All Forum Posts by: Eric Fernwood

Hello @Breanna Green,

I recommend first determining your financial goal and then selecting a location that best supports that goal. If your goal is financial freedom, choosing the right location is the most important investment decision you will make because it affects all long-term income aspects, including:

• Whether rents keep pace with inflation is crucial. If rents don't keep up with inflation, owning multiple properties in such locations won't matter because buying power decreases daily. We live on buying power, not a fixed income. This is evident from price increases every time you go to the store. Unless rent growth outpaces inflation, you will either have to continuously reduce your standard of living or get a job. The best indicator is whether the city has significant and sustained population growth. Wikipedia

• How long will your income last? Too many people face the nightmare of running out of money during retirement, a time when they are least able to reenter the workforce. Income persistence requires that your tenants remain employed at similar wages. The problem is that all non-government jobs are relatively short-lived. The average life of a company is 10 years. The average life of large corporations, like those on the S&P 500, is only 18 years and falling. So, in the foreseeable future, every non-government job your tenants have will vanish. Unless companies set up new operations in the city creating replacement jobs, all that will remain are lower-paying service sector jobs. Crime is a major factor companies consider when selecting cities for investment; companies are unlikely to set up new operations in high-crime cities. Rank of the top 50 most dangerous US cities.

• Operating costs. Every dollar you lose to operating costs is a dollar less you have to live on. There are direct costs and indirect costs. The major direct costs are property taxes and insurance. Below is a comparison of average annual property insurance and property taxes for 5 states:

  • Texas: average insurance: $2,536, property tax percentage of value: 1.68%
  • New York: average insurance: $1,418, property tax percentage of value: 1.40%
  • California: average insurance: $1,839, property tax percentage of value: 0.75%
  • Nevada: average insurance: $1,144, property tax percentage of value: 0.59%
  • Florida: average insurance: $2,207, property tax percentage of value: .91%

  To put these costs into perspective, below is a comparison of the annual cost for a $400,000 property.

  • Texas: $2,536 + 1.68% x $400,000 ≈ $9,256
  • New York: $1,418 + 1.40% x $400,000 ≈ $7,018
  • California: $1,839 + .75% x $400,000 ≈ $4,839
  • Nevada: $1,144 + .59% x $400,000 ≈ $3,504
  • Florida: $2,207 + .91% x $400,000 ≈ $5,847

  Sources: Homeowners insurance, state average property taxes

  Indirect costs: Rent control is a hidden tax that may limit your ability to select the best tenant, remove a non-performing tenant, and increase rents enough to compensate for inflation. The best source for information is a Google search for the specific city or state.

Breanna, I urge you to not narrow your focus to a city based on your familiarity. Instead, choose a city that best supports your long term financial goal.

In the last 16+ years, I’ve worked with many investors. Occasionally, I'm asked about two or more people pooling their resources to buy properties. This can work, but there is a potential pitfall: assumptions.

NOTE: I am not an attorney or business advisor. The following is a list of topics I've encountered in partnership agreements, although it's not exhaustive. I advise working together to identify and agree on potential issues. Then, have the document reviewed by an attorney.

For example, suppose two people decide to pool resources and invest together. They have known each other for many years, so no issues are anticipated. A few months later, the refrigerator breaks down at a property. One wants to install a used refrigerator to save money, while the other wants a new refrigerator with a warranty. Although this seems trivial, I have seen friends argue over less. How do you minimize future problems? By writing and signing an agreement that covers as many potential issues as possible. Below are some items I’ve seen in teaming agreements.

