All Forum Posts by: Eric Fernwood

Hello @Alyssa Dinson,

The adage, "Live where you like, but invest where you can make money," is true and remote investing works, if you have an experienced investment team.

We’ve run an investor services business in Las Vegas for over 17 years. Out of 180+ clients, only 8 or 9 were local. All the rest live in other states or countries. Does remote investing work? Our repeat business rate is >90%, so our clients are satisfied with our services.

The goal of real estate investing is financial freedom. This requires an income that allows you to maintain your standard of living throughout your life. The city where you invest determines all long-term income characteristics. To create rental income that enables financial freedom, you need a location that meets specific criteria.

• Rents increase faster than inflation: Prices and rents are driven by the imbalance between demand and supply. Significant and sustained population growth leads to demand exceeding current supply, causing prices to rise until there's a rough balance between sellers and buyers. As prices increase, fewer people can afford to buy homes, forcing them to rent. This increased demand for rental properties drives rents up. Only invest in cities with significant and sustained population growth.
• Lasts throughout your lifetime: For your rental income to last, your tenants must remain employed at similar wages. The challenge is that non-government jobs are often short-lived. Companies typically last only ten years on average. Even giant corporations like those on the S&P 500 only last about 18 years on average. This means that every non-government job your tenants have will likely end in the foreseeable future. Unless new companies create replacement jobs in the city requiring similar skills and pay comparable wages, your tenants may be forced to take lower-paying service sector jobs. The result could be limited, no rent growth or even rent decreases. Therefore, your long-term income depends on the city's ability to attract new companies. Companies have considerable flexibility in choosing where to set up new operations. So, only invest in cities that meet the following requirements:
  • Low crime: Companies are unlikely to choose high-crime cities. Never buy properties in any city on this list of the 50 most dangerous cities.
  • Low operating costs: Companies are less likely to choose cities or states with high operating expenses for new operations. This is why so many companies are leaving states like California.
  • Pro-business environment: Companies want to focus on their core business, not fight anti-business policies.
  • Significant infrastructure: Companies favor cities with substantial airports, freeway systems connecting to other cities, and more. This level of infrastructure typically exists only in cities with metro populations over 1M.

Summary

The odds of living in a city that meets all the requirements for financial freedom are low. Don't limit your future financial freedom to just where you live today.

Hello @Liam Alvarez,

You don't need any apps to select an investment city. The data is readily available, and I will provide the data source and its relevance.

To ensure we're on the same page, the goal of real estate investing is financial freedom. This isn't merely about replacing your current income—it's about creating an income stream that sustains your lifestyle indefinitely. To achieve this, the rental income must meet three requirements.

Rents Must Outpace Inflation

Inflation steadily erodes the purchasing power of a fixed amount of money. For example, if the inflation rate is 5%, what costs $100 today will cost $155 in 10 years. If rents don't keep pace with inflation, you won't have enough funds to cover these inflated prices.

Rents and prices are driven by supply and demand. Demand is a function of population change. In cities with significant and sustained population growth, rents and prices will rise faster than inflation, enabling financial freedom.

Conversely, rents and prices rise slowly in cities with static or declining populations because the current housing inventory is sufficient. Low property prices evidence this. No matter how many properties you own in such a city, you can't achieve financial freedom because inflation continuously erodes your purchasing power. Eventually, you'll have no choice but to get a job to maintain your standard of living.

Best source for population growth: Wikipedia

Last Throughout Your Lifetime

You cannot sustain financial freedom if your income doesn't persist throughout your life. However, your rental income depends on your tenants remaining employed at similar wages. The problem is that non-government jobs aren't permanent. On average, U.S. companies last only ten years. Large companies, like those on the S&P 500, last on average for 18 years. So, every non-government job your tenants have will end in the foreseeable future unless new companies move into the city and create replacement jobs that pay similar wages and require similar skills; Otherwise, soon all that will be left are lower-paying service sector jobs. Below are the key factors companies consider when choosing a city for investment:

