All Forum Posts by: Eric Fernwood

Hello @Saad Hameed,

Instead of choosing a state based on opinions, I suggest selecting a city based on your financial objectives.

To permanently escape the daily grind of working for a living, you'll need a passive income that meets three requirements:

• Inflation compensation: Rental income increases at a faster rate than inflation, compensating for rising prices.
• Persistent income: Your income will last, ensuring that you and your spouse won't outlive it.
• Reliable income: Your income continues even during difficult economic times.

Inflation compensation and income persistence depend on the city, while income reliability is based on both the location and the tenant segment. This post will focus solely on selecting an investment city.

A Straightforward Process

There is a straightforward process for selecting an investment city that meets all three requirements. The city selection process consists of starting with an initial list of cities and then eliminating cities that do not meet additional criteria. To begin, I recommend considering metro areas with a population greater than 1 million (source). Small towns may rely too heavily on a single business or market segment.

The following filters are mandatory for every city. If a city fails any of these filters, it must be eliminated from further consideration.

• 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.
• Inflation compensating - Every time you go to the store, the same basket of goods costs more and more. To have the additional dollars needed to pay inflated prices, rents must rise faster than inflation. If you choose a city where rents have not kept pace with inflation, your time off the treadmill will be short. Rents follow prices, so you can use the historical appreciation rate if you do not have historical rental data. Zillow Research
• 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
• 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.

Following the above process will result in a shortlist of cities.

One of the most important factors to consider when choosing between cities is the availability of a strong local investment team. No matter how much information you consume from podcasts, books, or seminars, you cannot replicate the years of experience that a team with hundreds of completed investment transactions can offer.

Hello @Jonathan Winkler,

I recommend the following:

1. Loan pre-approval - It's important to determine what you can afford before you begin the investing process.

2. Location - Live wherever you like, but invest where you can make money. The location is the most important investment decision because the city determines all 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

   If anyone would like a free guide on selecting an investment location, DM me.

3. Investment team - Find an experienced investment team in your chosen city. The information you learn in seminars, books, podcasts, and websites is general information. However, when it comes to real estate investment, you are not buying a generic property in a general location. You will be purchasing a specific property in a specific location that is subject to specific local rental regulations. You need detailed, local information and the only source for such information is a local investment team with years of experience working with investors. Also, you can not replicate years of experience by a team of experts. Furthermore, working with an investment team does not cost more than working with any other realtor.

4. Property selection - An investment property is no better than the tenant who occupies it. To permanently escape the daily grind, your property must be continuously occupied by reliable tenants. A reliable tenant is someone who stays for many years, always pays rent on time, and takes good care of the property. Reliable tenants are the exception, not the norm. To increase your chances of always having a reliable tenant, work with your investment team to select a tenant segment with a high concentration of reliable tenants. Once you've identified this segment, find out where and what they are currently renting, and buy similar properties. Following this process eliminates guesswork and opinions. We've successfully applied this approach to over 480 investment properties, and our results have been excellent.

5. Property evaluation - When evaluating a property, consider all recurring costs, but only include those that are known. For example, we know that the average annual maintenance cost for our properties is about $350, and we have an average tenant stay of over five years, so we know the annual vacancy cost is about $400. However, averages do not accurately represent the costs of individual properties. Therefore, we have not included depreciation or other tax savings, which are larger than the combined maintenance and vacancy costs. If anyone would like a free guide on how we calculate returns, DM me. Also, work with your investment team to estimate both renovation costs and renovation risk. Both should be factored into your property evaluation.

6. Get a property under contract - As soon as we get a property under contract, we solicit buy-down interest rates from multiple lenders. We then work with the client to select the best option for them. Without using interest rate buy-down, I don't believe any property will initially have a cash flow with a 7% or 8% interest rate. If anyone would like a free guide on increasing initial returns, DM me.