1. Ownership Interest: Clearly define the percentage of ownership each party has in the property. This is usually based on the proportion of the down payment, mortgage payments, and other costs each party contributes.
2. Financing Details: Define who will pay for what. This includes the mortgage, who will be named on the mortgage, and how you'll split the mortgage payments. Also, define how you'll share the acquisition costs, such as the down payment, renovation, and closing costs.
3. Payment Responsibilities: Explain how to divide and pay for regular costs like mortgage, property taxes, insurance, homeowners association fees (if applicable), and upkeep expenses.
4. Management and Maintenance: Agree on how property maintenance, repairs, and improvements will be handled, including decision-making processes, funding for these activities, and responsibilities for performing or managing the work.
5. Single Decision Point: For example, I've seen situations where one person agreed to replace an appliance while another strongly opposed it. This kind of indecision is harmful when running a business. One individual needs to make the final decisions.
6. Dispute Resolution: Define and agree on a method for resolving disputes that may arise, such as mediation or arbitration, to avoid litigation.
7. Change in Marital Status: What happens to the ownership if a party gets married or divorced? What happens if a party dies or becomes incapacitated?
8. Exit Strategy: Include provisions for what happens if one party wants to sell their interest in the property. This could involve a right of first refusal for the other party, buyout terms, and a method for determining the sale price.
9. Rental and Use: Define the rules for renting out the property or parts of it, including how income and expenses will be divided. Also, agree on how the property will be used, who can live there, and under what conditions.
10. Contribution Reconciliation: Determine a process for handling situations where one party cannot meet their financial obligations or if there are significant discrepancies in contributions to expenses.
11. Legal and Professional Fees: Decide how legal and other professional fees related to the purchase and management of the property will be shared.
12. Taxes: How will the tax advantages be divided?
13. Signatures and Legal Advice: All parties must sign the agreement, and each party is advised to seek independent legal advice to understand their rights and obligations fully.

Summary

The hours you spend creating the agreement will likely save your friendship and legal fees.

Hello Michael,

Your comment on unlearning is well-founded. The last person we added to the team was unlicensed. Today, we have an increased volume of clients, so we need a licensed person. 

If you know someone who might make sense, please send them our way.

...Eric

Hello @Abigail Lipson,

You are right to spend the time selecting an investment city. The location where you invest determines all long-term income characteristics essential for achieving and maintaining financial freedom. The characteristics defined by the location include:

• Total capital required: If you can grow your portfolio using accumulated equity by cash-out refinancing, which is only possible in areas with high appreciation, you'll need considerably less capital from your savings.
• Inflation protection: Whether rents outpace inflation, enabling you to sustain your lifestyle indefinitely, only occurs in cities with significant and sustained population growth.
• Income persistence: How long your income will last. This is dependent on the city's long-term economic growth.
• Natural disaster risk: Certain locations are more prone to natural disasters, such as hurricanes, tornadoes, earthquakes, fires, and floods. Although insurance may cover the rebuilding of your property, it could be vacant for months or years until the community recovers and people return.
• Operating costs: Every dollar lost to property taxes, and insurance is a dollar less for you to live on.
• Rent control: Government control of your rental property can transform a promising investment into a nightmare.

Location Selection Process and Tools

You can try to analyze all possible cities in the US and select the “best”. But it could lead to evaluating hundreds if not thousands of cities, which is impractical due to the time required and insufficient data for smaller cities.

The other method is to eliminate all cities that are unlikely to be good investment locations, and the remaining few are worthy of further investigation. This is straightforward and practical.

The process starts with an initial list of candidate cities. Start with cities with a metro population of >1M if you want long-term, reliable income. Smaller cities may rely too much on a single business or market segment. Source: Wikipedia

From this initial list, eliminate cities that do not meet the following additional requirements.