• Low operating costs: Companies are unlikely to choose a location where state income taxes, property taxes, and insurance consume a significant portion of their potential profit. Sources for insurance and property taxes: Insurance—ValuePenguin, State Property Tax Rates—Rocket Mortgage. State income taxes: Here's a map showing state income tax rates.
• Low crime: Companies are unlikely to choose high-crime cities. Avoid investing in any city listed here: The Most Dangerous Cities in America, Ranked.
• Cities with a metro population >1M: Companies need significant infrastructure, which is only available in metropolitan areas with a population > 1 M. Wikipedia
• Pro-business environment: Companies are reluctant to set up operations in cities with burdensome regulations that hinder profitable operations. Google search.

Ability to buy multiple properties with minimal capital

You'll need multiple properties to replace your income. Let's consider an example. Say your monthly income requirement is $5,000/Mo, and each property generates $300/Mo. If each property costs $250,000 and the only acquisition cost is a 25% down payment, how much savings would you need?

• ($5,000/$300) x $250,000 x 25% = $1,062,500

For most people, this is an unattainable amount of after-tax savings.

If you buy in a city with a high appreciation rate, you can grow your portfolio through appreciation and cash-out refinancing. For example, if the first property costs $400,000 and your acquisition cost is a 25% down payment, you need:

• $400,000 x 25%. = $100,000

If the appreciation rate is 8%/Yr, how long will you need to hold the property before a 75% cash-out refinance to yield enough to have $100,000?

• After one year: $400,000 × (1 + 8%)^1 × 75% - $300,000 ≈ $24,000. For simplicity, I've assumed no principal paydown on the original $300,000 mortgage.
• After two years: $400,000 × (1 + 8%)^2 × 75% - $300,000 ≈ $49,920
• After three years: $400,000 × (1 + 8%)^3 × 75% - $300,000 ≈ $77,914
• After four years: $400,000 × (1 + 8%)^4 × 75% - $300,000 ≈ $108,147

While the above example is oversimplified, the concept is valid. Many of my clients and I have grown our portfolios through appreciation and cash-out refinancing with minimal additional capital.

Zillow Data is one of the most reliable sources for analyzing appreciation rates at the zip code level.

Summary

No special apps are necessary. A process is far more important. The information required to select an investment location that enables financial freedom is readily available and straightforward. To choose an optimal investment location, follow these steps:

1. Select a city with a metro population >1M and sustained and significant population growth. Wikipedia
2. Choose a state with low operating costs. Every dollar spent on operating expenses reduces your potential income. Insurance—ValuePenguin, State Property Tax Rates—Rocket Mortgage. State income taxes: Here's a map showing state income tax rates.
3. Low crime: Avoid investing in any city listed here: The Most Dangerous Cities in America, Ranked.

I will add one more location consideration

1. Never buy in a city with any form of rent control. Google search.

Liam, I hope this helps.

I learned the hard way that properties don’t pay rent—tenants do. My first property, a C-Class multi-family in Houston, seemed like a great investment, but it turned out to be a money pit. I underestimated tenant behavior, facing issues like property damage, lease violations, and evictions.

Once I realized the importance of focusing on the right tenant segment rather than properties, everything changed. I targeted renters who pay on time, stay long-term, and care for the property. I researched this segment to discover what types of properties they preferred and where they lived. Understanding my customer, I bought similar properties to what they were currently renting.

This strategy is similar to how national retail chains operate: identify your target customers and provide what they want. For example, McDonald's sells poi in Hawaii and wine in France, adapting to local preferences.

In my approach:

• I chose property types based on what my target segment was renting. I did not choose.
• I selected configurations similar to what they were renting—for example, 3-bed, 2-bath, yard space, etc.
• I focused on locations where they were currently living.
• I set rent prices within their budget.

Summary

I became successful at real estate investing once I understood that what matters is the tenant segment who occupies the property. Properties do not pay rent; people do.

