All Forum Posts by: Eric Fernwood

Hello @Bruce Woodruff,

There is no general answer to your question because real estate local and broad statements do not apply. While national level events like interest rates can impact local markets, some markets will perform better than others.

Even within a city, property sectors perform differently. For example, sales of homes priced > $1M may be dead while homes priced between $300,000 and $400,000 might be selling in days.

The only information I can provide pertains to the specific property segment we target in Las Vegas. Hopefully, others can provide similar information on property segments in other cities.

The Overall Las Vegas Market

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

The Property Segment We Target

The following information pertains specifically to the property segment that we are targeting:

• 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

• Below is a map showing where many of our client’s properties are located.

I prefer using charts instead of lengthy text to convey information. We generate these charts every month, include them in our monthly market update, and post them on my blog. If you're interested, you can find the link to my blog on my profile page.

The Charts

Rentals - Median $/SF by Month

June rents were unchanged from May. YoY is flat. However, rents follow prices and prices are rising.

Rentals - Availability by Month

The number of homes for rent continued to drop.

Rentals - Median Time to Rent

The median time to rent is 20 days, unchanged from May. 45 days is typical for this time of the year.

Rentals - Months of Supply

There is only about 0.7 months' worth of supply.

Sales - Months of Supply

The inventory is only about 0.6 months of supply, whereas a balanced market is considered to have a 6-month supply. This shortage in supply will drive up prices.

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 Prices and Rents

Prices and rents are driven by supply and demand. Below is the supply and demand situation for 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. Most metropolitan areas have unlimited expansion room so new homes limit the growth of rent and prices of existing properties. A good example of this is Phoenix.

Demand

The driver for housing demand is population growth. Where there is sustained and significant population growth, demand for housing causes prices to rise.

The average Las Vegas annual population growth is between 2% and 3%. However, according to Yahoo Finance, Las Vegas is now the top city to which people are moving so the growth rate may be increasing.

What attracts people to Las Vegas (and other metropolitan areas) are jobs. In the last job fair, there were over 20,000 open positions. Moreover, the number of jobs will increase in the future. Currently, there are approximately $30B worth of new projects either under construction or planned. As these projects come online, they will create thousands of additional jobs, attracting more people to Las Vegas and further increasing housing demand.

A significant portion of those who move to Las Vegas fit the tenant segment we've targeted since 2005. Therefore, the demand for properties priced between $320,000 and $475,000 will continue to increase over time.

My Conclusion

The fixed supply of homes in our target price range, coupled with increasing demand due to population growth, almost guarantees that prices and rents will continue to rise for the foreseeable future.

Hello @Gordon Cai,

You are not alone in investing outside of California. We’ve worked with over 180 clients and most live in California. So, “Live where you like but invest where you can make money.”

Selecting an Investment Location

The location is the most important investment decision because it determines all the long-term income characteristics including:

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

I suggest using the process I followed when I selected a city for my investor service business. The process starts with a list of potential cities and then eliminates any that do not meet additional requirements. The steps are as follows:

• Cities with a population >1M: Start with cities with a metro population greater than 1M**.** Small towns may rely too much on a single business or market segment. Wikipedia
• Sustained and significant population growth: Prices and rents are a function of supply and demand. Demand is driven by population growth. Where there is sustained and significant population growth, the current housing supply will not meet demand so prices rise until the number of sellers roughly matches the number of buyers. Where population growth is stagnant or falling, the current housing supply is sufficient so there is little increase in prices. Rents are driven by property prices. Where prices are low, more people can buy so there is little demand for rentals so there is limited or no rent growth. Where prices are higher, more people are forced to rent so rents increase. In the best locations, rent growth keeps pace with inflation. Never invest in any locat Wikipedia
• Low crime - A rental property is no better than the jobs around it. And, it is not just the current jobs. The average lifespan of a company is ten years, and an S&P 500 company only has an average lifespan of 18 years. Every job your tenants have today will disappear in the foreseeable future. Without new companies moving into the city and creating replacement jobs, the only jobs left will be low-paying service sector jobs. Companies wanting to set up new operations will not choose high crime cities. Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.
• 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 city with rent control.
• Low operating cost - It's not about how much you gross, it's about how much you net. Every dollar lost to operating costs means one less dollar for you to live on. The two most significant operating costs are property taxes and insurance. Operating costs vary significantly by state, so keep this in mind. Sources for insurance and property taxes: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

At this point, you will have a small number of potential investment cities. The next step is to determine whether an experienced investment team is available in the city you are considering.

