All Forum Posts by: Eric Fernwood

Hello @Jeanie D.

If you're seeking financial independence, Las Vegas is one of the best places in the US to invest. In this post, I will explain why this is the case. But first, let me define financial freedom: it means that you are permanently off the daily worker treadmill. In order to achieve this goal, you need a passive income that meets three requirements:

• Inflation compensating: Rental income keeps pace with inflation, enabling you to maintain your standard of living by providing additional dollars needed to pay inflated prices today and in the future.
• Persistent income: Your income will last so you will not run out of money.
• Reliable income: Your income continues even in difficult economic times.

Maintaining your living standard depends on being able to buy the same goods and services in the future as you do today. Inflation erodes your buying power, so buying the same things takes more and more dollars over time. The only way to have the additional dollars you need to pay inflated prices is for your rents to increase faster than inflation.

What Drives Rents and Prices?

Prices are driven by supply and demand.

• When there are more sellers than buyers, prices either remain static or fall until a relative balance is achieved between the number of buyers and sellers.
• When there are more buyers than sellers, prices rise until there is a relative balance between the number of buyers and sellers.

Rents are primarily driven by property 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.

Rents follow prices, but the impact of price changes on rents is delayed by 1 to 5 years. This delay is primarily due to leases, which typically last for one year or more. Therefore, an increase in prices will likely result in a change in rent in 1 to 5 years. As a general rule, where prices go, rents will follow.

What is the 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

There is little undeveloped private land remaining in the Las Vegas Valley. Any available 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 that appeal to our target tenant segment are priced between $320,000 and $475,000. Therefore, no matter how many new homes are built, our target housing segment remains almost constant. This differs from metropolitan areas with unlimited expansion potential, where the construction of new homes limits the growth of rent and home prices of existing properties.

Demand

Population growth is the driving force for appreciation and rent growth. What is the population growth situation in Las Vegas? The average annual population growth in Las Vegas ranges between 2% and 3%. And, this is likely to increase. According to CNBC, Las Vegas is the #1 move destination in the US. According to a Penske Truck study, Las Vegas is the #2 move destination in the US. Every person that moves to Las Vegas will either rent or buy a place to live.

What is drawing so many people to move to Las Vegas? Jobs.

At the last job fair there were over 20,000 open positions. Nevada is also #1 in the US for job growth, (Source: Bureau of Labor Statistics. Note: Growth for the trailing 12-months ending January 2023.) According to a study by the Rose Institute of State and Local Government, Las Vegas is also the #1 destination for companies leaving California. When you add Henderson, the total is 3,603 companies moving to the Las Vegas Valley.

And, the number of jobs will continue to increase. Today, there are over $30B in major projects either under construction or planned. As these projects come online, they will create even more jobs attracting more people to move to Las Vegas, further increasing demand.

Moreover, the number of jobs is expected to continue increasing. According to a report by Applied Analysis, there is currently over $30 billion worth of major projects either under construction or planned in Las Vegas. As these projects come online, they are expected to create even more jobs, attracting more people to move to the city and further increasing demand.

What Does All This Mean?

To replace your current income, you will need to acquire multiple properties. Purchasing these properties in Las Vegas requires less total capital to achieve financial independence than buying in a low-cost location. I will explain using two example locations. For the purpose of this example, I assume that you need 20 properties to replace your current income and that you will put a 25% down payment for each property. For simplicity, I will only consider the cost of the down payment and ignore all other costs.

• Low-price location - Where prices are low, there has been little demand for housing for many years. The result is that prices failed to keep pace with inflation. Rents follow prices, so there has been little increase in rent. So I have some numbers to work with, I will assume each property costs $200,000. Because there is limited appreciation in low-cost locations, all the down payments must come from your savings. So, the total capital from savings required for down payments is 20 x $200,000 x 25% = $1,000,000.
• Higher price location - Suppose you purchased in a high appreciation location and each property costs $400,000. In a high-appreciation location, you will do a cash-out refinance when there is sufficient equity to pay the down payment on the next property. In this case, the total capital required from your savings to purchase 20 properties will be $400,000 x 25% = $100,000. To purchase additional properties, you can use cash-out refinance (BRRRR) from the equity of previous properties for the down payments. This is how many of our clients grew their portfolios. Many people would be unable to purchase all of the properties they have without using a cash-out refinance. Below is an illustration of how our clients grew their portfolios using cash-out refinancing.