7. Decide on the best form of ownership for your situation. Of the 180+ clients we have worked with, some put their properties in an LLC, while others set up an umbrella policy. A large percentage did not take any additional action. This is a relatively safe option in Las Vegas because there is not a lot of frivolous litigation, unlike in other states. Additionally, you can greatly reduce your litigation risk by doing the right things during renovation. Note: I am not aware of any lenders who will finance a property with the LLC as the owner. Our clients typically close the loan in their name and then transfer ownership to the LLC afterward. Additionally, in Nevada, the state has a do-it-yourself site for setting up an LLC. To my knowledge, none of our clients used an attorney to set up an LLC. You need to evaluate the litigation situation and options in the city where you plan to invest.

8. Tax strategist - Investing in real estate has a significant advantage in terms of tax savings. However, simply using TurboTax on April 14th will not maximize your tax savings. Moreover, most CPAs can only input numbers into forms. To take full advantage of all the savings that real estate investing offers, you need to work with someone who knows how to structure your taxes.

Hope this helps.

✴️✴️✴️ This time the entire post! Sorry about that. ✴️✴️✴️

Hello @Meir Preis,

[Good comments @Arn Cenedella]

There are properties that generate cash flow, but it's unlikely to find them at a +7% interest rate with 25% down payment. In this post, I will explain how we provide cash flowing properties to our clients. Before I discuss the details, let's talk about cash flow.

Real Estate Investing is a Long Term Investment

Return calculations only predict how a property is likely to perform under ideal conditions on day one. They provide no insight into the future. Our clients plan to hold their properties for the rest of their lives and pass them on to their children. Therefore, short-term performance is less important than long-term performance. In the long run, everything hinges on rents keeping pace with inflation. If rents fail to keep up with inflation, your escape from the daily grind will be short-lived.

For example, suppose every week you buy the same basket of groceries and today’s cost is $100. If inflation averages 5%, below is a table showing how much less groceries you can afford in the future.

In 10 years, $100 will only buy 63% of what you can purchase today for $100. After 15 years, $100 will only buy 49% of what it can today. Only if rents keep pace with inflation will you have the additional dollars to pay inflated prices. It is important to have a long-term focus; do not evaluate properties based only on day one return.

All the above said, how are we consistently delivering multiple positive cash flow properties each month to clients? It is a combination of the property and the financing.

The Right Property

High-performing properties that will cash flow (with reasonable down payments and interest rate buy-downs) are available, but they are difficult to find. In Las Vegas, less than 0.4% of all available properties are even worth considering. What makes it even more difficult is that good properties go under contract in about 2 days. This means that we must evaluate thousands of properties to find a very small set of potential investment properties and make an offer within one or two days after the property comes on the market.

The only way we can do this is:

• We use data mining software to quickly find the 10 to 20 potential investment properties from the thousands available in just a few minutes.
• We have a team of people who evaluate each property. If any team member does not agree, the property is eliminated.

Using the above method, we can bid on properties within one day of coming on the market. This allows us to secure three to five high-quality properties for our clients each month.

The Right Financing

The way we do financing has changed. Below is a diagram showing how financing worked in the past. You got a pre-approval and closed with that loan.

Today, we still get a pre-approval because this is needed to make an offer. Where it changed is once we get a property under contact, we solicit buy-down rates from multiple lenders. We then move the loan to the lender with the best deal for the specific client. Below is an example of one interest rate buy-down option.

If you look at the acquisition cost line, you'll notice that by spending $4,046, you can lower the rate to 6.75%, which will increase the cash flow by $120 per month. The payback period for the buy-down is ($4,046/$120) = 34 months or 2.8 years. In my view, this is a viable option.

Another consideration is how long before interest rates fall. I have asked many clients and most guesses range between, “the next presidential election,” and three years from now. No one knows when rates will actually fall. But when they might fall makes difference on what buy-down makes sense.

For example, if you believe interest rates will fall to reasonable levels within five years, choosing an interest rate buy-down with a 15 year payback period makes no sense.

Summary

The days of easily buying positive cash flow properties with 20% or 25% down ended at about 4 1/2% interest rate. Today, it takes a combination of the right property, the right financing to have a positive cash flow. This can be confusing which is why we put together a multi column spreadsheet for each client so they can understand the various options.

Hello @Tim Alhanati,

Renting to a relative is not something to be taken lightly. Below are some considerations and recommendations.

