All Forum Posts by: Eric Fernwood

Hello @Marty True,

I agree with you that unless you can cash flow, do not buy the property. Further, I believe that every good investment location/property must meet three criteria:

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
• Currently and likely to continue appreciating for the foreseeable future at or above the rate of inflation.
• In a location where you can make money and you control your property as opposed to the government dictating what you can do.

The right properties in Las Vegas meet the above criteria very well. However, like in any location, good investment properties are hard to find. Currently, only 1 in about 800 to 1000 properties available on any given day passes all our filters including ROI. With 25% down, 30 year fixed, 4.5% rate, expect a 3% to 5% return, after all expenses. With a cash purchase, add about 2%. They are certainly not abundant but we do find them regularly and close several each month.

Hello Dan,

Thanks for the clarification. In my opinion, the value a client brings to the table is their business. Whether they are flipping or investing, they are buyers.

As to why would we not purchase all the good properties for ourselves? A couple of reasons. First, we do not compete with our clients. We only buy properties that no active client is interested in. Second, we can not afford to buy a lot of properties.

On flippers, we generally do not work with flippers at this time. Flippers were a significant part of our business in 2010 through about 2013. We developed software to find below market priced homes and we could resurrect it if needed.

Another factor with flippers is that we have a fundamental policy: "No one gets hurt on our watch." Most of the people who contact us about flipping do not have the resources or experience to successfully flip, they are extremely likely to lose money. Our clients do not lose money, we do not put them in danger. If an experienced flipper came to us who had the resources, we would likely resurrect the software and see what is possible.

I am impressed that you can find good investment properties. Good investment properties are not easy to find manually. We can only do it using our data mining software. With 25% down you can expect 3% to 5% after all expenses, including management and debt service. With a cash purchase, add about 2%.

Hello @Dan Mumm,

A very good writeup defining your relationships with clients, which helps manage expectations. However, I disagree with you that it is the investor's responsibility to find the deals. I believe that as an investment realtor, it is absolutely our role and responsibility to find and qualify good investment properties for our clients. It is the highest value that an investment realtor can bring to clients, in addition to managing closing processes and providing access to network of resources (handyman, plumber, property manager, etc.). I'm not sure about your clientele but a lot of our investors are busy and successful professionals such as doctors, CPAs, engineers, project managers, entrepreneurs, etc, they do not have the expertise or the time to look for and qualify investment properties themselves. A vast majority of our clients live out of state or out of the country. By finding and qualifying properties for them, as well as coordinating and overwatching rehab and property manager handover, we help them achieve their goals of owning real estate in their investment portfolio and be on their way to financial independence, something they may not otherwise be able to achieve.

I agree with you that good investment properties are very hard to find. For us, only about 1 in every 800 to 1000 properties available on the MLS on any given day will pass all of our filters including ROI. It would be impractical to search for them manually using traditional methods such as driving around, knocking on doors, real estate websites, mass mailers, etc. This is why we developed data mining software to aid us in finding good investment properties. We would not be able to provide this service to our clients without the data mining software we developed.

In summary, I strongly believe that finding and qualifying good investment properties is the biggest value that an investment realtor can provide to his/her clients.

According to data from ATTOM Data Solutions, Las Vegas home prices crossed the point in the last few years where it is more affordable to rent than to buy. This means that the demand for good rental properties will increase and rental rates will follow.

Their 2020 3-bedroom rental estimate is $1656, a $151 increase over 2019 or 10% increase, with a population increase of close to 77,000 or 3.78%. That is a large increase in demand and population, given the size of the market.

The population growth and diminishing developable land almost guarantees price and rental rates increases. And, do not look to new homes to offset the increasing demand for rental properties. Currently, the median cost of a new home is over $410,000.

Strong rental growth is one of the reasons why we believe Las Vegas is an excellent location to invest in at this time.

Hello,

IMHO, national data will do little good if you are looking for profitable investment properties. What you need is hyper-local data. Even general local data is of limited value because you will not be buying an "average" property in an "average" location. You will buy a specific property in a specific location that will target a specific tenant pool. (The property type, configuration, location and rent range defines the target tenant pool. Ask if you are interested in more details.)

The reason you need data for a specific tenant pool is that each tenant pool's needs/wants may be different. For example, it may be critical to one tenant pool that the property is within walking distance to public transit. For another tenant pool, easy freeway access may be critical. The point is that there are few generalizations other than that the property must be in a location that is perceived as safe, looks and smells clean and is priced correctly compared to what your target tenant pool perceives as your competition.