Because of the high appreciation rate in Las Vegas, you can grow your portfolio through cash-out refinance instead of relying solely on your savings.

Summary

Las Vegas has unique features that enable you to achieve permanent financial independence with the least capital.

Hello Mohan,

You are wise to focus on the investment location. The location determines all the long-term income characteristics including:

• Whether rents will keep pace with inflation
• How long your income stream will last
• How reliable your income stream will be
• How much of your rental income is lost to overhead
• Whether you or the government control your property.

You want to invest in the city which is best for long-term investment. Fortunately, there is a straightforward process for selecting a city that provides the best combination of characteristics to provide a reliable passive income.

You don’t have infinite time to explore every possible location so below is the process I followed to select the city where I set up my investor services business.

I started with metro areas with A population greater than 1M**.** Small towns may rely too much on a single business or market segment. Wikipedia

I then eliminated any city that failed any of the following metrics.

• Both state and metro populations are increasing. Do not buy anywhere if the state or metro populations are static or decreasing. Wikipedia

• Low crime - High crime and long-term appreciation and rent growth are mutually exclusive. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.

• Low operating cost - High operating costs can turn what appears to be a profitable property into a money pit. The three most apparent costs are income taxes, property taxes, and insurance. Insurance - ValuePenguin, Metro Property Taxes - LendingTree, State Property Tax Rates - Rocket Mortgage

  Below is an overhead cost comparison between California, Texas, Florida, and Nevada..

  

  To put the above costs into perspective, below is the annual overhead cost for a $400,000 investment. To keep things simple, I will ignore California's state income tax.

  

  These numbers do not include all operating costs. For example, rent control in California may prevent you from increasing rent rapidly enough to keep pace with inflation. So, while rent control is not a direct cost, rent control can cost you a lot of money. So, you have to look beyond just the numbers, but the numbers are a good indicator of overhead costs. For example, a property in Florida will have to generate a $2,223 higher cash flow per year to have the same cash flow as a property in Nevada due to the higher overhead cost.

• Low disaster risk - Natural disasters, such as tornadoes, can destroy entire communities, including jobs, shopping, and housing. If a tenant loses their home, they will immediately move to a new location with jobs and a place to live, instead of waiting one year or more for the property to be rebuilt. Even if your insurance covers the cost of rebuilding, it may be difficult to find new tenants because people have already moved away. Communities hit by natural disasters may take years or never fully recover. Meanwhile, your expenses, such as mortgage, taxes, insurance, and maintenance, will continue. To avoid this, choose a location with low-cost homeowners' insurance, which indicates a lower risk of natural disasters. Insurance - ValuePenguin

• 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 location with rent control.

• Inflation compensating - Every time you go to the store, the same basket of goods costs more and more dollars. In order to have the additional dollars needed to pay inflated prices, rents must rise faster than inflation. Therefore, a critical location selection metric is that rents and prices are rising faster than inflation. Rents tend to lag behind prices, so you can use the appreciation rate if you do not have historical rental data. Zillow Research

Once you apply all the elimination filters to the initial list of cities, you will have only a few remaining for additional consideration.

Another important consideration when selecting a city is whether you can find an experienced investment team in the area that interests you. While podcasts, books, seminars, and websites provide general information, only an experienced local investment team can offer the necessary local resources, processes, and expertise to help you make a sound investment decision.

If you want a process for finding and qualifying a local investment team, let me know.

There is a straightforward process for determining what type of property to buy. You should elect the property based on financial objectives, rather than an opinion from someone who may be on the other side of the country. Always beware of blanket advice, as one size does not fit all in real estate.

The goal of real estate investing is a reliable income that you will not outlive. 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. However, there is typically a single segment with the highest percentage of reliable tenants, which can be identified through property manager interviews. Once this segment is identified, determine where they currently rent and what they rent. Then, purchase similar properties.

This method can be applied in any location. Essentially, you should identify the tenant segment that is most likely to provide reliable income and buy the type of property that they are willing and able to rent. By letting the segment decide the property type and other factors, you can maximize your cash flow and income reliability. Moreover, by doing so, you eliminate opinions and luck from your investment decisions.

Excellent comments on this thread. I decided to add my 2¢’s.