Hello @Van K Tran,

Real estate markets are not homogeneous. There can be a surplus of $1M homes simultaneously with an acute shortage of $400,000 homes. The numbers you find in the news are usually for all properties combined, which tells you very little value.

In 2005, we selected a specific tenant segment that has proved to be a highly reliable source of income for our clients. Below is a general description of the properties they are willing and able to rent:

• Type: Single-family
• Configuration: 3+ bedrooms, 2+ baths, 2+ car garages, 1,100 to 2,500 SF, one or two stories, lot size 3,000 SF to 7,000 SF.
• Rent range: $1,900/Mo to $2,400/Mo
• Location: See the map below for the general areas

Today, these properties cost between $350,000 and $475,000. Because real estate information from other sources is often too broad, we generate our own statistics. Below is the months of supply for our target segment.

Sales - Months of Supply

Six months of supply is considered "balanced," where the number of sellers roughly equals the number of buyers. Today, there are about 1.5 months of inventory for our target property segment.

There is a typical seasonal increase in inventory, but it remains a strong seller's market. Correctly priced, desirable properties stay on the market for only 3-5 days before going under contract. Consequently, there's no "bargain hunting" for good properties. Las Vegas's population growth is robust and is likely to continue into the foreseeable future. The increasing demand for housing absorbs everything that comes on the market in our segment.

So, don't believe everything you hear on the news. You need to focus on the situation for the properties that attract your target tenant segment.

Hello @Philip Anderson,

The goal of real estate investing is financial freedom, not owning a specific property type. Financial freedom isn't a one-time achievement—it's about creating an income stream that sustains your lifestyle indefinitely. This rental income must meet two key requirements, which depend on the city where you invest.

• Rents must outpace inflation: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to outpace inflation, you can never achieve financial freedom.
• Lifelong: The rental income should persist longer than you do. To continue paying rent at current levels, tenants must be employed in similar jobs. However, most jobs aren't permanent. On average, U.S. companies last only ten years. Large companies, like those on the S&P 500, last on average for 18 years. Unless new companies move into the city and create jobs that pay similar wages and require similar skills, soon all that will be left are lower-paying service sector jobs.

Summarizing the location requirements for financial freedom:

• Significant and sustained population growth. Wikipedia
• Conditions that attract new companies to set up operations and create replacement jobs:
  • Low crime: Companies have many options when choosing where to set up operations. They are unlikely to select a city with high crime rates. Never invest in any city on this list: The Most Dangerous Cities in America, Ranked.
  • Low operating costs: Companies compete with each other continually. They are unlikely to choose a location where operating costs would consume a significant portion of their profit. I would start with insurance and property taxes: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.
  • Pro-business government: Companies avoid cities or states with regulations that hinder profitability. Research the city's business climate online. Never invest in any city with any form of rent control.
  • Metro population > 1M: Companies require significant infrastructure, such as interstates, highways, major airports, talent pool, and other facilities. These are rarely found in cities with metro populations of less than 1 million. Wikipedia

After selecting an investment city, the most crucial decision is to select the right tenant segment to target. Remember, properties don't pay rent—people do. A property is merely a vessel housing rent-paying individuals. I recommend identifying a tenant segment with a high concentration of "reliable people." Reliable tenants stay for many years, pay the rent on schedule, maintain employment even during economic downturns, and take good care of the property. However, reliable tenants are the exception, not the norm. So, how do you find a segment with a high concentration of dependable renters?

Ask 10 to 15 experienced property managers, "Which properties would you purchase to attract long-term tenants who pay rent consistently and maintain the property well?" I asked this question when I launched my investor services business in Las Vegas in 2005. Surprisingly, 13 out of 15 property managers described identical property types.

Once you've identified where and what this tenant segment rents, purchase similar properties. Don't be constrained by dogma about the "best" property type. The best property type and location enable you to achieve financial freedom. Note that the best property type will likely vary depending on the city.

However, even if you buy properties that attract a tenant segment with a high concentration of reliable people, you still need to work with a property manager who can consistently select dependable tenants. In Las Vegas, I only know of two property managers I would trust to choose tenants for my properties. They possess the rare skill of selecting reliable tenants—something you can't do yourself. Remember, one bad tenant can cost you far more than the fees associated with professional property management.