Work With an Investment Team

Everything you learned from podcasts, books, seminars, and websites is general knowledge. You will buy a specific property, in a specific location, subject to local rules and regulations. The only source for the local knowledge you need is an investment team.

Working with an investment team usually does not cost more. For example, out of the 480+ properties we have delivered, we have charged our clients a fee for only four or five properties due to exceptional circumstances. In all other cases, the fees were paid by the listing agent of the seller, not by our client.

By working with an investment team, you get real world investment training at no cost to you.

Additional Location Considerations

• If possible, choose an investment city where you would like to visit. This will give you the opportunity to inspect (vacation) your properties and have at least a portion of your travel and lodging costs be tax deductible.
• The rental property you purchase today could potentially be your retirement home in the future. This is what several of our clients plan on doing.

Gordon, I hope this helps.

Hello Jordan,

I have not considered Mesquite. In 2005, I selected a tenant segment based on a high concentration of people with the desired behavioral characteristics. At that time, I found no indication that a statistically significant portion of these people lived in Mesquite, Pahrump, or Boulder City.

I searched the MLS and in the last 120 days, there were 15 sales of single-family homes in Mesquite. Out of these, 6 were new construction.

The price of vacant land in Mesquite appears to be between $150,000/Acre to $250,000/Acre, compared to Las Vegas valley where vacant land in the areas we target is >$1M/Acre. So, while there may be short term scarcity in Mesquite, there is a significant amount of inexpensive undeveloped land so new construction will limit price and rent growth of existing homes. I see no reason why prices in Mesquite will significantly increase in the future, as it will happen in Las Vegas.

If I did not answer your question, let me know.

...Eric

Hello @Michael Wallimann,

Thank you for the kind words, When I first started investing many years ago, people were very kind to me. My way of repaying their kindness is to help others on their journey.

Hello @Barri Griffiths,

Rents follow prices, whether they are increasing or decreasing. However, there is always a lag of 2 to 5 years between price changes and corresponding changes in rent. Rents have increased rapidly since 2008 until the interest rates exploded.

On finding good investment properties, they are out there. We find 10 to 15 good properties each month. However, the only way we can find them is using our data mining software and acting quickly. Good properties only stay on the market for 2 or 3 days before they go under contract.

Also, if you get a 7% to 8% pre-approval and close with that rate, there is almost no way to have a positive initial cash flow. What we do is once we get a property under contract, we solicit interest rate buy-down options from multiple lenders. We then move the loan to the lender with best rates. Also, most of our clients put 30% down. The combination of buying down the rates and a 30% down payment consistently works for us and out clients.

Barri, your planned process of buying a property, living in it for a while, and then converting it into a rental has been successful for several of our clients. Most of them stay for 2 to 3 years and then purchase another property. Therefore, the property's performance on day one is not the main issue. What matters is how it will perform in two or three years when you rent the property. The bigger concern is that you select a property that attracts what I call a reliable , your main concern should be buying a property that attracts reliable tenants. A reliable tenant is someone who stays for many years, always pays the rent on time, and takes good care of the property..

For many years, we have focused on a tenant segment with a high concentration of reliable tenants, and our results have been excellent. Out of approximately 500 investment properties we have delivered:

• Our average tenant stay is >5 years.
• Their rental income has been reliable. During the 2008 financial crash, our clients experienced no decrease in rents and had no vacancies.
• Six evictions in the last 15 years with a tenant population of over 1,000.
• Inflation compensating - From 2013 through the first quarter of 2022, the average annual appreciation has been over 15%, and the average annual rent growth has been over 8%. Our client's rental income growth has exceeded inflation, allowing them to maintain or improve their standard of living. Although rent increases and appreciation have slowed since the second quarter of 2022, the conditions that drove rapid appreciation and rent growth remain unchanged.
• We receive multiple contacts from wholesalers every month. However, they have only offered us properties that are either extremely damaged or located in high-crime, distressed areas. The tenant segment we've targeted will not rent in distressed, high-crime areas. The only tenants such properties attract will be low skilled hourly workers that will likely only stay one year. Before considering an off-market property, visit the area on a Friday or Saturday night and walk around with your family. Ask yourself if you would feel safe living there. Check out the schools, too.