Return Calculation Limitations

Return calculations only predict how a property is likely to perform on day one under ideal conditions. Return calculations tell you nothing about the future. Because you will hold a property for many years, what happens after the first day is far more important than what happens on day one.

Financial Independence

In order to have financial independence you need a income replacement equal to your current income that also meets three requirements:

• Inflation compensating: Rental income keeps pace with inflation, enabling you to pay inflated prices to maintain your standard of living.
• Persistent income: Your income will last so you will not run out of money.
• Reliable income: Your income continues even in difficult economic times.

Unless rents keep pace with inflation, your time off the daily worker treadmill will be short. This is because inflation will continue to increase prices, and you will not have the additional dollars you need. Regardless of how many “Property A’s” you own, your buying power will decrease each month, and you will be forced back onto the treadmill of daily work.

Rent Follows Prices

Property prices are driven by supply and demand.

• If there are more sellers than buyers, prices will fall.
• If there are more buyers than sellers, prices will rise.

Rental rates are driven by property prices.

• If prices rise, fewer people can afford to buy and will be forced to rent. Demand for rental properties increases as will rents.
• If prices fall, more people will be able to buy so fewer people will rent. Demand for rental properties decreases as will rents.

In short, where prices go, rents follow. However, rents typically take 2 to 5 years to catch up with changes in property prices. This lag is primarily due to leases, which are usually for one year or longer.

What Drives Demand?

Population change is what drives housing demand.

In cities where the population is increasing, the demand for housing exceeds the current supply. This causes prices to rise until a balance is reached between the number of sellers and the number of people who can afford to buy.

In cities where the population is static or declining, there are more sellers than buyers. This results in a decrease or stagnation of property prices. This trend continues until there is a balance between sellers and buyers. Low property prices are the result of years of low demand for housing. In other words, housing prices have not kept pace with inflation, resulting in lower property prices when compared to cities with increasing populations. Rents follow property prices, so if prices have not kept pace with inflation, neither will rents. If you buy in such a location, rent increases will not keep pace with inflation, and your buying power will continue to decline over time. No matter how many low-cost properties you own, your days of financial freedom are limited by how long you can continuously decrease your living costs.

If you purchase property in a city with higher demand, prices will be higher, but rent increases are likely to keep pace with inflation. If they do, you will achieve permanent financial freedom.

Your financial independence is tied to the city's ability to quickly grow its economy, create jobs, and increase its population. Do you want to risk your financial independence by betting that cities like Detroit, Cleveland, and many others with declining populations will somehow turn around and become economic powerhouses?

Do You Make the Most Money With Cash Flow or Appreciation?

An example will explain far better than text.

Suppose you have two properties. Property A has a 7% appreciation rate with no cash flow. Property B has a 7% cash flow but no appreciation. To keep the example simple, I ignored all other variables except for personal income taxes, which I assumed to be 30%.

Why Low-Cost Properties Are the Most Expensive

To replace your current income, you will likely need to acquire multiple properties. The total amount of capital required to acquire multiple properties depends on the city's appreciation rate. In the following examples, I will assume you need 20 properties to replace your current income. I will also assume the downpayment is 25% of the purchase price.

In a low-priced location, I will assume each property costs $200,000. To keep things simple, I will only consider the capital needed for down payments and ignore all the other costs like renovation, closing costs, etc., and no inflation.

Total capital from savings required for 20 down payments: 20 x $200,000 x 25% = $1,000,000 in after-tax dollars. The fact that all capital will come from after-tax dollars means that if your marginal tax rate is 35%, you will need to earn (gross) 1,428,571 to have $1,000,000 after taxes. $1.4M will take a lot of years to accumulate. And, if there is inflation you will need a lot more capital.

Higher price location - Suppose you purchased in a high appreciation market and each property costs $400,000. In a high-appreciation location, you use cash-out refinance when there is sufficient equity for the down payment on the next property. In this case, the total capital required for down payments will be:

First property capital requirement: $400,000 x 25% = $100,000

Each additional property is purchased with accumulated equity from the previous properties. This is how many of our clients grew their portfolios. The process is illustrated below.

In summary, if you buy in low-cost locations, every investment dollar must come from your after-tax savings. If you buy in a high-appreciation location, even though prices are higher, you will need significantly less capital because the majority of the capital required can be obtained from cash-out refinance.

