All Forum Posts by: Eric Fernwood

Hello @Michael Modesto ,

Before I attempt to answer your question, you need to know two things:

• I am not an attorney and am in no way qualified to give legal advice. You will need to investigate for your self and talk to competent authorities before you do anything.
• I am a Realtor in Las Vegas and my practice is almost exclusively remote investors and they use either LLCs or LLCs in combination with what is called a Nevada Asset Protection Trust to protect their assets.

The structure that the attorneys I have listened to advocate the following legal structure:

Some people I know who do not even own real estate in Nevada use the Nevada Asset Protection Trust due to the security it provides. Currently, 15 other states offer similar trusts. (I will provide links to further reading later.) Once you establish the trust you create what is called a Series LLC. Then, with no further costs you can create one LLC per property. Whether the properties are located in Nevada or other states should not matter. The only catch is that you need an agent that is a resident of Nevada. I am the agent for several of my clients. Once you read about the trust, you will see that the trust agent does nothing other than receiving legal notices should any be sent to the trust.

Another fact to consider is that Nevada is called the Delaware of the West for a reason. What I have been told is that when Nevada decided to get its act together on corporate laws they essentially copied after Delaware. I have been told by several clients that Nevada is a very desirable state in which to do business because of its business friendly laws.

Here are some links for further investigation. I will state one more time, I am not an attorney and am in no way qualified to give legal advice.

• Forbes article on Nevada Asset Protection Trust
• Another good source of information on the Nevada Asset Protection Trust
• Series LLC Article
• Nevada Series LLC Article

I hope the above helps.

Eric Fernwood

Hello @Louise Whidby-Drake ,

You are wise to not limit your investments to just where you live. Before I answer your question (as best I can), know that I believe you should only buy properties that generate a sustained positive cash flow and are located in an area likely to appreciate over time. Meeting these two goals (sustained positive cash flow and appreciation potential) is not easy. Let me explain:

Sustained positive cash flow

Sustained positive cash flow means that rent consistently exceeds the total recurring costs. What criteria must the property and the area meet in order to achieve sustained positive cash?

• A good property manager. The property manager is the key member of any investment team. Hint: collecting the rent is only one part of their value. 
• A good tenant. I define a good tenant as one who: pays all of the rent on schedule, takes care of the property, does not cause problems with neighbors, does not engage in illegal activities on the property, and stays for multiple years.
• Low maintenance cost. This is a combination of the climate, condition of the property, and the quality of the property manager.
• Stable or growing job market - Rental property profitability is dependent on a stable job market. You want a job market that is growing and not dependent on industries like manufacturing. Also, it is better to have a lot of smaller employers than a few large employers.
• Favorable property price vs. rent ratio. There are areas where it is virtually impossible to rent a property at a profit due to the high cost of the properties vs. the rent.
• Landlord friendly laws and taxes. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict a tenant. Also, state, local and property taxes are very important. It is very difficult to have a profitable property in a high tax area.
• A property that will rent quickly at a price which will exceed recurring costs thus generating a profit.
• There are other considerations as well but I think I covered some of the more important ones.

Potential Appreciation

• Low crime. High crime and appreciation do not go together.
• Sustained population growth of people who can and will rent your type of property.
• A stable area in which people desire to live and have good schools.
• Overall state population growth.

The Process

How should you identify and evaluate an area against the above two criteria? Below is a very simplistic view of the process I would follow.

Where

• Choose a city which is experiencing sustained growth and is likely to have continued growth. See population changes by state here.
• I would limit the locations to major cities with airports so you can easily reach there.
• A rental property is no more valuable than the jobs around it. The local chamber of commerce or university will likely have the information you need. Avoid boom towns where the jobs are here today and gone in 5 years. An example would be a town fueled by a major construction project (a dam, pipeline, high speed train, etc.). Once the project is complete all the construction jobs will vanish as will your renters and you will likely have a disaster on your hands. Job growth and population increase are the basis of long term appreciation.
• Check the landlord/evictions laws. For example, in Las Vegas the typical eviction takes less than 30 days and costs less than $500. I have heard from clients that evictions in California (and some other states) can take up to a year if the tenant actively resists and costs thousands of dollars in legal and other fees (not to mention the accumulated damage over the extended eviction period). No investor initially worries about evictions, until one happens to you. So, be certain to check the appropriate laws and regulations before you buy. Your simplest option would be to talk to local property managers. They deal with such issues every day. Also, be careful investing in cities with rent control laws.• State/city/county income taxes. Most states have a personal income tax. This can significantly impact your return. For example, a property with a 5% return in Nevada, Texas, Washington or Wyoming will actually earn you 5%. If the same property was located in areas with taxes you would also have to adjust down the return due to the taxes. I would not eliminate all states with taxes but you need to take taxes and such into account when you are comparing profitability.
• A city where climate is not a major factor. For example, people rarely move during heavy snowfall seasons in the north east. Or, the population swells and contracts rapidly with the season as in south Florida where rentals tend to seasonal.
• A location where annual maintenance costs are reasonable. Higher costs are sometimes due to climate or construction issues. For example, in heavy snow country you will have to include snow removal costs and more physical damage to driveways and the structure. 

