All Forum Posts by: Eric Fernwood

Hello @Tyler Bailey,

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

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

I hope this helps with your decision.

Hello Joe,

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

...Eric

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

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

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

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​[Source: The Bahnsen Group]

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

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​[Source: The Bahnsen Group]

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

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

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

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

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

Supply:

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

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​[Source: TradingEconomics.com]

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

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

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

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​[Source: National Association of Home Builders]

Demand:

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

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

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

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

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

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

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

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

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

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

Summary

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

Hello @Ignatius Okeke,

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

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

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

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

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

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

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

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

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

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

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

Below is an illustration of the process I followed.

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

Hello @Audrey Scott,

You did not specify this in your post, but I'll assume that you want to buy an investment property. Also, I will assume that your goal is financial freedom.

Financial freedom isn't just about replacing your current income. It's about always having enough money to maintain your lifestyle throughout your lifetime. The diagram below shows the required income characteristics and what they are dependent upon. (Click to enlarge.)

The key point is that financial freedom depends on income, not property specifics. As illustrated in the diagram above, the investment city determines crucial factors: rents outpacing inflation, acquiring multiple properties with minimal capital, and the longevity of your rental income. Therefore, choosing the right investment city is the most critical decision you'll make.

Critical factors for an investment city that will enable financial freedom:

• 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 outpace inflation. Never invest in any location with a stagnant or declining population 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 this list: The Most Dangerous Cities in America, Ranked.
• No rent control of any kind: 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.
• Low risk of natural disaster: Natural disasters can devastate your property and the surrounding community, leading to job losses and the closure of shops and businesses. This forces people to relocate. While insurance might cover the reconstruction of your property, the community's recovery could take years or, in some cases, never occur. Meanwhile, your expenses, like debt service, taxes, insurance, and maintenance, continue.

Once you choose an investment city that meets all the above requirements, select a tenant segment with the right income behaviors. The only way to ensure a reliable rental income is by having a dependable tenant occupy the property. A reliable tenant is someone who stays for many years, pays rent on schedule, and takes good care of the property. Reliable tenants are the exception, not the norm.

How do you target reliable tenants? Before I talk about how to select a tenant segment with a high concentration of reliable people, you need to understand the relationship between a tenant segment and the property.

Every tenant segment has specific housing requirements. And, they are unlikely to rent any property that does not meet all of their requirements. See the image below.

On the left are a tenant segment's housing requirements. On the right are four similar properties. However, only one of the four properties meets all the housing requirements of the tenant segment, and the other three are unlikely to be considered by anyone in this segment.

You can target a specific tenant segment by purchasing properties that match the segment's housing requirements. To identify a segment with a high concentration of reliable tenants, ask several experienced property managers a question like this: "If you were to choose properties where most tenants stay for many years, pay rent on schedule, and take good care of the property, what properties would you buy?"

When I established my investor services business in 2005, I posed a similar question to numerous experienced property managers. Remarkably, almost all of them described the same types of properties. This consistency reveals a valuable insight: once you identify where and what your target segment is currently renting, buy similar properties. This is what the above illustration shows.

Once you know the property profile that will attract your desired tenant segment, you can find properties, either off-market or on the MLS.

You make all decisions based on achieving financial freedom, and there's little luck or guessing required. What I've described is a straightforward process.

I hope this helps.

Hello @Kanika Jain,

I will compare Las Vegas and San Antonio net income and future rent and price growth.

Net Income

It's not about how much you gross but how much you net. When choosing an investment city, don't rely solely on simple return calculations; consider all major recurring costs. Property taxes and insurance are typically the two biggest recurring costs. Below is a comparison of Texas and Nevada.

Sources for insurance and property taxes: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

In order to demonstrate the impact of taxes and insurance on net rental income, I compared the overhead costs of a $400,000 property in Texas and Nevada. (These averages represent state-level data, and individual cities may levy additional taxes.)

To achieve the same level of cash flow as a property in Nevada, you would need to generate a higher cash flow in Texas to offset the higher operating costs. The property must generate $5,712 ($9,037 - $3,325) more cash flow annually to compensate for the higher operating costs in Texas.