How I developed our software was neither easy or quick. My efforts started about 12 years ago when I decided to change professions and build a business selling investment real estate. My first decision was the location. I was living in the NYC area and quickly determined that this was not a place that would work well. After a lot of research, I chose Las Vegas. (If any one is interested as to why Las Vegas, let me know.)

Once I settled on the location I started researching the market. I quickly realized that the days of driving around looking at properties and cruising real estate sites was over. In Las Vegas, good properties typically remain on the market 3 to 5 days during peak times and with over 10,000 properties on the market at any given time, data mining was the only viable option.

In order to build the software I first had to have a clear understanding of the tenant pool I wanted to target. This required me to define what I considered to be a good tenant. I define a good tenant as someone who:

• Has stable employment in a market segment that is very likely to be stable or improve over time.
• Pays all the rent on schedule
• Takes care of the property
• Does not cause problems with neighbors
• Does not engage in illegal activities while on the property
• Stays for many years

I next determined the tenant pool with the highest concentration of good tenants. With the tenant pool identified, I then developed a property profile (location, type, rent range and configuration) that my target tenant pool would be willing and able to rent. Over time we've developed a number of rules to efficiently filter out properties that are unlikely to be good rentals. For example, if the ratio of bathrooms to bedrooms does not conform to the following, we generally remove the property from consideration: Bedrooms <= Bathrooms + 1. In total, we have about 40 such filters.

Once we reduced the number of candidate properties using filters, we next evaluate properties based on more computationally expensive factors. For example, one of the key factors is subdivision median time to rent. Basically, if it takes a long time for properties to rent in a subdivision, you do not want a property within that subdivision. Properties that take a long time to rent in the good times will be very hard to rent in the bad times, when you are most likely to need the income. How well did our clients do during the 2008 crash? Zero change in rent and zero increase in time to rent. The market value of their properties crashed like every other property in Las Vegas but their income stream was unchanged.

While data mining is critical to get the number of candidate properties down to a manageable size , you still need to go on-site and manually evaluate the property. For example, if there is a constantly barking dog next door the property will not rent, no matter how good the numbers are.

In summary, there is no alternative to targeting a specific tenant pool and acquiring a deep understanding of that pool. Acquiring the information you need to build filters and processes will take time. Also, once you identify candidate properties, you must have a process in place to validate them, never blindly believe what the numbers say.

Feel free to ask questions and I will do my best to respond.

Hello @Dan Mumm,

On my comments concerning rent to price ratio, I was responding to the use of rent price ratio for comparing properties in different locations. That was why I chose one in Austin and one in Las Vegas. And, I agree that as long as you are comparing similar properties, in the same location, rent/price ratio is not invalid. However, it is also not very useful. It provides no indication of how the property will perform due to factors like HOA fees, insurance, taxes etc.

Also, metrics like ROI are at best a snapshot in time. They predict how the property is likely to perform under ideal conditions on day one of a 30 year hold.

On returns in Las Vegas, with 25% down we are seeing 3% to 5% (real return). Cash purchases are 5%-6%. That said, such properties are difficult to find. We can find them only because we developed data mining software for this purpose.

@Account Closed

You mentioned hard water and pipes. We have never had a hard water problem with pipes. We have had 4 occurrences where the water line from the main to the house leaked and had to be replaced. But that had nothing to do with hard water. I do believe that hard water shortens the life of water heaters. Water heaters only last 12 to 15 years here.

On the climate and the AC, I am of the opinion that the dry climate of Las Vegas is easier on AC systems than humid climates. Plus, the homes here are well insulated and windows are double pane. I've had problems with AC systems in humid climates but very rarely in Las Vegas.

The properties we deal with have very low maintenance cost. Part of it is due to our careful selection of properties and part is due to the construction. Below is a typical Las Vegas home. As you can see, there is not a lot to maintain. Even the "fences" are concrete block, not wood.

Hello @Account Closed

This was an example from our website where I had the complete data for both properties. Probably 2 or 3 years back. It in NO way represents the properties we deal with today. We ONLY deal in A class properties. I totally agree with you on C (D) Class areas. We will not touch them.

The actual point of my post is that Rent/Price ratios are misleading, at best. It was not an attempt to represent current opportunities in Las Vegas .

As stated in my previous post, for the properties (A class) we target today, we expect a rent of $1500-$1600 for a $260k-$265k home with <$10k rehab. For a home costing $340-$350k we expect the rent to be $2000 - $2100.

Hello @Account Closed

Rent to price ratios can be deceiving. Below is an example of two (actual) properties. One is in Las Vegas and one in Austin TX. Note, we own a home in Las Vegas and one in Austin. So, I have a pretty good understanding of both locations.