Barri, there are good properties available, although they are not cheap nor are there any steals. However, there are good deals to be found.

Hello @Brian Elston

Good observations/comments.

We have delivered over 500 investment properties, but I could not find a good property on any of the real estate sites. The days of cruising real estate sites and finding good deals ended when interest rates crossed about 5%.

Your comment on A Class properties. I do not agree. We only deal in A Class and a few B+ Class. These properties cost between $320,000 and $475,000. Our average tenant stay is over 5 years and our vacancy rate is less than 1.5%. Are they easy to find? No. But we do find 10 to 15 each month. A challenge is the such properties only remain on the market 2 to 3 days so speed of of the essence.

It you go much above $475,000, the average length or tenant stay drops to <2 years and the time to rent increases from weeks to months. This is not my opinion, I am engineer who has studied Las Vegas tenant demographics for over 15 years.

On foreclosures, there are very few. This is not 2008. Below are the bank owned properties as of 08/22/2023:

• Condo: 8
• Single family: 24
• Townhouse: 1
• Multi-family: 0

Properties appreciate so rapidly in Las Vegas that if someone gets into trouble with their mortgage, they sell the property for a significant profit, and rent for a few years.

Also, REO properties are not necessarily good investments. I've sold over 100 REO properties and, while a few were good buys, in many cases the properties are in such poor condition that the cost to restore them can be significant. And, renovations require much more cash than a higher price. For example, suppose you have two properties. Once costs $300,000 and requires $15,000 renovation. The other costs $250,000 and requires a $50,000 renovation. Your cash out for both properties at 25% down:

• $300,000 property: $300,000 x 25% + $15,000 = $90,000
• $250,000 property: $250,000 x 25% + $40,000 = $102,500

Plus, you lose more rental income due to the increased time for larger renovations. You have to look at cash out and time to market and then decide if an REO property makes sense.

On Section 8, a few of our clients tried this for one year. Some observations from these clients:

• With many Section 8 tenants in Las Vegas, you only receive the government paid portion, you do not necessarily receive the tenant paid portion. Why don’t landlords kick these people out? Because if they do they will have a vacant unit, possibly for months, and the next Section 8 tenant will likely be no better.
• A client bragged to me that he was getting $50/Mo higher with Section 8 than he could with a regular tenant. At the end of the year, he removed the Section 8 tenant. and it cost more than $15,000 to repair the damage.
• Section 8 rent is neither “guaranteed” and the damage is likely to be extensive. There are no shortcuts or guarantees.

House hacking, we have several clients who did (are doing) this and most properties are within HOAs. Not all HOAs allow this but many do not have any specific rule preventing this as long as the owner lives in the property.

On STRs, I do not see why you would want to consider C or B class properties. C Class properties are typically in distressed, high crime, areas. You might rent it a few times but the negative reviews will kill future rentals. On B+ Class properties, this might work depending on the area where the properties are located and how safe the areas "feel." We are working with a client with significant STR experience and he is only considering A Class. Most of our clients are now looking for MTRs. MTRs offer the best of STRs and LTRs, and generally do not face the licensing issues.

“Newbies” - Out of the nearly 200 clients we have worked with, only 4 or 5 had any prior real estate experience, yet all of them have done extremely well. One reason for their success is our onboarding process, which includes teaching them how to invest. Typically, we can teach someone with no prior real estate experience to be a savvy investor in just 2 to 3 hours. All of our processes are based on how things are done in the commercial real estate world. There are no secrets or gurus, only processes and metrics. Processes and metrics are easy to learn.

Brian, feel free to post more questions or observations and I will try to respond.

Hello @Annette Barnett,

Good questions. I have the following comments:

1031 Exchange

We've completed over eighty-1031 exchanges and I have a comment on the 45-day identification period.

While you only need to identify (up to three) replacement properties, you might not be able to secure any of them. Our solution is to coordinate the sale of the relinquished property with the acquisition of the replacement properties.