What

Now that you have a "where" (the location) that may be profitable, you need to know what to buy. You need to determine four criteria for each specific local, which are listed below.

• Type: Condo, high rise, single family, duplex, single story, two story, etc.
• Configuration: Two bedroom, three car garage, mud room, etc.
• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.
• Property laws, taxes and regulations: This is a catch-all category of local/state issues that affect landlords: eviction process and costs, rent controls, state/local income taxes, etc.

Where can you get this information for free? Local property managers. Property managers deal every day with tenants, maintenance issues, renting vacant units, local laws, evictions, etc. In short, every thing you need to know. Talk to 4 or 5 mid-sized local property managers. Tell them that you are new to investing and are looking for a property manager to work with. Develop a list of questions and ask the same questions of each property manager. (I have a set of property manager interview questions, drop me an email if you would like a copy.) After only a couple of interviews you will begin to have a very good understanding of the local market and what type of properties rent best and how long they typically take to rent if the properties are market ready. Remember that the property manager only makes money when they collect rent so they want rentable properties too. The last thing they want is another unrentable property. This approach will work in your home city or across the country.

Profitability

Once you know specifically what type of properties you are looking for (the "What"), the next step is to determine whether you can make money with these properties. Look on Zillow (or similar sites) for recent sales of such properties. Once you know the sale price of such properties and know what they will rent for (from talking to the property managers), you can use a tool I created to determine if you can make money: Break-Even Calculator -  below is a screen shot.

Using this tool and data from Zillow, I looked at properties in three cities: Austin, TX; Cupertino, CA and Las Vegas, NV.

If the Break-Even Price is lower than the Actual Sold Price it is unlikely that properties in that city will generate a positive cash flow. As you can see in the table above the prices of properties in Cupertino (and possibly Austin) are too high relative to the rent to generate a positive cash flow. If you cannot make an acceptable level of profit, look somewhere else.

If you can make a profit, time to dig deeper. Ask the two property managers you liked the best to recommend a Realtor. You will need to interview them and select the one that you think can provide the most value for you. I would provide them with the specific property criteria you developed and have them send you matching properties. If everything looks consistent with what you learned from the property managers, time to visit. Have the Realtor arrange for you to see 5 or more properties. Also, spend some time with the property manager of your choice. The property manager is the critical team member and you need to know and trust them.

While the above is not a complete process, I hope it will get you started. My best wishes to you and if you have questions feel free to reach out.

Eric Fernwood

Hello @Tom Suvansri ,

A good question. There is no standard answer because each locale is unique and your personal situation is unique. Based on market demand and the potential tenant population it could be single family homes in one location and condos in another. The basic approach is to determine where (example: south of the river, west of I35 and north of 11th street) and what (2 bedroom condo, three bedroom single family home, etc.) Once you know this where and what you can then determine whether the property will generate a positive cash flow. If not, look for another location and start again. This process is illustrated below. I will explain each block later.

The moral is that just because you would like to buy investment properties in a specific location does not mean that the property will generate a positive cash flow. Where can you find the location specific information you need quickly and at essentially no cost? Talk to local property managers.They deal with rental properties every day and know what rents well and what doesn't. Contact three to five and tell them you are just starting and you are looking for a property manager to work with. (I have a set of property manager interview questions you (or anyone else) can have. Just drop me an email.) What is the key information you need to know (what and where)?
• Type: Condo, high rise, single family, duplex, single story, two story, etc.
• Configuration: Two bedroom, three car garage, mud room, etc.
• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.
• Property laws, taxes and regulations: This is a catch-all category of local/state issues that affect landlords. An example is evictions. In Las Vegas an eviction typically takes less than 30 days and costs less than $500. Clients tell me that in California, if a tenant knows what they are doing, an eviction can take up to a year and can cost thousands. Another example is state income taxes. Nevada and Texas have no personal income taxes so a 5% return is actually a 5% return. If you buy a property in a state with a high personal income tax rate, you need to factor this into your actual return.