• Minimize total capital required (to achieve financial freedom): To replace your current income, you'll need to buy multiple properties. The capital needed from your savings will depend on the location's appreciation rate. In low appreciation areas, you'll need to cover the cost of purchasing multiple properties entirely from your savings. However, in cities with higher appreciation rates, you can leverage the accumulated equity to buy additional properties via cash-out refinancing. Therefore, you'll need less capital in rapidly appreciating cities than in lower-cost locations. Never buy in slow-appreciating cities. Source: FHFA House Price Index
• Inflation protection: The only way to maintain your purchasing power and living standard is if your rents increase faster than inflation. Prices drive rents. Where prices are higher, fewer people can buy, so they are forced to rent. This increases demand for rental properties, which drives up rent. Where prices are low, more people can afford to buy, so fewer people rent. Where prices are low, rents increase slowly, so you will not have the money to pay inflated prices. Only buy in cities with significant and sustained population growth. Never invest in any location with a static or declining population. Source: Wikipedia
• Income persistence: You need a rental income that will last throughout your lifetime, which requires your tenants to remain employed at similar wages. Non-government jobs typically last between 10 and 20 years, so every non-government job your tenants have will eventually disappear. Unless new companies move into the city and create replacement jobs that pay similar wages and require similar skills, the only available jobs will likely be service sector jobs, which pay significantly less. Companies are unlikely to set up new operations in cities with high crime or high overhead costs. Never invest in any city on this list: Mapped: The Most Dangerous Cities in the U.S.
• Low natural disaster risk: A natural disaster can be a financial disaster for you. The issue isn't your property. Insurance will cover the cost of rebuilding. The problem is the community. Jobs, stores, roads, healthcare services, and gas stations can all be destroyed in a disaster, as is often shown in the news. With the community destroyed, your tenant has no choice but to move somewhere they can live and work today. It could take years to rebuild the community, and it may never recover in many instances. Meanwhile, debt service, taxes, insurance, maintenance, and other expenses continue without pause. The relative cost of homeowners insurance is the best indication of a high-risk location. Source: Insurance - ValuePenguin
• No 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, limit your ability to select a reliable tenant, and make evictions of non-performing tenants difficult or impossible. Never invest in any city with rent control. Source: Google search.
• Low operating costs: 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 for investors are property taxes and insurance. Operating costs vary significantly by state; only invest in states with low operating costs. Source: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

Lastly, select a city with an experienced investment team to narrow the list of cities further.

We are hiring! Due to the increasing client volume, we are adding an investor agent to our team.

Who Are We?

- A team of investment realtors with over 16 years working exclusively with investor clients.

- Delivered over 500 investment properties to 180+ clients worldwide.

- A repeat business rate of over 90%. Over 90% of clients are remote.

- Our services encompass property selection, evaluation, renovation, and management. [Watch a 2-minute video overview of our investor services](https://tinyurl.com/yjpfbyw3).

Our core team consists of four members:

- Cleo Li: Engineer & Co-Founder - CEO. Manages the business and strategic direction, ensuring client success.

- Eric Fernwood: Engineer & Co-Founder - Specializes in data mining, analytics, software development, and process improvement. Handles new client onboarding.

- Taylor Koki: MBA - Investor agent. Primary client contact and on-site property evaluator. (Taylor has been with us for nearly 7 years.)

- Selena Tsai: Manages transactions and renovations, including vendor and property manager handoffs. (Selena has been with us for over 4 years.)

Our Client Base

Our clients are high-income professionals, such as engineers, doctors, finance professionals, and business owners who are all highly intelligent professionals with cash and credit but limited time. They purchase passive income stream services, not traditional real estate.

Our average client buys 2.8 properties. Repeat business is our business, this requires customer satisfaction. This means that you will work with the same people over many years.

What You Will Receive

• Training: Comprehensive investment training, including directed reading, one-on-one sessions, and field training.

• Client Assignments: You will receive fully qualified and trained clients who have signed our buyer representation agreement, obtained loan pre-approval, and are ready to invest. NO lead generation, cold calling, or prospecting.

• Property Assignments: You will receive and evaluate potential investment properties that meet our proprietary algorithm criteria and align them with your client's goals.

• Client Contact: Client interactions primarily via Zoom/email/phone/text. You will rarely physically meet clients. Most clients live in other states or countries.

• Support: You are the client relationship manager and will be fully supported as needed throughout the entire sales cycle.

Who We Are Looking For

- Integrity: Someone who prioritizes the client's interests above their own. We value long-term relationships built on trust.