For instance, one of our clients sold a property and purchased five replacements. We signed contracts for replacement properties once our client had a contract for the relinquished property and all contingencies were past. This method works as long as the replacement properties close after the relinquished property. Typically, we close on the replacement properties within two weeks of the identification period's start.

Using this strategy, if one of the replacement properties has significant issues revealed during the due diligence, we can still have enough time to contract another one and stay within the 45-day identification period.

Location Selection

Financial freedom is not about replacing your current income; it is about maintaining your current lifestyle for the rest of your life. The value of the dollar is constantly being eroded by inflation, so in order to maintain your current lifestyle, rents must keep pace with inflation.

Whether rents keep pace with inflation depends on the rate of population growth in the city where you invest. If the population is rapidly increasing, the current housing supply will not meet demand, and competition will drive up prices. If the population is static or declining, the existing housing supply meets demand, so prices do not rise significantly.

Rents follow prices.

• Higher prices reduce the number of people who can purchase, increasing demand for rental properties and increasing rents.
• Lower prices enable more people to purchase, decreasing demand for rental properties and decreasing rents.

If you buy property in a low-cost city, your rental income will not keep pace with inflation. As a result, your period of financial independence will only last as long as you can continuously decrease your living costs to match the falling buying power of the dollar due to inflation.

It Is Not What You Gross, It Is What You Net That Matters

There is a cost to doing business in every city. What percentage of your rental income is consumed by direct and indirect costs has a huge impact on how much money you will have left to live on. As an example, I compared the state average insurance and property taxes in Arizona, Florida, Georgia, Nevada, North Carolina, and Texas.

To put these rates and costs into perspective, below is the annual operating cost in the six states:

There is a hidden cost that can be larger than any direct cost, and that is rent control. In some cities, you may not have the option to select the tenant with the best financial history. In others, you may not be able to increase the rent fast enough to keep pace with inflation. Other cities make it difficult and expensive to remove non-performing tenants. While these are not direct costs, they can be the most expensive costs of all.

City Selection Criteria

While there are multiple selection criteria for a city where rents are likely to rise fast enough so you can maintain your standard of living for the foreseeable future, below are a few of the more critical ones.

• Cities with a metro 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.
• 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, State Property Tax Rates - Rocket Mortgage
• Rent control - Never invest in any city where there is rent control.

Any city that meets all the above requirements is worth considering.

Property Selection

I believe that deciding on a specific property type as the first step is a mistake. Your ultimate goal is financial independence for the rest of your life, not to own a certain type of property. I recommend focusing on the best properties to meet your financial goal. The type of property is irrelevant.

You want a property that keeps pace with inflation in terms of both rents and prices and that attracts reliable tenants. A reliable tenant is someone who stays for many years, always pays rent on schedule, and takes care of the property. However, such tenants are the exception rather than the norm.

My recommendation:

1. Choose a location based on the criteria specified in the City Selection Criteria section.
2. Through property manager interviews and research, select the tenant segment with the highest concentration of reliable tenants.
3. Buy properties similar to what this tenant segment is renting today.

This approach is effective anywhere and eliminates guessing and luck, making it the most likely method to generate the income you need for sustained financial independence. It is the approach we follow. How have our clients' 480+ properties performed over the last 15+ years? Between 2013 and the first quarter of 2022:

• Average annual appreciation >15%
• Average annual rent growth: >8%

Like everywhere else, the high-interest rates have reduced appreciation and rent growth.

Summary

Financial freedom requires buying properties in a city that provides the income necessary to maintain your same standard of living for as long as you live.

Hello Basit Siddiqi,

We have many foreign clients. Aside from getting an ITIN number, and working with a US CPA for filing taxes, what else is needed?

Hello @Stacey Michaels,

Some background: Over the last 15+ years, our investment team has successfully delivered over 480 investment properties to more than 180 clients worldwide. Our clients evaluate our performance very positively - over 90% of them purchase two or more properties, and our largest source of new business is referrals from existing clients. My point is that I have a solid understanding of how to find performing investment properties in Las Vegas. I am not just another armchair guru.

The goal of real estate investing is financial freedom. It does not matter what property type or anything else. However, financial freedom depends on keeping a reliable tenant in the property.

