All Forum Posts by: Eric Fernwood

Hello @Ann Seffens,

What I would do depends on how the property has performed in the past and is likely to perform in the future. So far, we have completed over eighty 1031 exchanges, mostly from California. Below are some of the more common reasons clients have given for moving their investments out of California.

• Rent control and the difficulty of removing non-performing tenants.
• The populations of the Bay Area and California are decreasing.
• High operating costs: income taxes, property taxes, insurance, etc.
• Rising crime

When considering an alternate location, take into account all of the major recurring costs. Below is a table comparing California to three other states.

Sources:

• Average property tax rate
• Average Insurance Cost
• State income tax rate

So you have some perspective, what are the basic operating costs for a $400,000 property in the four states?

This does not take into account indirect costs like rent control, etc.

You asked about DSTs. I do not know enough to comment. I found this article to be informative on DSTs. However, if you do a 1031 out of California, there may be no advantage to a DST.

Hope this helps.

…Eric

Hello @Pamela V.,

Focus on your goal of financial independence rather than buying a specific property type. Whether it is an STR, MTR or LTR does not matter, as long as it gets you where you want to be.

Cash flow is not where you make the most money or scale your investments. The most profitable aspect lies in appreciation.

I have created the following example to demonstrate the benefits of cash flow and appreciation over a five-year period. Property A has an annual appreciation rate of 7%, but no cash flow. Property B has a 7% cash flow, but no appreciation. Note that between January and today, the properties we are targeting in Las Vegas have appreciated by over 10%. Therefore, a 7% annual appreciation rate is not unreasonable.

Given the current 7% to 8% interest rates, a cash-out refinance may not make sense. However, I believe that high-interest rates are not permanent.

Another factor to consider is the effort involved in operating a short-term rental. Furthermore, Airbnb caters primarily to tourists, and during bad economic times, fewer people go on vacation. A better alternative might be mid-term rentals, which primarily accommodate traveling nurses.

Additionally, you may want to consider choosing a location with lower costs. Properties that appeal to our target segment typically range from $320,000 to $475,000. Also, buy a property that is an excellent long-term rental (LTR) and use it as a medium-term rental (MTR) or short-term rental (STR). This way, if the market changes, you have a fallback position.

One last recommendation. Wherever you buy, your financial future is tied to the long-term economic growth of the city where you invest. Below are a few location considerations:

• Only invest in cities with a metropolitan population greater than 1 million. Small cities can be overly dependent on a single market sector or major employer.
• Never invest in a city unless the state and city populations are both increasing.
• Do not invest in any city on the Neighborhood Scout’s list of the 200 most dangerous US cities.
• Prices and rents are driven by demand. Where prices are low, there is little demand for housing and rents will not rise fast enough to keep pace with inflation. In such locations, it does not matter how many properties you own, you will soon be back on the daily worker treadmill because your buying power is declining every day..

Hello @Rahil Jain,

We have completed over 80 1031 exchanges, with the majority of them coming from California. I cannot provide assistance with the disaster extension and how the IRS may view it, but I do have some considerations.

• We’ve delivered over 480 investment properties to over 180 clients. All (100%) that consulted their financial planner were told never to invest in real estate. Of the CPAs our clients consulted, many also recommended against real estate. One of our clients is currently receiving over $130,000/Yr net from their rental properties and their CPA is still advising them to sell the properties. So, conservative CPAs are not uncommon.
• Simply identifying three replacement properties within the 45-day identification period is not sufficient. In most of the 1031 exchanges we've handled, we closed on the replacement property within the 45-day identification period. The reason that identifying the properties is not enough is that if you are unable to close on the identified properties, you will lose your tax deferment. By using our approach, we have time to look for a replacement property if needed.
• You cannot use the proceeds from the relinquished property for renovations. Some of our clients have paid capital gains taxes on a portion of the proceeds and used that money to cover the cost of renovations.
• Simply buying a property does not solve the problem. If your goal is financial independence, you need a passive income that meets the following three requirements. Meeting these requirements largely depends on the city where you invest.
  • 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.
• When investing remotely, having a reliable local investment team is crucial. While podcasts, books, seminars, and websites can provide useful general information, what you really need is hyperlocal information that can only be obtained from a local investment team.