• Only rent to a relative if that individual has consistently lived up to their commitments. If you have any doubts, I would not recommend renting to them.
• Sign a lease. It is important to have a comprehensive lease agreement, not the ones found in stationery stores. Below are a few of the items that should be in the lease.
  • What happens if the relative does not remain in the property for the full lease term?
  • What happens if the relative does not pay the rent on schedule?
  • How are repairs to be handled? Who pays for repairs?
  • What happens if they decide to move out?
  • Require that they have renter’s insurance.
  • No pets unless you agree in writing in advance
• Use a tenant screening service to obtain a profile for your sister.
• Collect a security deposit that is reasonable and customary in that location.
• Buy a profitable long-term rental property, not necessarily a property that your sister likes. Chances are, you will own the property much longer than your sister lives in it.

Hello @Meir Preis ,

[Good comments @Arn Cenedella]

There are cash flowing properties, but probably not at +7% interest rate with 25% down. In this post I will explain how we deliver cash flowing properties to our clients.

Our investor services business is located in Las Vegas. Therefore, the examples and comments provided in this document are specific to Las Vegas. However, they are likely to be applicable in other locations as well.

Before I talk about specifics, I want to explain the importance of cash flow.

All return calculations predict is how a property is likely to perform under ideal conditions on day one. Return calculations tell you nothing about the future. Our clients plan to hold their properties for the rest of their lives and then pass them to their children. So, what happens the first month or year is not as important as the long term performance. When it comes to long term performance, everything depends on rents keeping pace with inflation. If rents do not keep pace with inflation, your time off the daily worker treadmill will be limited.

For example, suppose every week you buy the same basket of groceries and today’s cost is $100. If inflation is 5%, below is a table showing how much less groceries you can afford in the future.

In 10 years, $100 will only buy 63% of the goods that you could buy today for $100. in 15 years, 49%, etc. You will only have financial security if rents keep pace with inflation. You need an longer focs than just day one cash flow.

All the above said, how are we consistently delivering multiple properties each month to clients with positive cash flow?

The Right Property

High-performing properties that will cash flow (with reasonable down payments and interest rate buy-downs) are available, but they are difficult to find. In Las Vegas, less than 0.4% of all available properties are even worth considering. What makes it even more difficult is that good properties go under contract in about 2 days. This means that we must evaluate a large number of properties to find a very small set of potential investment properties and make an offer within one or two days after the property comes on the market.

The only way we can consistently get some properties under contract include:

• We use data mining software to quickly find 10 to 20 potential properties from the thousands available in just a few minutes.
• We have a team of people who evaluate each property. If any team member does not agree, the property is eliminated.

Using the above method, we are able to bid on the few good properties within 1 day of it coming on the market. This enables

Hello @Kris-Ann Lagumen,

Based on the provided information, I cannot make a recommendation. You will need background information on both potential tenants to make an informed decision. You can obtain such information by using one of the tenant profiling services. Additionally, contact the last two landlords for reference checks.

You mentioned that one potential tenant has a pet. We have strict guidelines regarding the breed and weight of dogs allowed. In Las Vegas, it is common for the security deposit to be increased by $300/pet, plus a $25 monthly fee per pet. We do not allow cats, as they may cause significant damage to the property. We also do not accept smokers, as the cost of removing smoke residue after move-out can be substantial.

The lowest cost option is to work with a property manager with a track record of selecting reliable tenants for the first year. If the tenant performed well, you can take over management starting the second year.

Note: There are very few property managers skilled in selecting reliable tenants, and in Las Vegas, I know of only two.

In the rest of this post, I will discuss how to attract reliable tenants. Note that the information I will provide may not be applicable to existing properties. Why? Because the tenant segment willing and able to rent a particular property is fixed, there is little you can do to change this.

Property and Tenant Segment Relationship

Each tenant segment has specific housing requirements, and will only rent a property that meets all of their requirements. Below is an example of a segment’s housing requirement:

• 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.

Every property has specific characteristics, such as the one listed below:

• 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.

The characteristics of this property match the housing requirements of the example segment.

Note: If you buy a property that does not meet ALL of a segment's housing requirements, you are intentionally excluding this segment from renting your property.