Summary

Low-cost locations may seem alluring initially, but it's important to look beyond the first-day returns and consider the long-term performance of the property over the next 20 to 40 years.

Hello @Allen Berrebbi,

The cap rate is only useful for comparing properties. It does not indicate what your ROI and cash flow will be, because it does not include debt service. That is why I find ROI and cash flow more useful. In this document, I will share the formulas we use for ROI and cash flow and how we are dealing with the high-interest rates. But first, I want to highlight the limitations of return calculations.

Return Calculation Limitations

Return calculations only predict how a property is likely to perform on the first day under ideal conditions. They do not provide any information about its future performance. Since most people hold their properties for many years, it is more important to consider how the property will likely perform in the long term rather than on the first day, month, or even year. Real estate is a long-term investment, so taking a long-term view is crucial.

For example, suppose there are two properties that have the same initial return. One has a rent growth rate of 2% annually and the other has a 6% annual growth rate. Assuming an inflation rate of 4%, suppose you buy the same set of groceries every week that currently costs $100. The table below shows what you can buy for the next 20 years. With Property A, the amount of groceries declines each year. With Property B, rents rise faster than inflation so you can buy more groceries each year. So, no matter how many “Property A”s you own, your time off the daily worker treadmill will be short because the rents are not keeping pace with inflation.

How can you choose between Property A and Property B, only considering ROI and cash flow? The answer is that you cannot. You need to take a long-term view of the economic future of the city.

The Formulas We Use

When calculating return, we include all known recurring costs. We do not include any unrealized gains, such as principal paydown or appreciation. Put simply, if it does not appear in the bank account it does not exist.

Also, calculated ROI and cash flow are not what you will actually experience. Your actual cash flow and ROI are heavily influenced by your tax situation. For example, depreciation typically will increase the effective return by 3% to 6%. However, in some situations, the benefit from depreciation may be much less.

The formulas we use for cash flow and ROI.

• Cash Flow = (Rent - DebtService - ManagementFee - Insurance - RealEstateTax - PeriodicFees - MaintenanceCost - VacancyCost) x (1 - StateIncomeTax)
• ROI = (Rent - DebtService - ManagementFee - Insurance - RealEstateTax - PeriodicFees - MaintenanceCost - VacancyCost) x (1 - StateIncomeTax) / ( DownPayment + ClosingCosts + RenovationCosts)

Or,

• ROI = CashFow / ( DownPayment + ClosingCosts)

We leave out what we do not know. For example, when we first consider a property, we have little knowledge of the property. This means we have no basis for estimating maintenance cost, vacancy cost, or renovation cost. So, the formulas simplify to:

• Cash Flow = (Rent - DebtService - ManagementFee - Insurance - RealEstateTax - PeriodicFees) x (1 - StateIncomeTax)
• ROI = (Rent - DebtService - ManagementFee - Insurance - RealEstateTax - PeriodicFees) x (1 - StateIncomeTax) / ( DownPayment + ClosingCosts)

We perform a multi-step validation process for each property, adding more cost elements as we gather more information about the property.

Comments:

• We do not include depreciation because the amount people actually benefit from tax deductions depends on their unique tax situation.
• We do not include unrealized gains, such as principal paydown or appreciation, as they are only recognized when the property is sold. For most people, the goal is to generate a passive income stream that will last the rest of their lives, so they will hold the property for many years. As for myself, I have no intention of ever selling my properties.
• We do not include what we do not know, specifically renovation, maintenance, and vacancy costs. Once we know more about the property, we add an estimate of the renovation cost.

How We Are Dealing With High-Interest Rates

The purchase process has changed. In the past, clients obtained pre-approval, which we submitted with offers. Once an offer is accepted, we proceed to close using the same lender. The process is illustrated below.

With interest rates over 7%, this no longer works. Now, once we get a property under contract, we obtain interest-rate buy-downs from multiple lenders, as illustrated below.

We compile the best interest rate buy-down options on a spreadsheet and present them to the client during a Zoom meeting. Together, we select the best option and move the loan to that lender. Below is the most recent buy-down comparison sheet. As you can see, the rates are all over the place. The name at the top is the lender.