Rahil, I hope this helps.

Hello Allen,

Last year, we conducted a study with a few clients and produced a white paper. If you would like a free copy of this white paper, please DM me.

Below are some of the results of our study:

• Short-term rentals and mid-term rentals are fundamentally different. Short-term rentals mainly cater to vacationers. During difficult economic times, fewer people tend to take vacations. This is why many short-term rentals in Las Vegas were sold during the COVID-19 pandemic. In contrast, mid-term rentals are primarily driven by business necessity. For instance, there is currently a nursing shortage across the US, and traveling nurses help to alleviate it. Our research shows that traveling nurses usually start with a 13-week contract that may be extended. They require a place to live, which is why mid-term rentals are driven by necessity.

• The primary consumers are traveling nurses. Hospitals with trauma care levels one and two and neonatal intensive care typically have the most traveling nurses. Properties should be within about 5 miles of such hospitals. However, the property must be in a safe location, which is sometimes further than 5 miles from the hospital. See the map below for trauma and neonatal intensive care hospitals.

• There are two primary places to market furnished rentals, the MLS and sites like Furnished Finder. Our research showed that furnished properties rented through the MLS have a $.60/SF to $.70/SF incremental rent above non-furnished long-term rentals. On Furnished Finder, the incremental rent appears to be about $1.20/SF.

• Having a property manager to handle mid-term rentals is crucial. The property manager we work with offers reasonable rates for this service and will take care of inventory management, leasing, maintenance, and overall property management.

• Always buy a property that would also be a good long-term rental. You need the backup option in case the mid-term rental market changes.

• Minimizing turn costs and downtime is critical. This requires the right renovation components and speedy make-ready after a tenant departs. A renovation company that has already completed over 350 renovations for us will quickly do whatever touchups/repairs are necessary so we can get the property back on the market.

• Use electronics to control access and reduce turnover time. For example, the garage door must be remotely controlled so:

  • The property manager can remotely open it to allow delivery and service people access.
  • Access to the garage will be through an app on the tenant’s phone, no clickers or digital keypads to reprogram. Also, immediately after the tenant leaves, the access can be changed.

• Minimizing vacancy is critical. We believe the best way to do this is:

  • To ensure sustained occupancy, positive tenant reviews are crucial. Providing a simple and easy move-in process can help create the best experience for new tenants. The gateway to tenant resources will be accessible through their phones via a QR code, which will give them access to a property-specific website. This website will include links to download the necessary apps to control the house, QR codes for food delivery and other services, maps to locations of interest, requests for repairs, and more.
  • Attractive furnishings. There are multiple companies that, given the dimensions and such, will provide a list of everything you need, down to spoons and salt shakers.
  • High-quality photos. The photos must show a bright, attractive, friendly property. For several years we've worked with a commercial photographer so we can get quality photos at a reasonable price.
  • Currently, properties are marketed solely with photos. We will create a unique website for each property which will increase its desirability. This website would include a walk-through video, more photos, information on what to do in the area, shopping recommendations, places to go, and things to see. By providing an overall guide to the area, potential tenants will realize that there are many things to do and places to go, increasing the desirability of the property.

  This is a summary of the study. If anyone is interested, DM me for the complete study.

• ...Eric

Hello Sophia,

Happy to share.

As an example, I will estimate the overhead for the Triangle. Below are the steps.

• I went to this page: State income tax rate, and got the minimum income tax rate for North Carolina: 4.75%
• I went to this page: State average insurance rate, and got the state average insurance cost for North Carolina: $1,800
• I went to this page: State property tax rate, and for the state average property tax rate: 0.84%

Now that I have the basic data, I assumed the investment property would cost $400,000 and the cash flow would be $15,000/Yr. (Change the numbers to match your specific situation.)

I then estimated the overhead as follows:

• Income Tax: $15,000 x 4.75% = $712
• Insurance: $1,800
• Property Tax: $400,000 x 0.84% = $3,360
• Total: $712 + $1,800 + $3,360 = $5,872

This is only an estimate but is close enough for comparing state overhead.