After only a couple of interviews you will begin to have a very good understanding of the local market and what type of properties rent best and how long they typically take to rent if the properties are market ready. Remember that the property manager only makes money when they collect rent so they want rentable properties too. The last thing they want is another unrentable property. This approach will work in your city or across the country.

Once you know specifically what type of properties you are looking for, use Zillow (or any other such site) and find rental properties that match the property managers recommendations (type, configuration, location, rent range). Next, find recent sales of similar properties (same source).

After you complete the above you will have a very good idea of what good rental properties cost, and how much they will rent for. Knowing these two pieces of information you can determine whether the properties in that area can generate a positive cash flow using a tool I developed for making what I call a quick investigate/forget decision. You ( and anyone else) are welcome to use the tool. Here is the link and below is a screen shot.

The tool generates what I call the break-even price based on the rent and other known factors. The break-even price is the purchase price where income (rent) equals recurring expenses (debt service, taxes, insurance, etc.). Watch the getting started video for details but simplistically enter the estimated rent and some other known factors and click Estimate. In the example shown (which you can automatically generate by clicking Sample Data in Getting Started), the maximum you can pay for a property which will rent for $1,200/Mo. (assuming all the other factors match your situation) is $185,960. Will you make money at this price? NO!!!! There are other costs to be considered as well. Making a purchase decision is not the purpose of the tool. The purpose of the tool is only to determine whether it is worth the time and effort to investigate further. For example, suppose you find a property where rehab and closing costs are minimal and you can get the property for $160,000. With a break-even price of $185,000 , you should make money on a property selling for $160,000 so it is worth further investigation. However, if you would have to pay $190,000 to get the property, forget it and look for another. Remember that it is only for a quick investigate/forget decision, not a purchase decision. 

At this point you will know: what type of property and where to buy the property as well as whether you can make a profit. If you can make a profit, time to see some properties. Contact a Realtor and provide them specific data (what and where) and tell them you want to see data on properties that match your criteria.

A final point. Never buy a property without first having the property manager see it. I deal with investment properties. I am a Realtor in Las Vegas and my practice is almost exclusively remote investors. Plus, I’ve owned 20+ rental properties. Despite my own experience I never buy anything without all members of the team agreeing that it will be a good property. My team consists of:
• Two Realtors with investment experience.
• A property manager with years of experience and who is managing over 1,000 properties.
• A licensed property inspector who is also a licensed plumber.
• Other as the situation dictates.

Tom, I hope the above process helps. Feel free to ask questions if what I said was not clear.

Best Wishes,

Eric Fernwood

Sometimes the hardest thing to do is to do nothing at this time. Based on what I know, doing nothing appears to be the right choice at this time.

Why should you use a property manager? Most new investors think that the only value a property manager provides is collecting the rent. Absolutely not true. A good property manager contributes value at all stages of the investment process. I created the following graphic listing some of the property managers contribution by phase:

Market Evaluation

Many people spend a small fortune on real estate seminars, coaches, books, videos, etc. While the lessons learned through these channels can be very valuable, little of it applies to any specific local because they are all different. So, what might work great in Portland, Maine might be disaster in Houston, Texas. Successful investing requires local knowledge, not general knowledge. The local knowledge you need includes:
• Type: Condo, high rise, single family, duplex, single story, two story, etc.
• Configuration: Two bedroom, three car garage, mud room, etc.
• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.
• Property laws, taxes and regulations: This is a catch-all category of local/state issues that affect landlords. An example is evictions. In Las Vegas an eviction typically takes less than 30 days and costs less than $500. Clients tell me that in California, if a tenant knows what they are doing, an eviction can take up to a year and can cost thousands. Nevada and Texas have no personal income taxes so a 5% return is actually a 5% return. If you buy a property in a state with a high personal income tax rate, you need to factor this into your actual return.

Where can you get the local knowledge you need quickly and at no cost? Property managers. Every day they work with properties and tenants. Property managers know the type, configuration, location and rent ranges that rent best. They are also experts on the local/state issues that affect landlords like evictions, rent restrictions, taxes, etc. So, if I were considering investing in a market, I would interview 3 to 5 property managers for the position of my (future) property manager. I have a list of property manager interview questions and if you (or anyone else) would like a copy, drop me an email.

Property Selection

I have owned 20+ investment properties and for the last 7 years I have almost exclusively dealt with investors. Six (and sometimes 7) days a week I am involved with finding properties that meet the dual criteria of sustained profitability and probable appreciation and overseeing rehabbing properties for my clients. Based on my experience, I feel I stay well informed on the rental market here in Las Vegas. However, I NEVER consider a property unless the property manager approves. She has saved us on multiple occasions by alerting us to properties that rent poorly. Always have your property manager review and approve every property you buy. Remember that they are on the same side as you; the last thing they want is another un-rentable property. Also, get their opinion on rent and time to rent.