Comments:

• Shopping for the best interest rate buy-down rate after the property is under contract has been effective. Through a combination of buy-down and in some cases, increased down payment, we are getting neutral or positive cash flows. This method is reasonable because Las Vegas has a unique situation (land shortage plus population growth: source, [source](https://www.macrotrends.net/cities/23043/las-vegas/population#:~:text=The current metro area population,a 2.7%25 increase from 2020.), source) so rents and prices are almost guaranteed to increase significantly over time.
• The downside of this approach is that we cannot accurately estimate ROI and cash flow until we get the property under contract, since we do not know the interest rate.

Allen, this was a lengthy response, but I hope it answers your question.

Hello @Geoff Anfuso

Spot on about cash flow, Geoff. Getting initial positive cash flow is difficult. We’ve had to change our process.

In the past, clients would obtain pre-approval, which we submitted with offers. Once an offer was accepted, we would proceed to close using the same lender. This process is illustrated below.

With interest rates now over 7%, our previous process no longer works. Therefore, we have changed our approach. After getting a property under contract, we get interest-rate buy-downs from multiple lenders, as shown below.

We then compile the best interest rate buy-down options on a spreadsheet and present them to our client during a Zoom meeting. Together, we select the best option and move the loan to that lender. Below is an example of what we work through with clients.

[The name at the top of each column is the name of the lender who provided the buy-down quote.]

Some considerations

• The buy-down rates change frequently so we do not know the actual interest rate until property under contract.
• We always consider the buy-down payback period. For the column in green, the payback period is 22 months or just under 2 years. This is geat If the payback period were over 5 years and you believe interest rates will fall in four years, then it would not be as good an investment.
• Friction - We’ve delivered close to 500 investment properties and we’ve worked on our processes for many years to remove friction points our client’s experience. Switching lenders after we get a propertyunder contract is an unwanted additional step. However, the results are well worth it.

It is important to note that return calculations only predict how a property will perform on day one under ideal conditions. How the property performs during the first year is not very relevant if you plan to hold it for 30 years or more. Therefore, it is necessary to keep the long-video in mind.

Geoff, pingback if I did answer your questions.

…Eric

Hello @Carl Trube

Thanks for the kind words.

Regarding your questions concerning an investment team. In this post, I will explain:

• Why you need to work with an investment team
• Residential vs investment realtor
• How do you find an investment realtor

Why You Need to Work With an Investment Team

Everything you learn from books, seminars, podcasts, and websites is general information. You will buy a specific property in a specific location subject to local rules and regulations. The only source of the hyperlocal knowledge you need is a local investment team. Plus, a local investment team has years of investment real estate experience dealing with everything you need to find, validate, close, renovate, and manage investment properties. A local investment team is your shortest, safest, and least expensive path to real estate success. Working with an experienced investment team is also the only way to learn real-world investing. Lastly, working with a team doesn't cost you any more than working with any other realtor.

Residential vs Investment Realtor

How do you find a good team? Begin by finding an investment realtor. Note that an investment realtor is not the same as an "investor-friendly" realtor.

Residential or "investor-friendly" realtors facilitate the buying and selling of homes. Homebuyers select properties, and the realtor provides MLS data sheets and access to the property. Once a property is chosen, the realtor helps with the offer and closing process. While some residential realtors may sell real estate that will become rental properties, they typically provide little beyond MLS data sheets and property access. MLS data sheets provide little value for investors.

Below is a table comparing an MLS data sheet with the information an investor needs to find an income-producing asset.

Instead of selling homes, investment realtors sell income-producing assets. Also, investment realtors are always part of a team. Only a team of experts can provide the end-to-end processes, skills, and knowledge necessary to bring a property to market. See below for a diagram of the process we follow.

While the process illustrated above is our process, all investment teams will have a similar process.

In summary, residential and "investor-friendly" realtors sell homes. Investment realtors sell passive income assets. As an investor, you will buy an income-producing asset.

How Do You Find an Investment Realtor

There are usually thousands of residential realtors in a metro area, but only one or two investment realtors. How do you find one? Start by compiling a list of candidates. Get names from

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

After creating a pool of candidates, evaluate each one using the following interview questions. The primary purpose of these questions is to determine the individual's character and capabilities.

Before starting the candidate interviews, create a list of 10 or fewer questions. You will not have time for more. Ask the same questions of each candidate and note their responses. Below are sample questions, along with acceptable answers. It is unlikely to find a candidate with the "right" answer to every question, but they must provide reasonable responses.