* Note: I used the same association fee for both properties to keep things "apples to apples". The property in Las Vegas actually does not have a HOA.

If I compute the rent/price ratio, the Austin property is the clear winner:

• Austin: $,1700 x 12 / $252,500 = 8.1%
• Las Vegas: $1,490 x 12 / $255,000 = 7.0%

However, rent ratios do not take into account differences in property taxes, state income taxes, insurance or anything else. Below I estimated the return for both properties. To provide a realistic comparison, I made the following assumption for both properties.

• 20% down
• 4.5% rate
• 30 year term
• 3% closing cost
• 8% property management
• 0% state income tax. Neither Texas or Nevada have a personal state income tax.

Below are the formulas I use for ROI and cash flow:

• ROI = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax) / ( DownPayment + ClosingCosts)
• Cash Flow = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax)

Calculations for the Austin property:

• ROI = (1700 * 12 - 1024 * 12 - 1700 * 12 * 8% - 1625 - 6022 - 41 * 12) / (3% * 252500 + 20% * 252500) = -2.9%
• Cash Flow = (1700 * 12 - 1024 * 12 - 1700 * 12 * 8% - 1625 - 6022 - 41 * 12) = -$1,659/Yr. or -139/Mo.

Calculations for the Las Vegas property:

• ROI = (1490 * 12 - 1033 * 12 - 1490 * 12 * 8% - 450 - 1511 - 41 * 12) / (3% * 255000 + 20% * 255000) = 2.7%
• Cash Flow = (1490 * 12 - 1033 * 12 - 1490 * 12 * 8% - 450 - 1511 - 41 * 12) = +$1,600/Yr. or $133/Mo.

Even though the Austin property is the clear winner based on the rent/price ratio, it is an absolute loser when you do a real world calculation. You must include all significant recurring costs when you are comparing properties. Simplistic calculations like rent to price ratio frequently produce invalid results.

In today's market, only 1 out of every 800 - 1000 properties in Las Vegas is a good investment. For the properties we target, we expect a rent of $1500-​$1600 for a $260k-$265k home with <$10k rehab. These properties provide a balance of cash flow and appreciation growth thanks to Las Vegas' outstanding economic outlook for the foreseeable future.

Hello @Edward L lauckern,

An excellent question. I will start my response with a quote:

“Live where you like but invest where you can make money.” …David Lindahl

If you can achieve your goals locally, then I recommend investing locally. The key question is, what is your goal? I believe that every investment property must meet the following three criteria.

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
• Currently and likely to continue appreciating for the foreseeable future at or above the rate of inflation - Properties appreciate in locations that have strong demand, which is the key driver for sustained profitability.
• In a location where you can make money and you control your property as opposed to the government dictating what you can do.

Achieving these three criteria requires a combination of the right location, tenant pool, investment team and property. If you do not get one or more correct, you are likely to lose money or not achieve your goal. The two most important are the location and the tenant pool.

While I could list several criteria, I will include only three in order to keep this post short. If you would like my full criteria list for selecting a location including tenant pool, property manager, Realtor and location, let me know.

• Appreciation - Appreciation is the best indicator of demand. If properties are not appreciating, then there is limited demand which indicates poor economic condition for the area. Also, rents lag property prices by 2 to 10 years so the trends in property prices today are a good barometer of what rents will do in the future. Also, if property prices are not rising at or above the rate of inflation, rents are effectively declining.
• Population size - I would focus on cities with a population of 1M or more. Small cities tend to be reliant upon a single industry, which makes them vulnerable to economic changes.
• Jobs - Not just any jobs but jobs that pay similarly to what your target tenant population is making today. Remember that companies do not live forever, the average life expectancy of an S&P 500 company is under 15 years. So, unless new employers are setting up operations in the location, look somewhere else.

All the above said there is no perfect investment location. Factors such as not having a good investment team or properties that require a lot of money to rehab could make an otherwise good location unacceptable. So look for a strong good and not a “perfect” location, they do not exist.

@Bill Brandt

Hello Bill,

It is impossible for me to comment since I do not know the location or condition of your properties. Also, the statistics are the median $/SF for a range of properties that are: between 1,100 SF and 3,000 SF, built after 1985, have 3 or 4 bedrooms, a 2 or 3 car garage within a specific geographic area. All the properties match a specific target tenant pool. So, they are not typical properties and we may be getting a higher $/SF than most properties.

Bill, if you would like to contact me directly and provide the addresses, I will be happy to provide an opinion on the rent rates for your properties.