- Tech-Savvy: Comfortable with technology and detailed analytics.

- Confidentiality: You must be willing to sign a non-disclosure agreement.

- Commitment: You must be motivated and committed to a career as an investor realtor.

- Client Relationship: This is not a typical realtor position involving house showings. You will act as a trusted advisor to high-income individuals seeking financial freedom, not a traditional realtor.

- Excellent Writing Skills: Strong written communication is crucial.

- Self-starting: Excellent time management and organization skills.

- Licensing: Must hold a Nevada real estate license.

If you are passionate about investment real estate and eager to join an elite team dedicated to helping clients achieve financial freedom, we would love to hear from you. Please reach out to me.

Hello @Jesse Rathe,

So we are on the same page, I will assume that your goal is financial freedom.

Financial freedom is more than just replacing your current income. Financial freedom requires:

• Your rental income must increase faster than inflation so you will have enough money to cover inflated costs in the future. For rents to rise quickly, housing demand must continue to increase. Therefore, the city you choose must have significant and sustained population growth.
• Sufficient rental income to replace your current income. This will require purchasing multiple properties. If you buy in a location without significant and sustained appreciation, every investment dollar must come from your savings. If you buy in a location with significant and sustained population growth, you can use a cash-out refinance to reinvest accumulated equity as the down payment on additional properties. This will greatly reduce the total capital required.
• Lasts throughout your lifetime. Your rental income depends on your tenants remaining employed and paying rent. However, most private-sector jobs last between 10 and 20 years. So, unless replacement jobs are constantly being created, your tenants will not be able to continue paying current levels of rent. This requires a city that attracts new companies who will create the replacement jobs. Companies expand to locations with low crime, low operating costs, a pro-business environment, and a metro population >1M.

Having defined these three requirements, I will now provide the sources for the necessary information.

• Cities with a metro population >1M: Small towns may rely too much on a single business or market segment. Source: Wikipedia
• Population growth: Source: Wikipedia. Never invest in any city with static or declining population.
• Crime rates: Never invest in any city on this list: Mapped: The Most Dangerous Cities in the U.S.
• Operating costs: The best indicators of operating costs are state income taxes, homeowner’s insurance, and property taxes. Source: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage. State income taxes - Intuit

Another factor to consider when choosing a city is rent restrictions. I would never purchase property in a city with such limitations. Rent restrictions can limit your ability to select the best tenant, increase rents, and evict non-performing tenants. The best way to determine whether a city has rent restrictions is a Google search for rent restrictions in the specific city you're considering.

Jesse, these information sources should help you on your investment city search.

It’s June, and it's time for another Las Vegas update. For a comprehensive view of the Las Vegas investment market, message me for my blog link. It contains more detailed information on investing insights, analytics, and, particularly, investing in Las Vegas.

Before proceeding, note that the charts only include properties that fit the following criteria unless stated otherwise.

• Type: Single-family
• Configuration: 1,000 SF to 3,000 SF, 2+ bedrooms, 2+ baths, 2+ garages, minimum lot size is 3,000 SF, one or two stories.
• 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 (click to enlarge).

Overall Las Vegas Real Estate Market Inventory

The chart below, provided by the MLS, includes all property types and price ranges.

The inventory level continued its downward trajectory, significantly lower YoY.

Rental Market Trends

The charts below are only relevant to the property profile that we target.

Rentals - Median $/SF by Month

Rents continued the up trend as expected. YoY is up 3%.

Rentals - Availability by Month

The number of homes for rent continued the downward trend. YoY is down 11%.

Rentals - Median Time to Rent

Median time to rent had a slight increase from April, but is still below 20 days. YoY is flat.

Rentals - Months of Supply

Only about 0.7 months of supply for our target rental property profile. YoY is down 36%! Demand is greater than supply. This will pressure up the rents.

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

Sales - Months of Supply

Sales - Median $/SF by Month

Despite persistently high interest rates, the $/SF continued to climb, up 10% Year over Year.