Due Diligence

During due diligence, two people you want in the property ASAP are the property inspector and the property manager. The property inspector will produce a report of what is defective but does not care about the property cosmetics. If the walls are painted back and ceiling pink, they do not care as long as the paint is not pealing. The property manager will provide a report on what needs to be changed cosmetically in order to make the property market ready. In general, I do most of what the property inspector recommends and all of what the property manager recommends.

On rare occasions, the property manager will notice things about the property that will make it an undesirable rental property and you may cancel due to their recommendation. This "final" evaluation is very important.

After close of escrow

Light rehab & cleaning
Most property managers I have worked with will handle light rehab: replace carpets, paint, minor plumbing, etc. In my case, I have a trusted team of contractors that can do the rehab faster and at a lower cost than most property managers.

Marketing
The only way to find tenants is through marketing. The property manager I work with posts the images and description on the MLS, Craigs List, Postlets, etc. Marketing is not just about posting the property's photos and information on various marketing channels, they must also follow up on each lead and get potential clients into the property and get them to submit completed applications.

Prospective Tenant Screening
Proper tenant screening is critical to finding good tenants. Some of the aspects of tenant screen include:
• Credit - These days may renters have bad credit but the key is understanding why their credit is bad. A recent applicant had a combined credit score in the mid 500’s due to medical collections. Her child got very ill and she had no where near enough money to pay for what was needed and the result was medical collections. If we did not consider the medical collections, her combined credit score was in the low 800’s. Another applicant had a reasonable credit score but upon further examination we discovered that in the past they had two collections for back rent.
• Criminal History - If the applicant has any criminal history (federal, state, county, sex offender, etc.) you do not want them.
•Back Child support & Alimony - If it comes down to meeting a court order or paying rent, you lose.
• References - The current landlord is not relevant because if the tenant is a problem, they will likely give good reviews just to get rid of the tenant. The one that matters is the prior landlord. Essentially, you ask if, “Would you like them back?” If the answer is yes, we may have a winner.

Collect all the rent on schedule
The most important task of a property manager is collecting the rent. The process is likely different where you are but below is a simplified description of how it works in Las Vegas:
1. Rent due on the 1st
2. On the 3rd a pay or quit notice is pasted on the front door.
3. A few days later an eviction notice is filed.
4. About 20 days later the tenant is removed from the property with the assistance of the constable.

While the above sounds easy, if the tenant does not pay all of them on schedule it takes a lot of time. And, while you may be willing to accept sad stories in lieu of the rent, property managers have heard it all and they want the money. Are you really prepared to do this in the face of a really, really good excuse for not paying the rent?

Long term tenant/cost management
There are multiple aspects to this issue including whether the tenant's living habits are damaging the property. If so, then the property manager needs to be proactive on this. How would you know if there is damage? I know of two ways: 1) Whenever there is a need for maintenance, the property manager's handyman enters the property for the repair and reports back to the property manager if they see any issues. 2) Periodic inspections. In the lease agreements I have seen the landlord has the right to enter the property at reasonable hours with a 24-hour notice. Most landlords do an inspection at least once a year.

Asset preservation
All properties need preventative maintenance. For example, if there are tree limbs toughing the side of the house or the roof, long term you are going to have (expensive) problems. Periodic HVAC service, guarding against snow buildup, etc. Small problems can become expensive disasters if they are not corrected early.

Brett, I hope the above explains some of the contributions of a good property manager which I believe to be far beyond collecting the rent.

Best Wishes,

Hello @Brett Vandervort ,

You should listen to @Hattie Dizmond on getting a loan. As long as it is a 1 to 4 unit property you should be able to get financing (or your parents can get the loan). As to whether it is a good time to buy? I see two aspects of this question:

• Is this a good time for you and your parents? This is a financial & emotional decision and I have no ability to comment on this.

• It is a good time to buy? Here I can offer some advice.

In my opinion, there is never a good time or bad time to buy. There are only good deals and unacceptable deals. Even during a sellers market there may still be good deals available but they will take more effort to find. And, if you cannot find a good deal, do nothing. You can never afford a bad deal. What constitutes a good deal? Properties which generate sustained positive cash flow and are likely to appreciate. These two goals sound simple but they are not; especially in multiunit properties. First, sustained profitability. Generating a sustained positive cash-flow includes:

• Buying the property at the right price vs. rent. Simplistically, Rent > Recurring Expenses + Profit. Recurring Expenses include: Debt Service, Insurance, Taxes, Periodic Fees, etc. I will tell you how to make a quick investigate/forget decision later.