Overhead costs have a large impact on cash flow.

Property Price Growth

According to Zillow:

• Average San Antonio single Family home prices decreased by 2.9% YoY.
• Average Las Vegas single-family home prices increased by 6.5% YoY.

San Antonio and Other Texas Cities

The challenge with San Antonio's appreciation and rent growth is its unlimited room for expansion. Here is a Google Earth timelapse view of San Antonio. With no limitations on growth, undeveloped land remains inexpensive. This gives people little reason to choose older existing homes over new developments. As a result, new homes effectively cannibalize appreciation and rent growth of existing homes. What does this mean for an investor?

Financial freedom goes beyond simply replacing your current income; it's about sustaining your lifestyle for life. Inflation steadily erodes the purchasing power of a fixed sum. For example, what costs $100 today will require $155 in a decade, assuming a 5% average inflation rate. If rent growth fails to outpace inflation, you have to get a job to supplement your diminishing rental income.

Las Vegas Metro Area

Below is a map showing the Las Vegas metro situation.

Las Vegas is a small island of private land surrounded by a vast expanse of federal land. Approximately 87% of Clark County (where the Las Vegas metro area is in) is under federal control. Currently, only about 16,000 acres of undeveloped land remain in Clark County. This scarcity has driven residential land prices in desirable areas to $1M per acre or more. Consequently, new single-family homes start at $550,000.

The demographic we've targeted for over 16 years can only afford to rent homes priced between $350,000 and $475,000. Regardless of how many new homes are built, this doesn't increase the number of homes in this price range. The inventory of homes within this bracket is virtually fixed.

Prices and rents are determined by demand, which is driven by population growth. Las Vegas adds 40,000 to 50,000 people each year. There is insufficient housing growth to accommodate all the new residents, so they are competing for the available housing.

What is bringing so many people to Las Vegas? Jobs. At the last job fair, there were over 20,000 open positions. Depending on which article you read, there's between $26B and $30B under construction and in late planning stages in the metro area. This will create thousands of additional jobs, which will attract more people to Las Vegas.

To summarize the Las Vegas situation: There is continually increasing demand due to population growth for an almost fixed number of homes. This dynamic will continue to drive up both prices and rents for the foreseeable future.

It's October, and it's time for another Las Vegas update. For a more comprehensive look at the Las Vegas investment market, please DM me for a link to our blog. There, you'll find detailed information on investing, both in general and specifically in Las Vegas.

Before I continue, note that unless otherwise noted, the charts only include properties that match the following profile.

• Type: Single-family
• Configuration: 1,000 SF to 3,000 SF, 2+ bedrooms, 2+ baths, 2+ garage, minimum lot size is 3,000 SF.
• 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.

What we are seeing:

The chart below is from the MLS and includes ALL property types and price ranges.

Rental Market Trends

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

Rentals - Median $/SF by Month

Interestingly, September saw a rent increase MoM ($1.21/SF vs. $1.18/SF), bucking the traditional seasonal slowdown trend. YoY is up 6%.

Rentals - Availability by Month

The number of homes for rent remained flat MoM.

Rentals - Median Time to Rent

The median time to rent increased Month over Month from 22 days in August to 27 days in September. This is in line with the expected seasonal trend and probably correlated to the rent increase in September.

Rentals - Months of Supply

The supply for our target rental property profile stands at about 1.4 months, slightly down year-over-year. This low inventory will continue to pressure up rents.

We saw a similar slight slowdown in the sales market.

Sales - Months of Supply

In September, our target property profile has a supply of 1.5 months. A six-month supply is typically considered a balanced market. This limited inventory will likely continue to drive prices upward.

Sales - Median $/SF by Month

As expected of the season, the $/SF dropped slightly MoM. YoY is up 3%.

Why invest in Las Vegas?

The goal is to achieve and maintain financial freedom. Financial freedom goes beyond simply replacing your current income—it's about sustaining your lifestyle for life. To accomplish this, you need an income that outpaces inflation. Otherwise, you won't have the extra funds necessary to cover the rising costs of goods and services in the future.