A reliable tenant is someone who stays for many years, always pays the rent on time, and takes care of the property. Reliable tenants are the exception, not the norm. And, you will need multiple reliable tenants over the years you own the property.

The best way to always have a reliable tenant occupy your property is to purchase a property that attracts people from a tenant segment with a high concentration of reliable tenants. How do you find such a segment? Through interviews with multiple property managers and additional research. This is what I did in 2005. Once I identified the right segment, I determined where and what they rented. The, we bought similar properties. These are the properties we’ve delivered for 15+ years and our results have been excellent.

• Average tenant stay >5 years
• We’ve had 6 evictions in the last 15 years with a tenant population of over 1,000.
• Our client's income was unaffected during both the 2008 crash and COVID-19 pandemic. Meanwhile, properties that attracted other tenant segments experienced high vacancy rates.

Notice that I did not pre-define a property type or location. The tenants I wanted to occupy our properties defined everything. It is really that simple. And, this method works anywhere. In some cities, the target segment property type might be multi-family, while in others it could be single-family homes or condos. The property type is not what matters. Income reliability is what matters.

It's Not as Simple as Selecting an Area

The map below shows where many of our client’s properties are located.

As you can see, there are areas with a high concentration of properties and areas with few or no properties. How did we know what and where to buy? Because we listened to our target tenant segment.

How Do We Consistently Find Performing Properties?

Below is our process:

1. Using data mining software we developed and exported data from the MLS, we eliminate all properties that do not match our target demographic. Only about 0.4% of all properties pass the data mining software.
2. Next, we compare the characteristics of each remaining property to the financial profile of each client. The ones that appear to match, we manually evaluate. About 60% of properties we manually evaluate are eliminated.
3. Next, we conduct an onsite evaluation of the remaining properties. If we determine that a property is likely to attract our target tenant segment, we take a video and send it to both our client and the property manager we work with.
4. Based only on the MLS number and the video we provide, the manager responds with probable rent, time to rent, pros and cons, and a list of renovation items necessary to attract our target tenant segment and maximize the rent.
5. We next use software we developed to generate an estimated renovation cost based on the list of renovation items provided by the property manager.
6. If the property and renovation costs match the client's profile, we provide actionable analytics and recommendations. We never send MLS data sheets because they contain nothing of value to an investor. If the client is interested, we submit an offer.

How long does it take to complete this process? Typically, it takes between 6 and 10 hours. Good properties tend to stay on the market for only 2 or 3 days, so we have to move quickly. On average, we close 4 to 5 properties every month.

A common question I receive in, “How much does it cost to work with an investment team like ours?” I can’t answer for others (there are no others in Las Vegas to the best of my knowledge) but we’ve only charged a fee 4 or 5 times out of the over 480 properties we’ve delivered. And these few occasions were due to exceptional circumstances. For all other properties, our fees were paid by the seller's listing agent, not our client. This enables you to take advantage of 15+ years of experience and a team of experts, without any additional cost to you.

Summary

I’ve worked almost exclusively with investors for over 15 years and selected hundreds of investment properties. Could I find a good property by driving around or cruising websites? No, there are too many properties and the time they are on the market is too short.

Reach out if I can help.

Hello @Raj Palem

Appreciation is critical for three reasons.

• Compensating for inflation.
• Minimizing total capital required to achieve financial independence.

Compensating for Inflation

Financial freedom is more than just replacing your current income; it's about maintaining your current lifestyle for life. Inflation continually erodes the purchasing power of a fixed amount of money. What you can purchase today for $100 will require $155 in 10 years if the inflation rate is 5%. The only way to sustain your current lifestyle is if rents and prices keep up with inflation.

Prices and rents are determined by supply and demand.

• When population growth is stagnant or declining, the current housing inventory is sufficient and rents and prices rise slowly or not at all. Such locations are characterized by low prices due limited demand for housing of an extended period of time. In such locations, rents will not keep pace with inflation. The first rent check you receive will have the highest buying power for the life of the property.
• When there is sustained and significant population growth, there are more buyers than sellers. In such locations, prices increase until the number of buyers and sellers reach an equilibrium point. Locations with increasing population are characterized by higher prices and rising rents.

Unless prices and rents keep pace with inflation, your financial freedom will be short lived.