...Eric

Hello @Chris Rodriguez,

The decision on whether to Flip or BRRRR is straightforward, which I will explain. Your statement that you do not want to manage tenants is understandable. I will address this first.

Property Managers

We have delivered over 480 investment properties to more than 180 clients worldwide. However, only one client manages their own properties. Why? Because even though you may think you can save money, one bad tenant can cost you far more in the long run. Additionally, managing properties requires a significant amount of time and expenses if you do not have access to the right service people.

As an owner of 6 investment properties in Las Vegas, I have found that using a skilled property manager is essential for making money, lowering maintenance costs, and avoiding tenant issues. If you would like my free guide on selecting a good property manager, please DM me. (Spoiler alert: Do not base your decision on selecting a property manager based on Yelp reviews.)

Flip or BRRRR?

Ask yourself the following questions:

1. Is the property currently profitable (after all recurring expenses) and are rents and prices increasing fast enough to keep pace with inflation?

• Yes - Keep the property and consider BRRRR.
• No - Flip or 1031 the property.

1. Does BRRRR make sense?

• Do you have enough equity in the property to do a BRRRR (ARV)?
  • No: Flip or keep the property and continue renting.
  • Yes: consider BRRRR.

1. Does Flipping make sense? Do you possess the experience and resources necessary to successfully flip the property and generate a profit?

• No: Unless you have the experience and skills, chances are you will lose money flipping. If anyone wants my free guide on profitably flipping properties, DM me.
• Yes: Determine how much money you will net and decide based on this.

Other Considerations

• Many of our clients used BRRRR to expand their portfolios. However, when interest rates are as high as they are, it requires further consideration. For example, suppose your property is profitable with the existing loan at 3.5%. If you refinance the property, will it still be profitable at 7% or 8% and with a higher principal?
• Making money flipping is not easy - I often read about people advocating for flipping properties as an easy way to make money. However, flipping is far from easy. We encounter properties three or four times a month where someone is selling a flipped property but failed to sell it for enough to even cover their expenses. Zillow's attempt at flipping is a good example of a large-scale failure, which they eventually stopped. Another example is Open Doo. We occasionally see their properties on the market and it seems they are losing money on many of them.
• What we are doing to mitigate high-interest rates - 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.

Summary

Deciding whether to flip or use the BRRRR method is largely a spreadsheet decision, especially during times of high-interest rates.

Hello @Khaled El Dorry

We’ve completed over eighty 1031 exchanges and I can make a few suggestions.

• Although it is possible to coordinate the sale of multiple properties simultaneously, it is not an easy task. One option is to offer the properties for sale with a “closing date to be determined.” This may limit your pool of buyers and could result in a slightly lower sale price. However, it is the most effective way I know to have all properties close nearly simultaneously.
• The odds of everything going right with multiple properties are small. Therefore, I would suggest planning on purchasing two or more properties. This will make coordinating the sale of the relinquished properties easier.
• You are not allowed to use the proceeds from the relinquished property to pay for renovations. Some of our clients have opted to pay capital gains tax on a portion of the proceeds and use that money for the renovation.
• Not all purchase contracts include 1031 exchange verbiage. Obtain the correct verbiage from your exchange agent and include it in the agent-to-agent remarks, specifying that the 1031 text must be included in offers..
• If you need the name of a 1031 exchange agent, I can recommend three who are very good. If you would like their contact information, please DM me.
• If you do all the properties with one agent, ask for a discount.
• Be aware of the 45-day identification period. Although you only need to provide details for three potential properties, there is no guarantee that you will be able to secure those specific properties. We coordinate the purchase of the replacement property with the sale of the relinquished property. For instance, we recently had a client who was selling a property and buying five replacements. Once the seller had the relinquished property under contract, we made offers on the replacement properties. As long as the replacement properties do not close before the exchange property, this approach will work. It has allowed us to close on the replacement properties within about two weeks of the start of the identification period. By using this approach, if something does not work out with one of the replacement properties, we still have enough time to contract another one and stay within the 45-day identification period.

Hope this helps.

…Eric

Hello @Lisa Talbot,

When choosing an investment location, it's important to consider both short-term and long-term factors. The initial return can be estimated using typical return calculations, but these only predict how the property is likely to perform on the first day under ideal conditions. They don't provide any insight into the property's likely future performance.