Choose the Segment First

A rental property is only as good as the tenant who occupies it. For a reliable passive income stream, the property must be continuously occupied by a reliable tenant. A reliable tenant is someone who stays for many years, takes care of the property, and always pays the rent on schedule.

Reliable tenants are the exception, not the norm. Also, you will probably hold this property for the rest of your life so you will need multiple reliable tenants over the years.

The only way I know to constantly have a reliable tenant is to purchase a property that attracts a tenant segment with a high concentration of reliable tenants. And, work with a property manager skilled at selecting reliable tenants.

How do you identify a segment with a high concentration of reliable tenants? Property manager interviews.

Once you identify a tenant segment you want to occupy your property, determine what and where they rent today. Then, buy similar properties.

Using this approach has many advantages:

• Works in any location.
• Focuses on your financial goals.
• Maximizes your rental income by ensuring that your property is likely to always be occupied by a reliable tenant.
• Removes opinions and bias from property selection.

Hello @Daniel Lang,

Considering all the locations in the US is impractical due to their sheer number. However, there is a simple process based on elimination. Start with an initial list of cities, and then apply elimination filters. Each filter eliminates cities with fatal flaws for a long-term passive income stream that keeps pace with inflation and that you will not outlive. By the end of the process, you will have a small set of candidate cities for further investigation.

Begin by selecting cities with a metropolitan area population of greater than 1 million. Small towns may rely too heavily on a single business or market segment. Here is the source: Wikipedia

Below are additional elimination filters. If a city fails one filter, eliminate it from further consideration.

• 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
• 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. Google search the city concerning 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

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

Hope this helps.

Hello @Dalton Thornsberry,

Instead of pre-determining the type of property to buy, I recommend focusing on your financial goals. Let's assume that your goal is to have a reliable passive income. A reliable passive income must meet the following requirements:

• Inflation compensating: Rental income keeps pace with inflation, compensating for rising prices.
• Persistent income: Your income will last, ensuring you and your spouse won't outlive the income.

The above is dependent on the investment city.

In order to have a reliable income, your property must be continuously occupied by what I call a "reliable tenant." A reliable tenant stays many years, always pays the rent on schedule, and takes care of the property. You will hold the property for many years you you will need multiple reliable tenants over the years.

How do you have the highest probability of always having a reliable tenant? There are two key success factors:

• A property manager who is skilled at selecting reliable tenants. I know many property managers in Las Vegas, but only two of them are skilled in selecting reliable tenants.
• Selecting a tenant segment with a high concentration of reliable tenants. This is what I did when I set up our investor services business in 2005.

How do you identify a tenant segment with a high concentration of reliable tenants? Multiple property manager interviews. Once you identify this segment, determine what and where they rent today. Then buy similar properties.

Summarizing

I see investing as a three-step process.

1. Choose a location where rents keep up with inflation. Maintaining long-term financial independence is only possible if rents keep pace with inflation.
2. After selecting a location, interview property managers to identify a tenant segment with a high concentration of reliable tenants.
3. Buy what your selected segment is willing and able to rent.

We’ve delivered close to 500 investment properties and I did not decide on any of the properties :

• Where to buy
• What to buy
• The property type
• The property configuration
• The renovation components

Everything was defined by the tenant segment we want to occupy our properties.

If you make decisions based on your financial goal and not other people’s opinions, you should do well.

DM me if you have questions.

Hello  @Allan Tualla,

Rather than focusing on property type, I recommend prioritizing your financial objective, which I assume is achieving financial independence. To become and remain financially independent, it's essential that your property is always occupied by what I refer to as a reliable tenant. Such a tenant will stay for many years, always pay rent on schedule, and take good care of the property. However, reliable tenants are the exception, not the norm, and since you're planning to hold the property for many years, you will need to have multiple reliable tenants over the holding period.

The only way I know to maximize your odds of always having a reliable tenant is:

• Select a tenant segment with a high concentration of reliable tenants.
• Work with a property that is skilled at selecting reliable tenants. This is a rare skill. I only know of two property managers in Las Vegas who have this skill.

To find a segment with a high concentration of reliable tenants, start by interviewing multiple property managers. Once you identify a segment that will provide the reliable income you need, determine what and where they currently rent. Then, buy similar properties.