• 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 they have not personally owned investment properties, reject the candidate.
• How many investment properties did you close in the last 12 months? - Some realtors only sell two or three properties per year. Even if all were investment properties, it's not enough repetition to have the needed processes, experience, and resources. I believe a minimum of 12 investment properties per year is necessary to be proficient.
• Did you or your client select the properties? This is an important question. Residential and investment-friendly realtors do not pick properties. They send MLS data sheets for the properties the client selected. The client evaluates the properties and selects one or more to make an offer. The realtor adds almost no value if you do all the work. Reject the candidate if the client selected 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? - A good response to the question "How do you evaluate investment properties?" would be to describe a process, such as "I examine recently rented comparable rentals." Another viable answer is that the individual works with a property manager who supplies this information. However, if the person's response involves citing websites such as Zillow, Redfin, or Rentometer, they do not know how to evaluate investment properties. Such online real estate sites do not provide reliable estimates of rent or the time it takes to rent a property, which is critical information when seeking investment properties.
• Tell me about your renovation process. - You are seeking a response similar to: "I collaborate with the property manager to identify a list of renovation items. Then, I partnered with XXX company to obtain a quote. After the escrow closes, the renovation company completes the work, and the property manager provides final approval.”

If the candidate answered all questions satisfactorily, you can reasonably assume they know what they are doing and can provide the skills and resources you need.

Summary

An investment team possesses knowledge, processes, resources, and experience that cannot be replicated no matter how many podcasts you listen to.

Another important consideration is that if you have a local investment team, the location of your investment doesn't matter. Whether you invest locally or across the country, your investment team will handle all the legwork. In our case, out of the more than 180 clients we've worked with, only 8 to 10 were local. All other clients lived in other states or countries. With a repeat business rate of over 90%, we know remote investing works.

Live where you like but invest where you can make money.

Hello @Lucas Anderson

You listed some potential locations Omaha, Columbus, Milwaukee, and Cleveland. I recommend starting with your financial objective and selecting a location that supports your financial goals.

Purchase Price vs. Long-Term Rent Growth

There is always a trade-off between the purchase price and the long-term performance of a property. Real estate prices and rents are a function of supply and demand. Where there is little demand, prices will be low. However, unless there is high demand, rents will not increase. If your rents do not keep pace with inflation, sooner or later, you will find yourself back on the daily worker treadmill.

Population Growth

The primary driver of demand is population growth. Below is a table showing population growth for the cities you listed.

Static or declining populations is why prices are low and there will be little increase in prices or rents.

Crime

Another factor is crime. People who can afford to leave a high crime location, will. As higher-income individuals leave, city revenues fall, and they are forced to cut back on services. The result is increasing crime and more people fleeing the city. This is a financial death spiral from which few cities have ever recovered. So, how are the cities doing on crime? The following information is from Neighborhood Scout’s list of the 100 most dangerous US cities.

Omaha and Columbus are not on the list, which is good. Milwaukee and Cleveland are high on the list, therefore they are not good investment locations.

Income Persistence

Your ability to remain financially independent is tied to the long-term economic growth of the location where your investments are located. Take a hard look at any location you are considering and decide whether over the next 20 years the population will double or triple in size causing prices and rents to increase rapidly.

Summary

Real estate is a long-term investment. Carefully consider the economic future of the investment location. Your ability to avoid the daily grind of working for a living depends on the long-term economic growth of your investment location.

Hello @Amy Healy

Many of our clients used cash-out refinance in the past for the down payment on their next investment property. A few used HELOCs on their residences too.

What makes cash-out refi's and HELOCs difficult now are the high-interest rates.

You mentioned the possibility of selling your property and buying another property through a 1031 exchange. Here's is when I would choose a 1031 or a cash-out refi::

• 1031 Exchange - You no longer wish to own the property and you believe that a replacement property will bring you more benefits.
• Cash Out Refinance - The property is currently performing well and is expected to continue to do so in the future. If you want to keep the property but reinvest the accumulated equity, that could be a wise choice.

Ultimately, the decision to use a 1031 exchange or refinance and take out equity depends on your individual circumstances and investment goals.