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 $350,000 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 and price and rent increases. Las Vegas's average annual population increases by 40,000 to 50,000 per year. What attracts people to Las Vegas? Jobs. Ongoing construction projects valued between $26 billion and $30 billion fuel employment opportunities. The most recent job fair featured over 20,000 open positions.

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 @Imani Naomi,

Deciding on a property type first is not the right approach. Properties don't pay rent—tenants do. When you buy a property, only one tenant segment will rent it. Here's why.

Each tenant segment has specific housing requirements and won't consider alternatives. Similarly, every property has unique characteristics. Tenants will only rent a property if its characteristics match their housing requirements. The diagram below illustrates this cause-and-effect relationship (click to enlarge).

Also, the goal of real estate investing is not to own property. The goal of real estate investing is financial freedom. This is not just about replacing your current income. It's about creating a reliable income stream that sustains your lifestyle indefinitely. So, everything depends on the income, not the property itself. The property is nothing but a vessel to attract tenants who pay the rent. (Click to enlarge.)

To maximize your success, follow the steps illustrated below. 

Why select the city first? Because all long-term income characteristics depend on where you invest. If you buy properties in a city where rent increases don't outpace inflation, you can't achieve financial freedom—no matter how many properties you acquire.

For example, suppose you buy enough properties to generate $5,000/Mo, which replaces your current income. And, assume that rents increase by 2%/Yr and inflation averages 5%/Yr over the expected hold period, which I will assume is 20+ years. What will the value of the rent you receive in 5, 10, 15 and 20 years under these conditions.

• Year 0: $5,000 x (1 + 2%)^0 / (1 + 5%)^0 ≈ $5,000
• Year 5: $5,000 x (1 + 2%)^5 / (1 + 5%)^5 ≈ $4,325. Although rents increased by 2% annually, the purchasing power of this income is equivalent to $4,325 in today's dollars.
• Year 10: $5,000 x (1 + 2%)^10 / (1 + 5%)^10 ≈ $3,742
• Year 15: $5,000 x (1 + 2%)^15 / (1 + 5%)^15 ≈ $3,237
• Year 20: $5,000 x (1 + 2%)^20 / (1 + 5%)^20 ≈ $2,800

Due to rent increases failing to keep pace with inflation, you won't be able to maintain your standard of living. Your only option will be to get a job to supplement your rental income.

What if you purchased properties in a city with 8% rent growth while inflation averages 5%?

• Year 0: $5,000 x (1 + 8%)^0 / (1 + 5%)^0 ≈ $5,000
• Year 5: $5,000 x (1 + 8%)^5 / (1 + 5%)^5 ≈ $4,325
• Year 10: $5,000 x (1 + 8%)^10 / (1 + 5%)^10 ≈ $5,756
• Year 15: $5,000 x (1 + 8%)^15 / (1 + 5%)^15 ≈ $7,629
• Year 20: $5,000 x (1 + 8%)^20 / (1 + 5%)^20 ≈ $8,783

Income reliability is crucial for financial freedom, and it hinges on the tenant occupying your property. To have a reliable income, you need reliable tenants. Reliable tenants stay for many years, pay rent on schedule, and take good care of the property. Unfortunately, such tenants are not commonplace.

To maximize the odds of always having your property occupied by a reliable tenant, buy properties that attracts a tenant segment with a high percentage of reliable people. How do you find such a segment? Ask 10 to 15 experienced property managers: "What properties would you buy if you wanted tenants who stay for many years, pay rent on schedule, and take good care of the property?"

I conducted a survey in 2005 when I launched my investor services business, and 13 out of 15 property managers described the same properties. The tenant segment we've targeted for over 17 years is families with elementary school-age children and a gross household income between $65,000 and $85,000.

The only properties this segment will rent are:

• Type: Single-family

• Configuration: 3+ bedrooms, 2+ baths, 2+ car garages, 1,100 to 2,400 SF, one or two stories, lot size 3,000 SF to 6,000 SF.

• Rent range: $1,800/Mo to $2,300/Mo

• Location: See the map below for the areas where our target tenant segment chooses to live.

  
  

What has been our results following this process?