• Keeping good tenants in the property. I define a good tenant as one who: pays all of the rent on schedule, takes care of the property, does not cause problems with neighbors, does not engage in illegal activities on the property and stays for multiple years. Never rent to friends and family.

• Buying a property in acceptable condition. Many of the multiunit properties I see (I am a Realtor in Las Vegas and my practice is almost exclusively remote investors so I am always looking for properties that meet the dual goals of profitability and appreciation.) in Las Vegas are not in good condition and require significant upfront capital investment. I do not think this is a possibility in your consideration.

• Stable or growing job market - Rental property profitability is totally dependent on employed tenants. The property must be in a job market area that is at least very stable but preferably growing.

• Control maintenance cost. Do you have the skills to fix the things that will fail? If not, do you know a cost effective handyman?

There are other factors but the above is a good start. On the second goal of potential appreciation, this is quite different from single family properties. If you buy a single family property and later decide to sell it, there are two categories of potential buyers: individual owners and investors. If property prices are rising in the area, the value of a single family property will rise with it and the highest offer is likely to come from an individual wanting the property as a residence. With multifamily properties, the primary buyers are other investors and investors focus on return more than area values (although area values are a component). So, for investors, the key valuation component is rising rents. Rents rise (ignoring inflation and such economic factors) on increased demand. The key components of demand include a combination of the following:

• Low crime. High crime and appreciation do not go together.

• Sustained population growth of people who can and will rent your type of property.

• A stable area in which people desire to live and have good schools.

• Sustained job growth.

In my practice I have to quickly evaluate a lot of properties so I developed a tool for doing what I call a quick investigate/forget decision. You ( and anyone else) are welcome to use the tool. Here is the link and below is a screen shot. Watch the getting started video for details but simplistically all you have to do is enter the estimated rent and some other known factors and click Estimate. The resulting amount is the purchase price where rent = recurring expenses + profit.

Remember that the only value of this tool is to decide whether to take the time to investigate the property or to forget it. As an example, suppose you are considering a multiunit property matching the following:

• Rent: A 4-plex and the rents are 2 @ $500 and 2 @ $600/mo. So, your total gross rent is $2,200. Based on your research a 9% vacancy rate is a reasonable estimate so I would use ($2,200 x (1 - 9%) = $2,000 as the rent.

• Monthly Fees: Suppose you end up paying water and sewage and that averages out to be $200/Mo.

• Your goal is a 10% profit (a very good return these days).

• Financing: The terms of your loan is 20% down, 30 year, 5%.

• Real Estate Tax: 1%/Yr

• Insurance: $600/Yr

• Management: You manage the property yourself (A very bad idea but that is another issue.)

Enter these numbers into the estimator, click Estimate and you will see that the break-even price is about $300,000. So, if you think you would have to pay $310,000 for the property, forget it and look for another. If you think you could get the property for $260,000 then it is time to get the spread sheet out and really investigate the property taking into account rehab costs, existing leases, etc.

So:

• Under ideal conditions, a project like this is going to take a lot of time and effort, if everything goes well. Do you have the time?

• There will always be unplanned expenses so in addition to the down payment and initial rehab you need a cash reserve. Are your parent's up for this?

• Managing a property is not an easy task. I wrote an article once about the most popular ways to fail. Managing your own properties is on that list.

Brett, I hope the above helps.

Hello @Sulin Rubalcava ,

There are many good sources including Biggerpockets where you can get a high level understanding of the basic issues involved in real estate investing. As to attending seminars and such, I have a fundamental concern about their relevance to local markets. Not that the material isn't good, most of it is. My problem is that it has to be very general in nature since it is designed to appeal to a wide audience. And, what might be an outstanding investment approach in a specific local in Cleveland would probably be a disaster in a specific local in Ventura, California. What you need is very focused local knowledge, not just the generalized knowledge you will get from seminars.

Best Wishes.

Hello @Precious Thompson ,

I believe that the goal should be to purchase properties that generate a sustained positive cash flow and are located in an area likely to appreciate. Profitability is the most important of the two factors and the only one you can easily determine. How much below market you paid for a property is not going to seem very important if you are losing money each month. Is it easy to find properties that meet the dual test of sustained positive cash flow and probable appreciation? No! Sustained positive cash flow means that rent consistently exceeds the total recurring costs. (I do not take into consideration the positive aspect of taxes during initial property selection.) What criteria must be met to achieve sustained positive cash flow?