1031 Exchange 45-Day Identification Period Consideration

The identification period for the replacement property is 45 days. Many people believe that they only need to identify (up to) three properties. However, this is a high-risk approach. For example, what happens if you identify a property and then cannot close on it due to inspection issues or other related problems? In such cases, you would lose your tax exemption.

To avoid risks, we coordinate the purchase of the replacement property with the sale of the relinquished property. Our goal is to close on the replacement property within two weeks of the exchange property's closing. This approach allows us to have time to get another property under contract if we run into a problem and cannot complete the purchase, while still staying within the 45-day identification period.

Financing Considerations

The days of finding a lender, and closing with that lender, are pretty much over. The process we are now following is illustrated below.

Immediately after we get a property under contract, We reach out to multiple lenders and request their interest rates and buy-down options. We then select the best option and close with that lender. Using this approach enables our clients to get a positive cash flow. Interest rate buy-downs are available for refinances and HELOCs.

Below is an example showing the benefit of the right interest rate buy down.

The challenge is that we cannot choose the final lender upfront because buy-down options vary almost daily. Therefore, we cannot explore buy-down options until we have the property under contract.

So, as soon as we have a property under contract, we reach out to multiple lenders. We then consolidate the many options and select the best five or ten options and put them on a spreadsheet. I then have a Zoom meeting with the client to go through the various option.

Amy, I apologize for not providing a simple answer. Unfortunately, there is no straightforward answer to your question. Here are some questions that I would consider:

• Is the current investment property performing well? Will it likely perform better in the future? Most importantly, will the rent keep pace with inflation?
• If you did a cash-out refinance using an interest-rate buy-down, what will be the cash flow situation with the current property?
• If you do not believe that rents will keep pace with inflation, then a 1031 exchange may make sense.
• If you choose to do a 1031 exchange, be aware that you cannot use the proceeds for renovating the replacement property. Some clients have chosen to pay taxes on a portion of the 1031 proceeds so that they can use it for renovation costs.
• Work with someone who has a lot of experience dealing with 1031 exchanges. Is easy to trip up and lose your tax deferment.

Amy, I hope this helped.

 Hello @Matt M.

You asked for observations from the field. To provide context for my response, we are engineers who operate a real estate investor services business in Las Vegas. We have been in business for over 15 years, and our services are based on data science and rigorous processes, and a team of experts.

We've targeted a narrow segment of tenants that has performed extremely well. This tenant segment defined the properties we target. So far, we have delivered over 480 properties.

A general description of the properties and locations we select for our clients is below.

• Single-family
• 3+ bedrooms
• 2+ car garage
• One or two stories
• 1200 to 2000 square feet
• Generally cost between $320,000 and $475,000 today

As to locations, see the map below showing where most of our client’s properties are located.

Below are statistics for the specific property segment we target.

Sales - Median $/SF by Month

Despite the high-interest rates, $/SF is steady. Prices are rebounding and have increased by 10% since January.

Sales - List to Contract Days by Month

Demand is still strong and the times properties are on the market are declining. 45 days is average under normal conditions. Today, it is about 12 days.

Sales - Closings by Month

The number of closings is still high, despite limited inventory.

Sales - Months of Supply

In my 15 years of experience in real estate in Las Vegas, I have never seen inventory levels this low. A balanced market is typically defined as having six months of inventory. However, for the property segment that we focus on, we are down to only about 0.75 months of inventory!

Rentals - Median $/SF by Month

Rental rates are back up to the peak rates of 2022.

Rentals - Months of Supply

The supply of rental properties continues to decline. The result will be rents continuing to increase.

Interest Rates

Changing our processes to achieve first-year positive cash flow has led to a new approach. Previously, you would select a lender and then close with that lender, as shown in the example below.

Once we have a property under contract, we contact multiple lenders and choose the one with the best buy-down rates. See the image below for reference.

This process has enabled us to achieve first-year positive cash flow.

Summary

• There are good deals available in Las Vegas, but they would be almost impossible to find by hand. We find them using the data mining software we developed. Today, there are 15 properties in Las Vegas that are worthy of consideration. And, because good properties only list on the market for a few days, time is of the essence.
• The traditional financing method no longer works. We had to change to a method where as soon as we get a property under contract, we look for the lender with the best buy-down rates.
• Based on what I am seeing, I believe that as soon as there is any decrease in interest rate, housing prices and rents will increase dramatically.

