All Forum Posts by: Eric Fernwood

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.”

Hello @Wale Lawal,

I recommend selecting an investment location based on your financial goals, rather than on others’ opinions. To achieve financial freedom, you need a passive income that meets three 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.

What are some of the characteristics of a location that will meet the above requirements?

• A metro area population greater than 1M**.** Small towns may rely too much on a single business or market segment.
• Both state and metro populations are increasing.
• Low crime - High crime and long-term appreciation and rent growth are mutually exclusive.
• Rent control - Never invest in a location with rent control or similar anti-landlord regulations.
• Low operating cost - Investors often overlook operating costs when selecting an investment location, so below is an example to illustrate the difference in location costs.
• Rents keep pace with inflation. Unless rents keep pace with inflation, your financial independence will be short-lived

Below is a comparison of operating costs for Texas, Ohio, Kansas, and Nevada.

Sources:

• State average insurance cost
• State average property taxes
• State income taxes

To put the overhead costs into perspective, here is a comparison of the estimated annual operating costs for a $400,000 property. I did not include state income taxes in this example.

What does this mean to you as an investor? To have the same net cash flow in Texas as a property in Nevada, the Texas property must generate a $6,192 higher cash flow ($9,736 - $3,544) than a similar property in Nevada.

I hope this helps,

…Eric

Hello @Tom Hall,

You will not buy in a state. You buy in a specific city. So you want to select the city.

Fortunately, there is a straightforward process for selecting a city that generates reliable passive income. But what exactly is a reliable passive income? A reliable passive income meets three requirements:

• Inflation compensating: Rental income increases faster than inflation, compensating for rising prices. If your rental income does not keep pace with inflation, your financial freedom will be short-lived.
• Persistent income: Your income will last, you and your spouse won't outlive it.
• Reliable income: Your income continues even in difficult economic times.

There are too many cities to evaluate so I recommend a different approach. Start with an initial set of candidate cities and then eliminate ones that fail any of the additional requirements.

• Start with metros with a population greater than 1M**.** Small towns may rely too much on a single business or market segment. Wikipedia

• 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 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

• 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.

• Low operating cost - It’s not how much you gross, it's how much you net. You must consider all major recurring costs when selecting an investment location. As an example, below is a comparison of operating costs in Florida, Texas, and Nevada. (Remember that these are state averages, and individual cities may impose additional taxes.)

  

Information sources:

• Insurance cost
• State Property Tax Rate

To show the impact of taxes and insurance I compared overhead costs on a $400,000 property in the three states.

What does this mean to you as an investor? A property with lower cash flow in a city with lower overhead costs may generate a higher net cash flow than a property with higher cash flow in a city with higher overhead costs.

Tom, this is your financial future. Do your own due diligence based on facts; do not bet your future on someone else's opinion.

It’s July and time for another Las Vegas update. 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+ car garage, 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.

What we are seeing:

Overall inventory is falling in Las Vegas. The chart below is from the MLS and includes all property types and price ranges.

The Charts

The charts below are only for the property profile we target.

Rentals - Median $/SF by Month

June rents were unchanged from May. YoY is flat.

Rentals - Availability by Month

The number of homes for rent continued to drop rapidly, indicating a decreasing supply.

Rentals - Median Time to Rent

The median time to rent is 20 days, unchanged from May. This is a very reasonable time to rent.

Rentals - Months of Supply

Only about 0.7 months of supply for our target rental property profile. Demand is greater than supply. This will push up the rent.

We saw a similar tight supply in sales as well. Now only about 0.6 months of supply. This will push up the prices.

Sales - Months of Supply

Sales - Median $/SF by Month

Despite increasing interest rates, $/SF is climbing month after month in 2023. June $/SqFt is 7% higher than January.

What is driving long-term demand for rental properties in Las Vegas?

Las Vegas Fundamentals

Unlike financial markets (which are largely driven by emotions), real estate prices and rents are driven by supply and demand. 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 very little undeveloped private land remaining, and 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, the housing stock we target remains almost constant. This is different 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

The driver for housing demand is population growth. The average Las Vegas annual population growth is between 2% and 3%. What attracts most people to Las Vegas (and other metros) is jobs.

In a study I did in January, I looked at two major job sites (Monster and Glass Door) for the number of open jobs in Las Vegas. According to these sites, there are between 26,000 and 31,000 open jobs in Las Vegas.