• Average tenant stay of over 5 years.
• 7 evictions in 17+ years out of >1,000 tenants.
• Income reliability: Our clients had zero decrease in rent and zero vacancies during the 2008 financial crash. Property prices plunged, but rental income continued uninterrupted. We achieved similar results during the COVID-19 pandemic and the eviction moratorium.
• Average rent growth and appreciation from 2013 through 2023: >8% and >15%, respectively.

Summary

Properties don't pay rent; tenants do. Therefore, identify a tenant segment with a high concentration of reliable people through property manager interviews. Once you know the properties they currently rent, buy similar properties. The properties could be condos, single-family homes, multi-family units, etc. The property type doesn't matter. What matters is income reliability.

Hello @Vinay Sanapala,

I recommend listening to the excellent comments from: @James Wise, @Drew Sygit, @Jay Hinrichs, and @Mark Cruse.

I regularly read people claiming that Section 8 is free money and guaranteed. They argue that tenants wouldn't want to lose their government-supported housing, so they'll be good tenants. This has not been the case for any of my clients who tried section 8. Here's a summary of their experiences:

• In Las Vegas, the government pays about 80% of the rent (depending on the tenant's income) and the tenant is supposed to pay the balance. After the first couple of months, tenants often stop paying their portion. I talked to our client about evicting the non-performing tenant. I researched the situation and learned that there was no point in evicting the current non-performing tenant because you'll likely have the same issue with the next section 8 tenant.
• One client rented his property through section 8 was very happy to get about $50/Mo more that the market rent. At the end of one year, the cost to restore the property to livable condition was over $15,000. The people maliciously destroyed the property.
• Maintenance costs are much higher due to the tenant knowing that any damage they do, the owner will be forced to repair due to the inspections. Section 8 maintenance is very expensive.
• There was a set of condos that were partially rented to Section 8 tenants. The resulting increase in crime drove many of the other residents out, leading to high vacancy rates and constant police calls. The areas around the Section 8 units were always filled with trash and looked a little like a war zone.
• A client once owned four 4-plexes. There were so many calls to the police that the city ended up boarding up several units. With no income from the properties due to all the tenant issues, the bank foreclosed on them. Then either the county or city condemned on at least two of the buildings and demolished them.

The goal of real estate investing is financial freedom. Everything revolves around consistently receiving rent and having the ability to increase rents faster than inflation. So, instead of focusing solely on the property, focus on who pays the rent. No property ever paid rent itself. Only tenants pay rent.

When we started out in 2005, we identified multiple subdivisions where the average tenant stay exceeded five years. We then bought properties similar to what these tenants were already renting. The results are:

• Delivered over 530 investment properties to more than 180 clients worldwide.
• Our repeat business rate is >90%, indicating the clients made money.
• Our average tenant stay is over five years.
• We've had 7 evictions out of a tenant population exceeding 1,000 over the last 17+ years.
• Our client’s rental income has been highly reliable: no vacancies and no decrease in rent during the 2008 financial crash. The results were similar during the COVID-19 pandemic.
• Between 2013 and 2023, the annual average appreciation and rent growth exceeded 15% and 8% respectively.

Vinay, I applaud you for wanting to help people. If you want to do the most good, donate money to charities that have proven to really help the people they target.

Hello @Ben Stanley,

I want to share some thoughts on purchasing properties in areas with a high potential for natural disasters. This is a topic that investors rarely seem to consider. I suspect most people assume it won't happen to their property. And if it does, they believe their insurance will cover them.

Your property isn't the issue. When a natural disaster strikes, it affects the entire area—not just your property. This leads to widespread job losses and closures of schools, shops, and businesses. People are forced to relocate due to the loss of both homes and essential services.

While insurance should cover the reconstruction of your property, until the community recovers, there is no reason for people to move back and rent your property. The community's recovery could take months, years or, in some cases, never. Meanwhile, your expenses, like debt service, taxes, insurance, and maintenance, continue.

Another concern with investing in disaster-prone areas is the high cost of insurance. In fact, some insurance companies now refuse to write new policies in these regions. As property reconstruction costs climb due to inflation, I anticipate more insurance providers will follow suit in the coming years.

Therefore, investors with properties in high-risk areas might consider a 1031 exchange to a safer investment location as a prudent option.