Summary

Philip, I hope this post has provided guidance on selecting an investment city and the types of properties that will generate reliable income. Remember to focus on the ultimate goal—financial freedom—rather than adhering to any particular dogma.

Hello @Tiffany Makiya,

Many investors compare properties using the ratio of annual rent to property price. However, this method often fails because it doesn't account for operating costs. Let me demonstrate why you should not rely on this approach.

Suppose you want to compare two properties.

Property A:

• Rent: $1,800/Mo
• Price: $300,000
• Taxes: $2,000/Yr
• Insurance: $1,500/Yr
• Assoc Fee: $250/Mo

Property B:

• Rent: $1,600/Mo
• Price: $300,000
• Taxes: $800/Yr
• Insurance: $600/Yr
• Assoc Fee: $35/Mo

Calculating the rent price ratio for both properties

• Property A: $1,800 x 12 / $300,000 = 7.2%
• Property B: $1,600 x 12 / $300,000 = 6.4%

So, Property A is the better property! Or is it?

Calculating the cash flow for both properties:

• Property A: $1,800 x 12 - $2,000 - $1,500 - $250 x 12 = $15,100/Yr
• Property B: $1,600 x 12 - $800 - $600 - $35 x 12 = $17,380

Property B is the better property once operating costs are included.

Summary

Because the rent price ratio does not include recurring costs, it almost always provides invalid results.

Hello @Tyler Bailey,

The decision to sell depends on how the property has performed in relation to the requirements for an income enabling financial freedom. The income requirements and the dependences are illustrated below. (Click to enlarge.)

I've created the following decision tree to help determine the best option based on your situation. (Click to enlarge.)

I hope this helps with your decision.

Hello Joe,

Thank you for the kind words. I handwrite all my articles. Where I use AI is for research. For example, it would have taken me a long time to find all the charts in this article. I also use AI to discover topics of interest.

...Eric

As Election Day nears, many individuals halt their major financial activities because they feel the uncertainty of the election results may have adverse effects if they act now. In this post, I will explore the historical impact of the election results on the housing market, if any, and share my view of the current election impact.

Historically, U.S. investors have seen similar annual stock market returns regardless of which political party is in power. Major economic downturns, such as the Great Depression and the 2008 Financial Crisis, occurred under both parties and were driven by factors unrelated to the party in office.

The following table shows the DJIA's performance during each presidential administration.

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​[Source: The Bahnsen Group]

Since the Great Depression, 78% of four-year presidential terms have seen positive S&P 500 results, with an average return of 33% per term—regardless of which party holds office.

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​[Source: The Bahnsen Group]

Median sales prices of houses sold since 1963-1-1 (the earliest data I could find).

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​[Source: Federal Reserve Bank of St. Louis]

Below is a breakdown of SFR price change for each presidential term.

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Historical data reveals no correlation between the presidential party in office and housing price growth or stock market performance.

The stock market is driven by emotions in the short term and by corporate performance in the long term. Single-family home prices and rents are primarily driven by supply and demand dynamics, with interest rates playing a crucial role.

Supply:

Existing homes for sale have hit a near 30-year low.

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​[Source: TradingEconomics.com]

The number of new homes built for the last 10+ years has been chronically lower than the previous decades.

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​[Source: Federal Reserve Bank of St. Louis]

Single-family home building permits serve as a leading indicator of future housing supply trends. And it is not trending up.

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​[Source: National Association of Home Builders]

Demand:

The chart below illustrates the steady increase in household formation, a key driver of housing demand. The U.S. is forming more households than ever, and that trajectory will likely remain the same due to population growth.