The number of available jobs will increase in the future. Depending on which study you read, there is between $18B and $26B of new construction under development. As these come online, they will create even more jobs attracting more people to Las Vegas.

Of the people who will move to Las Vegas, a significant portion matches the tenant segment we've targeted since 2005. So, the demand for conforming properties priced between $320,000 and $475,000 will increase over time.

Summary

Due to the unique combination of a fixed supply and increasing demand, I believe Las Vegas fundamentals will continue to drive up prices and rents for the foreseeable future.

Let me know if you want more sales or rental data, and I will post additional charts.

Hello @Michael Baum,

If I gave you the impression that I would purchase a low-quality property with the hope of future appreciation and rent increases, that was not my intent. You should never buy a bad property. I agree that low-cost locations can provide good initial cash flow. So, if your only criteria is initial cash flow, then low-cost locations are the way to go.

Financial security is the goal of most real estate investors. Financial security means that the income must continue for as long as they and their spouses live, which could be 30 to 50 years. Additionally, the generated income must keep pace with inflation because we live on buying power, not a fixed number of dollars. An example will illustrate this point.

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

If the difference between the rate of rent growth and inflation is 4%, in ten years, $100 will only be able to buy 66% of the groceries it can buy today. In 20 years, $100 will only buy 44% of the groceries it can buy today. Therefore, buying properties based solely on their initial return is unlikely to provide the long-term financial security people are looking for, because rents will not keep pace with inflation. So, I recommend a long-term view instead of only the initial cash flow.

I looked up the stats on Coffeeville, KS. The population has declined since 1960. So, as long as the refinery jobs exist, your friend will do well. However, if the refinery jobs go away, there are few alternative employers. Again, it is the difference between a short-term view vs. a long-term view. I know that I would not want to bet my financial future over the next 20 to 40 years on a small town with a declining population and only a few employers.

Source

Hello @Greg Parker,

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

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

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

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

Below are some considerations when choosing an investment location.

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

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

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

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

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

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

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

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

Hello @Amy Healy,

This is a question I get asked fairly often by our clients. There is no good answer but below are some considerations:

Cash-Out Refinance

Over the years, many of our clients have used a cash-out refinance to leverage the equity in their properties. However, with current interest rates at 7% to 8%, it can be challenging to see favorable returns. (I will discuss interest rate buy-down options later.)

How much would refinancing cost you in increased debt service? So I have some numbers to work with, I will assume you purchased the property for $400,000 with 25% down and a 2.7% interest rate. If so, your monthly debt service is approximately $1,200/Mo. If you refinance the same amount but with a 7.75% loan, the debt service will be approximately $2,150/Mo. Will the property still be profitable if the debt service increases by almost $1,000/Mo? Will you be able to buy another property with the proceeds at the current high-interest rates and will it be profitable?

Investment HELOC

You can get a HELOC on an investment property. However, few lenders offer such loans. I searched and found one HELOC lender that handles investment properties and below are some of the requirements.

• Typically a credit score of 720 or greater.
• A maximum loan-to-value ratio of 80%.
• Cash reserves covering six months or more and for rental properties, proof of long-term tenants.
• A debt-to-income ratio between 40% and 50%.
• There are higher interest rates on an investment HELOC than on a residence.

1031 Exchange

Another consideration is whether you want to keep the property. So far we have completed over eighty 1031 exchanges, and a significant number were from Portland.

As you know, Portland's population is declining. There are rental restrictions and rising crime. Plus, taxes are high. So, is Portland a good location for a long-term investment? I do not know Portland so I can not answer that question.

What We Are Doing to Mitigate High-Interest Rates

Currently, clients are obtaining pre-approvals for 25% down investor loans at interest rates ranging between 7.5% and 8%. To address this, we implemented a process whereby, once we secure a property under contract, we reach out to multiple lenders to obtain their interest buy-down rates. We then choose the lender with the best option and move the loan to them.

Note: Interest-rate buy-downs are also available for HELOCs and cash-out refinance.

How Long Will High-Interest Rates Last?

To determine the best finance option, it would be helpful to know when interest rates will drop to 4% or 5%. After polling many clients, the consensus is that interest rates will decline before the presidential elections. I am not that optimistic. My best guess is that we'll see 5% interest rates again in about three years, but I have no basis for this statement. Your guess is as good as mine.

When considering buying down the interest rate, take into account the length of the payback period. Some interest rate buy-downs pay for themselves in three years, while others may take 15 years. Therefore, it is important to think beyond the present and evaluate the best option based on foreseeable future events.