Why invest in Las Vegas?

In short, to achieve and maintain financial freedom. However, financial freedom isn't just about replacing your current income. Financial freedom requires maintaining your lifestyle for life. This requires an income that rises faster than inflation, or you will not have the additional dollars you will need to pay future inflated prices.

What causes rents (and prices) to increase?

Supply & Demand

Unlike financial markets, 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 because it is a tiny island of privately owned land in an ocean of federal land. See the 2020 aerial view below.

Very little undeveloped private land is left in the Las Vegas Valley, and desirable areas cost more than $1 million per acre. Consequently, new homes in these locations start at $550,000. Homes that appeal to our target tenant segment range from $320,000 to $475,000, so the supply of housing we target remains almost the same regardless of how many new homes are built.

Demand

Population growth drives housing demand. Las Vegas's average annual population growth is between 2% and 3%. What draws people to Las Vegas? Jobs. Depending on the article, there is between $26B and $30B under construction, and the last job fair had over 20,000 open jobs.

In Conclusion

While nothing is guaranteed, the combination of population growth and limited land for expansion virtually assures that prices and rents will continue to increase.

Thanks for reading my post. Reach out if you have questions or would like to discuss investing in Las Vegas.

It’s May, and it's time for another Las Vegas update. For a comprehensive view of the Las Vegas investment market, message me for my blog link. It contains more detailed information on investing insights, analytics, and, particularly, investing in Las Vegas.

Before proceeding, note that the charts only include properties that fit the following criteria unless stated otherwise.

• Type: Single-family
• Configuration: 1,000 SF to 3,000 SF, 2+ bedrooms, 2+ baths, 2+ garages, minimum lot size is 3,000 SF, one or two stories.
• 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 (click to enlarge).

Overall Las Vegas Real Estate Market Inventory

The chart below, provided by the MLS, includes all property types and price ranges.

The inventory level continued its downward trajectory, significantly lower YoY.

Rental Market Trends

The charts below are only relevant to the property profile that we target.

Rentals - Median $/SF by Month

$/SF remained unchanged from March, now at the highest level in the last 13 months. YoY is up 3.4%.

Rentals - Availability by Month

The number of homes for rent continued the downward trend. YoY is down 5.5%.

Rentals - Median Time to Rent

Median time to rent continued to fall, now below 20 days, showing a heating up rental market. YoY is down 9.5%.

Rentals - Months of Supply

Only about 0.8 months of supply for our target rental property profile. YoY is down 33%! Demand is greater than supply. This will pressure up the rents.

We saw a similar tight supply in sales as well. Now just 0.5 months of supply. This will continue to push up the prices.

Sales - Months of Supply

Sales - Median $/SF by Month

Despite persistently high interest rates, the $/SF continued to climb, up 7.8% Year over Year.

Why invest in Las Vegas?

In short, to achieve and maintain financial freedom. However, financial freedom isn't just about replacing your current income. Financial freedom requires maintaining your lifestyle for life. This requires an income that rises faster than inflation, or you will not have the additional dollars you will need to pay future inflated prices.

What causes rents (and prices) to increase?

Supply & Demand

Unlike financial markets, 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 because it is a tiny island of privately owned land in an ocean of federal land. See the 2020 aerial view below.

Very little undeveloped private land is left in the Las Vegas Valley, and desirable areas cost more than $1 million per acre. Consequently, new homes in these locations start at $550,000. Homes that appeal to our target tenant segment range from $320,000 to $475,000, so the supply of housing we target remains almost the same regardless of how many new homes are built.

Demand

Population growth drives housing demand. Las Vegas's average annual population growth is between 2% and 3%. What draws people to Las Vegas? Jobs. Depending on which article you read, there is between $26B and $30B under construction.

In Conclusion

While nothing is guaranteed, the combination of population growth and limited land for expansion virtually assures that prices and rents will continue to increase.

Thanks for reading my post. Reach out if you have questions or would like to discuss investing in Las Vegas.