• Property price vs. rent. There are areas where it is virtually impossible to rent out a property at a profit due to the cost of the properties vs. the rent.

• Stable or growing job market - Rental property profitability is totally dependent on employed tenants. The property must be in a job market that is at least very stable but preferably growing. Also, it is better to have a lot of smaller employers than a few large employers.

• Keeping a good tenant in the property. I define a good tenant as one who: pays all of the rent on schedule, takes care of the property, does not cause problems with neighbors, does not engage in illegal activities on the property and stays for multiple years.

• Low maintenance cost. This is a combination of the climate, condition of the property, and the quality of the property manager.

• Landlord friendly laws and taxes. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict a non-paying tenant. Also, state, local and property taxes are very important. It is very difficult to have a profitable property in a high tax area.

These are some of the more important criteria for sustained profitability. What about potential appreciation?

• Low crime. High crime and appreciation do not go together.

• Sustained population growth of people who can and will rent your type of property.

• A stable area in which people desire to live and have good schools.

• Sustained job growth.

Going back to profitability, profitability depends on multiple factors including the purchase price. While there are many formulas for profitability, the one I use most closely reflects what my client actually see in pre-tax cash-flow:

There is only one thing in the above formula over which you have complete control and that is the purchase price. Everything else you have little control over. How can you control purchase price? By only making offers for properties which meet the dual goals. Is it easy to find such properties? In my experience it is not. I am a Realtor in Las Vegas and my practice is almost exclusively remote investors which means I am always searching for properties that meet the dual criteria that I mentioned. Since I have to consider a lot of properties in order to find a good one, I developed a tool for doing what I call a quick investigate/forget decision. You ( and anyone else) are welcome to use the tool. Here is the link and below is a screen shot.

Watch the getting started video for details but simplistically enter the estimated rent and some other known factors and click Estimate. In the example shown (which you can automatically generate by clicking Sample Data in Getting Started), the maximum you can pay for a property which will rent for $1,200/Mo. (assuming all the other factors match your situation) is $185,960. Will you make money at this price? NO!!!! Here is where it works well. Suppose you find a property that rehab and closing costs are minimal and you can get the property for $160,000, it is worth further investigation. If you think you would have to pay $190,000 to get the property I would forget the property. Remember that it is only for a quick investigate/forget decision, not a purchase decision.

In summary, I think you should only consider properties that will generate a sustained positive cash flow and are located in an area likely to appreciate. Any time you need to make a quick investigate/forget decision you now have a tool to do that.

Best wishes.

Eric Fernwood

Hello @David Gillilan ,

The cost of money is only one of the cost elements to be considered on a flip. But, how much of an impact is the cost of money? I will show you how I would build a spreadsheet to determine the effect of various money costs. Before I do that below is how I determine the maximum price I can pay for a flip in order to make a profit.

Work backwards to make money

Suppose you find a property that looks like a good flip. You carefully study recent sales comps and decide that after being remodeled to market standards, the property should go under contract for $200,000 within 60 days after the rehab is complete and it is placed on the market. And, your trusted contractor conservatively estimates it will cost $40,000 and take 2 months to bring it to market standards. Since profitable flippers are pessimists I would estimate the total rehab cost as $50,000. Your hold time will be:

As to profit, suppose you are OK with a 10% return. So, your goals are:

On hard money financing, the last time one of my clients used hard money the terms were: 40% down, 5% up front, 9% interest, 18 month life of the loan. For the example property your loan costs would be:

Also you determined that the real estate tax rate is 1%, property insurance is $450/year, purchase (closing) costs are 3% and cost of sales (commissions, closing costs, etc.) will be 8%. I put these numbers in the table below:

Now that we have an (over simplified) estimate of the total cost, we can work backwards from the probable sales price to determine the maximum price we can offer.

Based on the above, you cannot pay more than about $99,000 for this property if you are going to make money. I created a spreadsheet to calculate the above numbers which is illustrated below. If you (or anyone else) would like it, drop me an email.

Using the spreadsheet as a starting point you can build a model for determining the maximum price you can pay for a property. 

I have a few flip considerations for you.

Flip considerations

• Before settling for a hard money loan, check into alternatives. Talk to a knowledgable lender about 203k loans and possibly HomePath. You need to get this nailed down before you even start looking.

