location, it's important to take into consideration all major recurring costs. 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 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 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.

✅ Low crime rate.

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

✅ 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 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. To avoid this financial disaster, only invest in locations with low-cost homeowners' insurance. Insurance - ValuePenguin

✅ 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

Conclusion

If you select an investment city based on the above criteria, you should do well. 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 also receive a master class on real estate investing at no cost to you.