Hello @Maxwell Emerson,

Your next step depends on your financial goal. If your goal is financial freedom, you'll need a rental income that can replace your current income and must increase fast enough to outpace inflation.

Inflation increases the cost of goods and services over time, effectively reducing the value of your money. For instance, if your rent is $1000/Mo and the annual inflation rate is 5%, the buying power of $1000 will decrease to $950 next year. You will need approximately $1630 in ten years to buy what $1000 can buy today. Therefore, if your rental income doesn't keep up with inflation, you must consistently reduce your monthly expenses or return to work to compensate for decreased purchasing power to maintain your living standard.

No matter how many properties you eventually own, unless rents outpace inflation, you can not achieve true financial freedom.

Back to Your Situation

You stated, “I don't believe that the property will continue to appreciate or see the rent growth it has seen over the past few years.” Thus, you may need to take action. To simplify the decision process, I created the following decision tree. (click to enlarge)

Bottom Line

Evaluate the property based on whether it will enable you to achieve financial freedom. If rent increases have not outpaced inflation, you know what to do.

Hello @Ryan Daulton,

A popular question. I am usually asked about stocks but CDs, mutual funds, and bonds are similar so I will compare them to real estate.

Clients frequently ask me whether real estate or stocks are the best investment. My answer is, “It depends on your goal.”

For most people, the goal of investing is financial freedom. Financial freedom is more than just replacing your existing income. Financial freedom is the ability to maintain your current standard of living for as long as you live. To achieve this, you need an income that meets three requirements:

• The income must outpace inflation: If the income does not outpace inflation, you will not be able to maintain your standard of living, and sooner or later, you will be back to being a daily worker.
• Income persistence: Your income must last throughout your life.
• Income dependability: The income must continue, even in bad economic times.

How do stocks and real estate meet the income requirements for financial freedom?

Stocks, Mutual Funds, CDs, Bonds, Etc.

All of these financial instruments are for capital accumulation. The concept is to accumulate sufficient capital and then draw it down over the remainder of your life. This is problematic for financial freedom for the following reasons.

• If you live longer than expected, you will run out of money. A nightmare many are facing.
• You need additional capital to offset inflation and potential market crashes throughout your remaining life.
• During bad economic times, stock prices plunge. Withdrawing the same amount for living expenses magnifies the loss of your working capital.

For example, if you need $10,000/Mo for 30 years (assumed remainder of your life), how much capital will you need to accumulate? Assuming no inflation and no market crashes:

• $10,000 x 12 x 30 = $3,600,000 in after-tax savings.
• If there is inflation or market crashes you will need far more. For example, if there are no market crashes and inflation averages 4%/Yr, you need to accumulate $6,730,193!

Inflation and market crashes are a fact of life, so you must accumulate additional funds to compensate. Plus, you can not assume that you will always make the right stock selection over an extended period of time. What if you make a mistake? Even the best money managers have been unable to do this over an extended period of time.

I regularly hear people say that over a xx-year period, stocks outperform real estate. One thing they missed is that because you will be living off the stocks, you cannot wait xx years to withdraw the funds; you will have to withdraw/sell every month, regardless of the market state. And, every time you sell, your working capital decreases.

What about dividend-paying stocks? Inflation, market dynamics, and taxes complicate the calculation of the total capital required to generate $10,000 per month for the rest of your life. It's enough to say that you will have accumulate millions before you get of the daily worker treadmill.

The one big advantage of stocks over real estate is liquidity. In most cases, you can convert your portfolio of stocks to cash in a day.

Real Estate

Real estate is a combination of recurring income plus capital accumulation. Let’s stack it against the requirements for financial freedom:

• If you buy property in a city where rent increases exceed inflation, you will have the extra income necessary to maintain your standard of living throughout your life, despite inflation.
• Rental income is a near-perpetual income that you can pass on to your children and their children. There are families in Asia and Europe who are still living off real estate investments their ancestors purchased over 600 years ago. With real estate, dynastic wealth is a real possibility.
• If you purchase properties that target a reliable tenant segment, your income will not be disrupted by economic turbulence, as demonstrated by our clients’ unchanged rental incomes during the 2008 financial crash and COVID.