Matt, I hope this helps.

Hello @Hanaa Abou Ouf,

I will provide my opinion on your property later in this post. But before I do, I want to explain why this particular property is likely to always have serious tenant issues, regardless of the property manager you work with. To explain the problem, I need to first describe the relationship between a property and a specific segment of tenants.

Each Property Only Attracts a Single Tenant Segment

Each tenant segment has specific housing requirements and is unlikely to consider any property that does not meet all of its needs. Below is an example of one segment's housing requirements:

• Rent range: $1,500/Mo. to $1,850/Mo.
• Type: Single-family
• Configuration: 3+ bedrooms, 2+ baths, 2+ car garage, 1,200 SF to 2,100 SF
• Location: North of the river and east of Line Rd.

Below is a profile of a property that will attract people with the previous segment's housing requirement.

• Rent: $1,700/Mo.
• Type: Single-family
• Configuration: 3 bedrooms, 2 baths, 2 car garage, 1,500 SF
• Location: North of the river and east of Line Rd.

Each property only matches the housing requirements of a single-tenant segment. And, there is little you can do to change this. So, when you buy a property you are also getting a single tenant segment. This is why choosing the property first is almost always a bad idea. More on this later.

Las Vegas Tenant Segments

In 2005, when I moved to Las Vegas to establish my investor services business, I spent months studying tenant pool demographics. As an engineer, I conducted extensive analysis. The chart below provided me with the most valuable insight into the three tenant segments.

Almost all the multi-family in Las Vegas are, at best, C-Class. C Class and Many -B Class only attract lower-wage hourly workers and have an average tenant stay of one year. This equates to high vacancy costs.

Vacancy cost is a function of

• Length of tenant stay <<<This is the killer of profits
• Time to rent
• Monthly carrying costs
• The skill of the property manager to select good tenants (a rare skill)
• Construction materials used
• In between tenant renovation cost

Below is a chart including the estimated annual vacancy provision for the three major tenant segments in Las Vegas.

There is another significant issue with the tenant segments who occupy low-cost housing. Typically, low-income workers have easily replaceable skills and are the first to be laid off during times of economic uncertainty. They are also the last to be rehired. Therefore, if your property targets low-income workers, there is a high probability that your property will have extended vacancies during economic downturns.

I could continue but I think you can see where this is going.

Selecting a Property the Right Way

The only way you will have a reliable income is if your property is 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. Also, you will hold a property for many years and during that time you will need multiple reliable tenants.

Getting and keeping a reliable tenant in your property is dependent on two things.

• A property that matches the housing requirements of a tenant segment with a high concentration of reliable tenants. You can determine this segment through multiple property manager interviews. Let me know if you would like more details on this topic.
• Working with a property manager who is skilled at selecting reliable tenets. I've been in the investment real estate business in Las Vegas for over 15 years. I’ve worked with many property managers. Of all the property managers I've worked with, I only know two who are skilled at selecting reliable tenants. One of the two is the property manager we work with.

So the process of selecting an investment property is to first identify a tenant segment with a high concentration of reliable tenants. Once you identify this segment, determine where and what they currently rent. Then, buy similar properties. It is really that easy.

This process works in any location and requires no guessing or luck. In one location, the tenant segment with a high concentration might be attracted to single-family homes, while in another location it might be multi-family properties or high-rise condos. The type of property doesn't matter; what matters is rental income reliability.

The Difference the Tenant Segment Makes

To illustrate the difference a tenant segment makes, below are the 15+ year performance characteristics for the tenant segment we target.

• We have delivered more than 480 investment properties, each targeting the same tenant segment. As a result, we have a lot of experience and knowledge of this particular segment.
• Our average tenant stays over five years.
• We've had six evictions in the last 15 years (over 1,000 tenants).

How does this segment perform in terms of income reliability?

• 2008 crash - Zero decline in rent and zero vacancies.
• COVID - Almost no impact
• Eviction moratorium - Almost no impact

My Recommendation for Your Situation

There is frequently a large gap between what you should do and what you can do. I do not know your financial situation so your options may be limited.

My recommendation, if you are financially able, sell this property and buy a property that attracts a reliable tenant segment. Whether you should sell or do a 1031 depends on your equity position.

Hanaa, reach out if you have questions.