In my opinion, what happens in the next 10 to 30 years is more important than how it performs initially. Your financial future depends on the long-term economic growth of the city where you invest. Here are some location considerations to keep in mind.

Population Growth

Population growth or decline determines where property prices and rents will increase, stagnate, or fall. Below is a table showing population change between 2020 and 2022 for the cities you listed and I added Las Vegas, which is where I live. Source

Moving to another city can be emotionally and financially costly. Typically, people move only when things become unbearable in their current location. Detroit, Houston, Philadelphia, and St. Louis have had a decline in population. Due to this, I would not consider these locations because prices and rents are driven by population growth.

Overhead Costs

Every dollar lost to overhead is one less dollar available for living expenses. To illustrate the cost differences between cities, I compiled overhead costs for the listed cities.

Sources:

• State income tax rate
• State average insurance rate
• State property tax rate

To put this in perspective, below are the annual operating costs for a $400,000 property with a taxable $15,000 annual cash flow. I sorted the cities by overhead cost.

To have the same net cash flow, a property in Springfield would need to generate $7,051 ($10,595 - $3,544) annually than a property in Las Vegas to have the same cash flow.

Overhead costs make a huge difference when selecting a location.

Rent control and Evictions

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 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.

I researched the time it takes to evict a non-paying tenant for each city. Please note that the times shown may have changed due to court backlogs caused by the eviction moratorium.

• Springfield - “The entire process from notice to set-out can run from 4 weeks to multiple months depending on your specific situation.”
• Houston - “Evicting a tenant in Texas can take around one to three months, depending on the type of eviction. If tenants request a continuance or jury trial, the process can take longer.”
• Detroit - “On average, it would take anywhere between for a complete eviction process.”
• Cincinnati - I found no clear timeline. From what I read, 2 months to several months. If anyone has a better answer, please post it.
• Philadelphia - “…from eviction notice to removing the tenant, could take roughly 2-4 months”
• St Louis - Several months. “It takes about 30-60 days before a landlord can start filing an eviction. If the case is about failure to pay rent, then they have to wait 1 month before they can start filing an eviction lawsuit.”
• Las Vegas - One month.

I view nightmare evictions like I view cancer. The odds of getting cancer are relatively small, but if you do get it, it is devastating, and "odds" mean nothing.

Summary

The location is the most important investment decision you will make. Take the time to evaluate locations based on long-term factors such as population growth, overhead costs, and the landlord-friendliness of the city.

Hello @G Pyros,

Thank you Bill for your kind remark.

As I am not familiar with any other market, I will explain how I determine the appropriate rental period for the properties we target in Las Vegas. Our target properties are mostly A-Class and are rented through the MLS.

Considerations:

Location

When evaluating properties, we usually limit our search to properties within a mile of the subject property. We also consider nuisances. For instance, a property located next to I15 is not comparable to a property located 1/4 mile away from I15, as shown in the aerial image below.

Below is an example of two subdivisions that are not comparable. The subdivision bordered in green has a much higher $/SF than the subdivision bordered in red. Although they are physically close and similar in size, they are not comparable.

Property condition is another factor. Below are two similar properties. The top property has tile floors and is highly upgraded and the other has carpet and not upgraded as much. The upgraded property rents for ~$200/Mo more than the lower property due to the condition and takes about 50% less time to rent.

Configuration

Even if two properties have the same total square footage and were built in the same year, configuration factors can make them dissimilar. For example, you could not compare the property shown below to a single or two-story property.

In Las Vegas, certain types of properties should not be used as comparables for most one and two-story homes. These include:

• Split level or tri-level homes
• Properties with short driveways
• Properties with a master bedroom smaller than 12 feet in any dimension
• Properties located near power lines
• Single-family homes with only a one-car garage
• Homes with tandem garages (where two cars are parked nose to tail)
• Properties with lot sizes less than 3,000 square feet

Seasonality

Depending on the time of year, the same property may take longer to rent than at different times of the year.

If we are in a slow period, I may look at time to rent in a high-demand period and balance the two.

“Recent”

In a slowly changing market, it may be possible to look back as far as 120 days. However, in a quickly changing market, even 60 days may be too long.