Minimizing Total Capital Required

To replace your current income, you will need to acquire multiple properties. How much capital will be required depends on appreciation.

• Low-price location: I will assume each property costs $200,000. I will also assume that you will need 20 properties to generate sufficient monthly income to replace your current income. I will only consider the capital needed for the down payments and ignore all the other costs like renovation, closing costs, etc. I will also assume the downpayment is 25% of the purchase price. The total capital required from savings for down payments: 20 x $200,000 x 25% = $1,000,000
• Higher price location - I will assume that each property costs $400,000. In a high-appreciation location, you can use cash-out refinance when there is sufficient equity to pay the down payment to buy the next property. In this case, the total capital requires from savings to purchase 20 properties will be: First property capital requirement: $400,000 x 25% = $100,000. Each additional property is purchased with accumulated equity from the previous properties. This is what many of our clients did to grow their portfolios. The (BRRRR) process of growing your portfolio is illustrated below.

This method is how successful investors grow their portfolios over time.

In summary, you can’t afford to buy in low-cost locations if you want to achieve financial security with the least total capital possible.

In Summary

Locations with high appreciation:

• Enable you to to achieve permanent financial independence because prices and rents keep pace with inflation.
• Reduces the total capital required to acquire the number of properties you need to replace your current income.

Locations with low appreciation:

• Provide short-term financial freedom because rents and prices will not keep pace with inflation. Sooner or later, you will be forced back onto the daily worker treadmill.
• Requires far more capital to purchase the number of properties needed to replace your current income.

In short, if you want to achieve permanent freedom, you cannot afford to buy in low appreciation locations.

Hello @Raj Palem

Appreciation is critical for three reasons.

• Compensating for inflation.
• Minimizing total capital required to achieve financial independence.

Compensating for Inflation

Financial freedom is more than just replacing your current income; it's about maintaining your current lifestyle for life. Inflation continually erodes the purchasing power of a fixed amount of money. What you can purchase today for $100 will require $155 in 10 years if the inflation rate is 5%. The only way to sustain your current lifestyle is if rents and prices keep up with inflation.

Prices and rents are determined by supply and demand.

• When population growth is stagnant or declining, the current housing inventory is sufficient and rents and prices rise slowly or not at all. Such locations are characterized by low prices due limited demand for housing of an extended period of time. In such locations, rents will not keep pace with inflation. The first rent check you receive will have the highest buying power for the life of the property.
• When there is sustained and significant population growth, there are more buyers than sellers. In such locations, prices increase until the number of buyers and sellers reach an equilibrium point. Locations with increasing population are characterized by higher prices and rising rents.

Unless prices and rents keep pace with inflation, your financial freedom will be short lived.

Minimizing Total Capital Required

To replace your current income, you will need to acquire multiple properties. How much capital will be required depends on appreciation.

• Low-price location: I will assume each property costs $200,000. I will also assume that you will need 20 properties to generate sufficient monthly income to replace your current income. I will only consider the capital needed for the down payments and ignore all the other costs like renovation, closing costs, etc. I will also assume the downpayment is 25% of the purchase price. The total capital required from savings for down payments: 20 x $200,000 x 25% = $1,000,000
• Higher price location - I will assume that each property costs $400,000. In a high-appreciation location, you can use cash-out refinance when there is sufficient equity to pay the down payment to buy the next property. In this case, the total capital requires from savings to purchase 20 properties will be: First property capital requirement: $400,000 x 25% = $100,000. Each additional property is purchased with accumulated equity from the previous properties. This is what many of our clients did to grow their portfolios. The (BRRRR) process of growing your portfolio is illustrated below.

This method is how successful investors grow their portfolios over time.

In summary, you can’t afford to buy in low-cost locations if you want to achieve financial security with the least total capital possible.

In Summary

Locations with high appreciation:

• Enable you to to achieve permanent financial independence because prices and rents keep pace with inflation.
• Reduces the total capital required to acquire the number of properties you need to replace your current income.

Locations with low appreciation:

• Provide short-term financial freedom because rents and prices will not keep pace with inflation. Sooner or later, you will be forced back onto the daily worker treadmill.
• Requires far more capital to purchase the number of properties needed to replace your current income.

In short, if you want to achieve permanent freedom, you cannot afford to buy in low appreciation locations.