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​[Source: Federal Reserve Bank of St. Louis]

A comparison between household formation and new home construction shows a significant housing shortage. Below are estimates of the housing shortage by different institutions:

• The National Association of Home Builders (NAHB) estimates a shortage of 1.5 million units (2021 data).
• Freddie Mac’s estimate is a 3.8 million unit shortfall (Q2 2020 data).
• A report commissioned by the National Association of Realtors (NAR) (2021 - Rosen Consulting Group) suggests a 5.5 million unit housing shortage.

No matter which data source you choose, there is a massive shortage. And, regardless of which party takes the White House, the housing shortage will not change.

The only way to boost supply is for builders to significantly increase home construction. However, this seems unlikely given the current high interest rates.

I don't anticipate significant interest rate fluctuations for the next 6 to 9 months. Here's a summary of the reasons: With inflation now in the 2% range, the Fed needs to lower interest rates from their current "restrictive level" (Powell's words) to prevent a recession. However, there's a floor for interest rates due to fears of inflation resurgence, particularly in housing prices. These factors are independent of any presidential candidate's policy promises.

It's worth noting, however, that in the long term, housing markets with abundant vacant land can significantly increase their inventory if policies and economic conditions favor builders.

In markets like Las Vegas, where undeveloped land is limited, and population growth is strong and steady, housing inventory will continue to tighten. This scarcity will drive both property prices and rents upward.

Housing supply and demand dynamics are more determined by interest rates and state/local economics than by the president and Congress.

Summary

Waiting for the election outcome won't give you an advantage. In fact, now may be the best time of the year to buy properties due to reduced buyer competition and seller motivation (those selling now are probably committed.) Prices and rents are driven by supply and demand, which does not change with who is elected, at least in the short term.

Hello @Ignatius Okeke,

I can’t offer any advice on tools for finding off market deals. And, while buying off-market properties sounds appealing, purchasing a property solely because it's inexpensive may not provide the results you are seeking. Remember, the property doesn't pay the rent—it's merely a vessel to attract tenants who do. So, instead of just looking for a "deal," focus on the tenant segment that will pay the rent. I learned this lesson the hard way when I bought my first investment property off market.

You need tenants who stay for many years, pay rent on schedule, and take good care of the property. Each property's characteristics match the housing requirements of only a single tenant segment. Therefore, you should buy properties that attract the segment with the highest concentration of reliable people.

Each property attracts only a single tenant segment because its characteristics match only one segment's housing requirements. The characteristics of this tenant segment have a significant impact on your rental income.

For example, below are the characteristics of the three major tenant segments in Las Vegas. Wherever you invest, you're likely to encounter a similar situation. (Click to enlarge.)

So, if you purchased a property whose characteristics match the housing requirements of the Transient segment, you would likely lose a lot of money—no matter how cheap the property. And, you cannot change the property characteristics later.

For example, suppose you bought a one-bedroom condo in Las Vegas because it was inexpensive. In Las Vegas, the only segment with housing requirements that match a one-bedroom condo's characteristics are individuals and couples without children. The average tenant stay for this segment is between one and two years. Vacancy costs may make the property unprofitable. Plus, in times of economic turbulence, many in this segment will be laid off.

If you purchased a property with characteristics that match the Permanent segment, the average stay is over five years. During the 2008 financial crash, our clients had zero vacancies and no interruptions in rent. It was similar for COVID.

When you buy a property, many other important factors are fixed and cannot be changed, as illustrated in the diagram below. (Click to enlarge.)

I recommend first identifying a tenant segment with a high concentration of reliable tenants. A reliable tenant stays for many years, pays rent on schedule, and takes good care of the property. Such tenants are the exception, not the norm. How do you identify such a segment? Ask multiple property managers, "If you wanted to have tenants who stay for many years, take care of the property, and pay rent on schedule, what properties would you buy?"

When I started my investor services business in 2005, I asked this question of about 15 property managers. Remarkably, all but two described the same types of properties.

The next step is to purchase a property similar to what these reliable tenants currently rent.

Below is an illustration of the process I followed.

In summary, determine which tenant segment will provide the most reliable income and buy properties they are willing and able to rent. Focus on this strategy rather than simply seeking the lowest-priced property you can find.