• You may have noticed that I used the phrase "market standards" multiple times. There is a common erroneous belief that if a property is "really improved" that it will sell for more than what similar homes have sold for. This is never true. If similar homes are selling for $200,000, even if you put $100,000 of "improvements" into the property, it will not significantly increase the sales price. One of the biggest challenges for new flippers is the tendency to remodel the property to their taste as oppose to rehabbing to market standards. If similar homes are selling for $200,000 with vinyl floors, travertine tiles will not significantly increase the sales price. You need to really know what characteristics made similar properties sell and not go much beyond that. Cost control during the rehab is critical. Of course, there are small things that can make the property much more desirable to potential buyers without spending a fortune. For example, ceiling fans in the master bedroom and family room, improving the curb appeal and the front entrance area, fresh paint, etc.

David, I hope the above helps. Flipping can be a profitable business but only if you really know what you are doing and you have a well thought out plan. Be careful and good luck.

Eric Fernwood

Hello @Mark Kumm ,

Many would-be flippers buy a dilapidated property, remodel it to their own taste, discover that they can't sell the property for what they need to break even, run out of money and sell at a loss. I am a Realtor in Las Vegas and my business is almost exclusively remote investors. I am in potential investment properties all the time. And, about twice a month, I see properties that have been remodeled to the flipper's personal taste such that there is no way to break even let alone make money. Unless you really know what you are doing you can lose a lot of money flipping. But, if you are inclined to try, below is a process that I have used and worked for me and I believe will work for everybody.

Once you find a property that you believe has flip potential, take the time to really think the entire process through with a spread sheet. Start with what you conservatively believe that the property will sell for if it is brought to market standards (more on market standards later). Do not be optimistic on the eventual sales price or time to sell; be very conservative. Once you are reasonably confident about the sales price and how long it will take to close once the rehab is complete you are ready to work backwards to the maximum you can offer for the property.

Work backwards to make money

As an example, suppose you find a property that looks like a good flip. You carefully study recent sales comps and decide that, remodeled to market standards, the property should go under contract for $200,000 within 60 days after the rehab is complete and it is placed on the market. And, your trusted contractor conservatively estimates it will cost $40,000 and take 2 months to bring it to market standards. Since profitable flippers are pessimists you estimate the total rehab will cost $50,000. Your hold time will be:

As to profit, suppose you will be happy with a 10% return. So, your goals are:

Also during your due diligence you learned that the real estate tax rate is 1%, property insurance is $450/year, purchase (closing) costs are 3% and cost of sales (commissions, closing costs, etc.) will be 8%. I put these numbers in the table below.

Now that we have an (over simplified) estimate of the total cost, we can work backwards from the probable sales price to determine the maximum price we can offer.

Based on the above, you cannot pay more than about $110,000 for this property if you are going to make money. Yes, you can probably reduce cost of sales and perhaps other numbers but you cannot significantly reduce rehab costs and there will always be surprises which will burn you if you do not have sufficient funds set aside.

Flip considerations

• Typically, lenders will only finance properties that are already livable so financing damaged properties can be a challenge. Talk to a knowledgable lender about 203k loans and possibly HomePath. You need to get this nailed down before you even start looking. The alternative is cash or a hard money loan. The terms on the last hard money loan one of my clients did was 5% closing costs, 40% down, 10% interest rate and the life of the loan was 18 months. Hard money loans vary significantly so the numbers you get might be completely different.

• You may have noticed that I used the phrase "market standards" multiple times. There is a common erroneous belief that if a property is "really improved" that it will sell for more than what similar homes have sold for. This is never true. If similar homes are selling for $200,000, even if you put $100,000 of "improvements" into the property, it will not significantly increase the sales price. One of the biggest challenges for new flippers is the tendency to remodel the property to their taste as oppose to rehabbing to market standards. If similar homes are selling for $200,000 with vinyl floors, travertine tile will not significantly increase the sales price. You need to really know what characteristics made similar properties sell and not go much beyond that. Cost control during the rehab is critical. Of course, there are small things that can make the property much more desirable to potential buyers without spending a fortune. For example, ceiling fans in the master bedroom and family room, improving the curb appeal and the front entrance area, fresh paint, etc. 

I hope the above helps. Flipping can be a profitable business but only if you really know what you are doing and you have a well thought out plan. Be careful and good luck.

Hello @David B. ,

Buying turnkey is only a purchase method, it does not assure you that you are getting a good property or that you are going to get good tenants. Also, a property is no better than the jobs around it so if the economy is going down in the location in which you buy, what is a good investment today could be a disaster in 6 months. I believe that the process should be:

1. Determine where and what kind of property will generate a sustained positive cash flow and is located in an area likely to appreciate over time. I call this a property profile. (I will elaborate on this later.)

2. Once you have determined the best property profile for you, then you need to consider all your purchase options in that specific location. Whether or not you buy a property turnkey or some other approach is a trade-off you can evaluate based on differences in money, time and risk.