I did not create this process; this is simply how the commercial world operates. When a business wants to select a location, they do not base the decision on someone's opinion and hope that things will work out. Instead, they first identify their target demographic and choose a location that best matches it. Selecting the location or property type first is unlikely to yield the best results.

To target a specific tenant segment, you need to choose the appropriate property in the right location.

How Tenants Select a Place to Live

When someone is searching for a rental property, they typically begin by browsing one of the many real estate websites. They then proceed to eliminate unsuitable options, usually in the following order:

• Rent Range - If the person can afford $1,800 per month, they will eliminate properties with an asking rent that exceeds this amount.
• Property type - If a person has a wife and two children, they are unlikely to consider one-bedroom properties.
• Configuration
• Location

Even if there are hundreds of available properties, after applying the above housing requirement filters, only a few properties will remain. Below is an example of a segment’s housing requirements.

• Rent range: $1,600/Mo. to $1,800/Mo.
• Property Type: Single-Family
• Location: Northwest, within 5 to 10 miles of the central business district.
• Configuration: Three bedrooms, two car garage, one story or two stories, built after 1990, with a lot size between 4000 ft.² and 8000 ft.²

It's unlikely for people to rent properties that do not meet all of their housing requirements. You can leverage this fact to choose properties that appeal to a specific tenant segment.

Each property has specific characteristics. The characteristics of an example property are below.

• Rent: $1,750/Mo.
• Property Type: Single-Family
• Location: Southeast, 12 miles from the central business district.
• Configuration: Three bedrooms, two car garage, one story, built 2000, with a lot size of 5000 ft.²

This property aligns with the housing requirements of the tenant pool segment that I previously mentioned, so most applicants will come from that segment. However, if a property does not meet all the requirements of a certain tenant segment, that segment will be excluded from your potential tenant pool.

Does buying a property to attract a specific tenant segment work? We have successfully delivered over 480 investment properties targeting a single-tenant segment in Las Vegas. Our results have been excellent due to the tenant segment we target and the property manager we work with.

Alan, be cautious of general advice. Real estate is a local market, so you should make investment decisions based on the specific area where you want to invest, and not based on other locations.

Hello @Tom Hall,

I disagree with the notion that the best place to start investing in real estate is where you live. The ultimate goal of real estate investing is to achieve sustained financial freedom, which requires a passive income that meets three key requirements:

• Inflation compensating: Rental income increases faster than inflation, compensating for rising prices.
• Persistent income: Your income will last, ensuring that you and your spouse won't outlive it.
• Reliable income: Your income continues even in difficult economic times.

All three requirements depend on the location. The odds of anyone already living in a location that meets all the requirements are low. And, if you make a purchase in a location that does not meet all the passive income requirements, your time spent being financially independent will be short-lived. Why? Inflation.

Suppose every time you go to the grocery store, you buy the same groceries. Today, these groceries cost $100. Additionally, I will assume that you plan to hold the property for the remainder of your life, which is at least 30 years. Suppose rents in the location only rise 2% per year and inflation is 5%. What happens to your ability to buy these same groceries over 30 years? I created the following table to demonstrate the decrease in the amount of groceries you can purchase in 5-year intervals.

As you can see, each year you have to reduce your grocery purchases by 3% (5% inflation - 2% increase in rent). In just 10 years, $100 will only be worth 74% of what it can buy today. This is why I said that if you do not invest in a city where rents keep pace with inflation, your financial independence will only last as long as you can continually reduce your standard of living.

Another consideration is knowing what, where, and how to buy a property. Everything you learn in seminars, books, podcasts, or websites is general knowledge. Valuable, but nothing is applicable to any specific location. You need hyperlocal knowledge, years of experience, and access to the right resources. The only source for this is an experienced local investment team. Working with an experienced investment team is not only free in most cases, but also saves you time, money, and risk. Plus, you will learn from experts how to invest in real estate the right way for the specific location.

Does remote investing work? We’ve delivered over 480 reliable passive income properties to over 180 clients, worldwide. I believe only 8 clients were local. All the rest lived in other states or countries. And, we know remote investing works because we have >90% repeat business rates.

In summary, live where you like but invest where you can make money.

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