Also, because rents and prices are both driven by population growth, where you have rapid rent growth, you have rapid appreciation. With rapid appreciation, you can use cash-out refinance for the down payment on additional properties. This is how I and many of our clients have grown their portfolios with reduced capital injection.

So, if your goal is $10,000/Mo, how many properties will you need to buy? If I assume each property provides $300/Mo net cash flow:

• $10,000 / $300 ≈ 33 properties

How much do you need for the down payments on 33 properties?

If you purchase in a city where prices are low because they have not kept pace with inflation, every investment dollar must come from your savings. How much would you need for 33 properties if properties cost $200,000 and your only expense was the downpayment and you put 25% down?

• 33 x $200,000 x 25% ≈ $1,650,000

If you purchase property in a city with significant appreciation, you can use the accumulated equity every few years through cash-out refinance for the down payment on your next property. If you use this approach, how much capital will you need to acquire 33 properties?

I will assume each property costs $400,000, and you are putting 25% down. The down payment for the first property will be:

• $400,000 x 25% = $100,000

If the property is appreciating at 8%/Yr, how long will you have to wait until you have sufficient equity that the proceeds from a 75% cash-out refinance will cover the down payment on another $400,000 property?

I will calculate the net proceeds from a 75% cash-out refinance using the following formula.

Net Proceeds = $400,000 x (1 + r)^n x 75% - $300,000

Where:

• r: Annual appreciation %
• N: The number of years into the future
• $300,000 is the loan payoff. I assume no principal paydown to simplify the example.
• 75% is the refinanced amount.

The calculations for the net proceeds are as follows:

• Year 1: Net Proceeds = $400,000 x (1 + 8%)^1 x 75% - 300,000 ≈ $24,000
• Year 2: Net Proceeds = $400,000 x (1 + 8%)^2 x 75% - 300,000 ≈ $49,920
• Year 3: Net Proceeds = $400,000 x (1 + 8%)^3 x 75% - 300,000 ≈ $77,914
• Year 4: Net Proceeds = $400,000 x (1 + 8%)^4 x 75% - 300,000 ≈ $108,147

So, after four years, you have the downpayment for your next property. Using cash-out refinance, the total capital required is greatly reduced.

There are additional advantages to real estate that stocks do not offer. Below are three:

• Leverage: You can acquire $1M worth of real estate by putting down $250K. When the real estate appreciates 50% (how many years does it take for Las Vegas properties to appreciate 50% at 10% a year? (4.25 years), you’ve tripled your equity. If you put $250k into stocks and when the stocks appreciate 50%, your equity increases by 50% minus taxes.
• 1031 exchange: You can sell one income property, buy a replacement income property, and defer capital gains taxes.
• In many cases, depreciation alone will reduce or eliminate taxes on your rental income.

Real Estate Disadvantages

• Liquidity: There is no way to convert real estate to cash instantly like you can with stocks.
• Higher entry price point: You can buy stocks for a$5 or less. With properties in a city with rapid rent and price growth, you will currently need between $125,000 and $150,000 for your first property.

Summary

I view stocks, mutual funds, CDs, bonds, etc. and real estate as completely different investment vehicles.

• Stocks, Mutual Funds, CDs, Bonds, Etc.: Stocks are for capital accumulation. Once you've accumulated enough capital, you sell shares monthly for living expenses. At the end of the drawdown period, you have no more shares.
• Real estate: Real estate provides a nearly perpetual income stream plus capital growth. If you purchase properties in a good investment city, rent growth will exceed inflation, enabling you to maintain your current living standard throughout your lifetime. Also, as your properties appreciate, you can grow your portfolio using cash-out refinance, which will increase your rental income with minimal additional capital.