Below is a diagram illustrating the process.

Below I will explain about each block in the illustration.

Property Profile

There are two parts to a property profile: where and what.

Where

• Choose a city which is experiencing sustained growth and is likely to have continued growth. See population changes by state here.

• A rental property is no more valuable than the jobs around it. The local chamber of commerce or university will likely have the information you need. Avoid boom towns where the jobs are here today and gone in 5 years. An example would be a town fueled by a major construction project (a dam, pipeline, high speed train, etc.). Once the project is complete all the construction jobs will vanish as will your renters and you will likely have a disaster on your hands. Job growth and population increase are the basis of long term appreciation.

• Check the landlord/evictions laws. For example, in Las Vegas the typical eviction takes less than 30 days and costs less than $500. I have heard from clients that evictions in California (and some other states) can take up to a year if the tenant actively resists and costs thousands of dollars in legal and other fees (not to mention the accumulated damage over the extended eviction period). No investor initially worries about evictions, until one happens to you. So, check the appropriate laws and regulations before you buy. Your simplest option would be to talk to local property managers. They deal with such issues every day.

• Remember that you need to have sufficient cash reserves so you can carry the property for several months if necessary. This dictates the price range of properties that you can afford. I would start by looking for rental properties in the cities you are considering and then looking for sales comps of similar properties.

• State/city/county income taxes. Most states have a personal income tax. This can significantly impact your return. For example, a property with a 5% return in Nevada, Texas, Washington or Wyoming will actually earn you 5% (subject to your own state income tax and the ability to deduct from your state/federal taxes paid in other states). If the same property was located in areas with taxes you would also have to adjust down the return based on these taxes.

• A city where climate is not a major factor. For example, people rarely move during heavy snowfall seasons in the North East. Or, if the population swells and contracts rapidly with the season as in south Florida where rentals tend to be seasonal.

• A location where annual maintenance costs are reasonable. Higher costs are sometimes due to climate or how the homes were constructed. For example, in heavy snow country you will have to include snow removal costs and more physical damage to driveways and the structure in your annual maintenance cost provision.

What

Now that you have a location that may be profitable, you need to know what to buy. And, what is a good type of property in Cleveland will not necessarily be a good type of property in Phoenix. So, you need to determine four criteria for each specific local, which are listed below. Your best source will be interviewing three or four local property managers. Tell them you are staring out and that you are looking for a property manager to work with.

• Type: Condo, high rise, single family, duplex, single story, two story, etc.

• Configuration: Two bedroom, three car garage, mud room, etc.

• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.

• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.

I have a set of property manager interview questions which I use (I am a Realtor in Las Vegas and my practice is almost exclusively remote investors and I occasionally have to move my clients to a different property manager when the current one starts to go bad.), and I will be happy to send to you (or anyone else who want it). Just drop me an email.

Profitability

After talking to a few property managers you will have a very good idea of what properties rent best. The next step is to determine whether you can make money with these properties. Look on Zillow (or similar sites) for recent sales of such properties. Once you know the sale price of such properties and know what they will rent for (from talking to the property managers) you can use a tool I created to determine if you can make money. (Break-Even Calculator - see here for more information.)

Using this tool and data from Zillow, I looked at properties in three cities: Austin, TX; Cupertino, CA and Las Vegas, NV.

If the Break-Even Price is lower than the Actual Sold Price it is unlikely that properties in that city will generate a positive cash flow. As you can see in the table above the prices of properties in Cupertino (and possibly Austin) are too high relative to the rent to generate a positive cash flow. 

If you cannot make an acceptable level of profit, look somewhere else. 

Acquisition Method

At this point you are ready to consider your acquisition options. I believe this decision can be made through a spread sheet and a thorough evaluation of the property manager involved if you are considering turnkey. Even though you buy a property that has the potential to be profitable, only a good property manager can make it happen. Be very careful on choosing the right property manager. Once you evaluate this and you are satisfied, it is time to buy.

Remote Investing Considerations

• Choose a location where you would like to spend some time. When I was setting up manufacturing for a certain item (past life) I chose India as opposed to Vietnam or China. I like spending time in India. I find the other two places more challenging. Almost all of my clients are remote investors and they like to come to Las Vegas to "inspect" their properties once or twice a year. It is actually a vacation for them but they can deduct a portion of the trip cost from their taxes (in most countries). During winter, I find that Canadians are especially interested in "inspecting" their properties!

• As I mentioned before, be VERY aware of issues like: landlord laws (eviction process and costs), climate factors, population trends, job stability and rent stability.

David, I hope the above helps.

Eric Fernwood