Inventory

A property can have a short time to rent when there is a shortage of rental properties may take much longer to rent when there is a lot of inventory available.

After Renovation

If the subject property is not in good condition, we typically choose comparables that are in a similar condition to the subject property after it has been renovated.

The Process We Use to Determine Time-To-Rent

1. We look for comparable properties that rented within the last 30 to 60 days within one mile of the subject property.
2. We eliminate properties that have issues or are not actually comparable.
3. We select or eliminate properties based on the after-renovation condition of the subject property.
4. We generally stay in the size; generally ±15% of the subject property SF.
5. For the segment we target, the lot size is not relevant as long as long as long as the lot size >3,000SF
6. We stay within ±5 years of the age of the subject property, if possible.
7. We try compare single-story to single-story and two-story to two-story.

Some Additional Thoughts

• If we find a significant variance in time to rent, it is likely that we did not select truly comparable properties.

• If a property takes longer to rent than expected, check the quality of its photos. For instance, based on the quality of the photos provided below, I would expect this property to take longer to rent.

• There is no online source for rental information. Most are wildly inacurate.

• Determining time to rent takes experience. I recommend finding an investment realtor in the market you are considering and work with them.

• Property managers are generally not great at estimating time to rent.

I hope this helps. Reach out if you would like to discuss this further.

Hello @Becca F.,

Good questions as always.

I broke my response into a few sections.

Seller Concessions

Whether you can get seller concessions depends on the specific property. While we occasionally get seller concessions, it is not something you can count on. In Las Vegas, inventories are extremely low, and prices for the segment we target have increased by 10% since January. Good properties go under contract in three or four days, so there is no incentive for sellers to offer concessions. If you go to a market where the population is decreasing and there is little buyer demand, then you can likely receive concessions. However, prices and rents are driven by increasing demand (population growth) so the rents would not keep pace with inflation. In the long term, you can not afford low-cost markets.

30% Down

Clients often choose to put down 30% or more because it results in lower interest rates and, sometimes, lower upfront costs. Additionally, interest-rate buy-downs are more cost-effective with a higher down payment. Therefore, the decision to make a larger down payment was based on a spreadsheet calculation, rather than emotions.

Regarding your comment about a higher down payment resulting in more money out of pocket, you are correct. However, if you are able to put 30% down and buy the rate down cost-effectively to 5.99%, you may actually be better off than putting 25% down and paying 7.75%.

Hard Money Loans

I have limited experience with hard money loans, with probably fewer than 10 clients having used them. In my opinion, the main issue with hard money loans is their cost and short duration.

For instance, the last hard money loan a client used had a 5% origination fee, market rate plus 5%, and a 12-month term with the interest amortized over 20 years. Although there were options for 18 and 24 months, the cost was significantly higher for these longer durations.

For fix and flips, hard money may be the only option because the property may not be financeable. The risk here is that if the renovation or sale of the property does not go well, you could have a serious problem.

DSCR Loans

I have limited experience with DSCR loans too. Probably five or less. Sometimes, DSCR loans can be an excellent option. It all depends on the rate and terms.

ARM Loans

A 5/1 or a 7/1 could also be a good option. It depends on how long the interest rates will remain high. Several of our clients believe that interest rates will come down before the presidential election. They are basing this on the belief that if the interest rates are not down to 5% or less, the Democrats will lose the Senate and the presidency. I'm not so optimistic. My best guess is that within three years we will be down to 5%.

So, if you believe that interest rates will decline significantly in 3 to 5 years, a 7/1 interest-only loan may be a good alternative.

Flipping

Flipping can be a profitable business, but it requires knowledge and favorable market conditions. Otherwise, you could lose a lot of money. Each month, I come across one or two partially remodeled properties for sale or remodeled properties selling for little more than they were purchased for. These indicate another victim of the "instant profit" flip.

Profitability flipping is difficult even for large corporations. Zillow attempted it, lost a significant amount of money, and ceased flipping operations. OpenDoor appears to be facing similar problems, but they continue to flip properties.

If anyone would like a free guide I wrote on profitable flipping, DM me.

Summary

Becca, I hope this helped.