All Forum Posts by: Eric Fernwood

Hello @Travis Avenarius ,

I believe that you must first understand what team members you need and what responsibilities each team member has before developing interview questions. I am a Realtor in Las Vegas and my practice is almost exclusively remote investors. My primary team members include the following:

• Property Manager
• Realtor (my partner and I)
• Inspector
• Investor (the client)
• Contractor

The property manager is THE key person but I will provide a brief description of the duties for each. Will you occasionally find an individual who has more skill categories than what is shown below? Yes. For example, we developed software and processes for finding good properties; we find the properties for our clients. So, take the following as a general guideline, not a rule. 

What to Expect from Team Members

Property Manager

The property manager is the key member of any investment team. Below is a diagram showing the roles they play in each phase of the investment life cycle.

Realtor

Most Realtors know little about selecting investment properties. However, they know what sells and what does not as well as local economic conditions. And, what motivates people to buy are the same motivations to rent. They also have the best understanding of changing conditions in the local market. And, last but most importantly, they are the ones who ensure that you have a safe and secure transaction. They know the laws and regulations concerning buying properties.

Property Inspector

The property inspector I work with has saved me and my clients from buying potential disasters many times. For example, in a recent purchase he detected that something was wrong with the tile roof. To make a long story short, the seller put a new roof on the house before close of escrow. If the inspector had not called out the potential roof problem, my client would have been faced with an unexpected $12,000 expense in the near future.

Investor (You)

Your job is to lead the team but it would be a very incompetent leader that did not listen to their trusted advisers. It is also your job to ask only what each team member can realistically provide. For example, you would not ask your Realtor to quote on replacing the roof on a property. That is the job of the contractor. So, do not expect the Realtor to select good investment properties. That sort of knowledge comes from the property manager. Also, do not expect the property manager to estate profitability, that is your job.

Contractor

The contractor is the person to tell you what something will cost and what are the risks. For example, carpets, paint, window treatments, appliances have virtually no risk. Mold, bad plumbing, bad electrical, structural damage can all be high risk items. 

The Key Team Member Element

Integrity is THE critical characteristic for all investment team members. The reason integrity is so important is that there is no way to write an agreement which will ensure that the team member will do what is actually needed for you to be successful. Saying this another way, there is the "letter" of an agreement and there is the "spirit and intent" of an agreement. A person with integrity will consistently carry out the spirit and intent of the agreement. A person without a deep sense of personal integrity can usually be relied upon to carry out the letter of the contract most of the time which simply is not enough. Never associate with or deal with anyone who is not a person of high integrity.

I have a set of property manager interview questions which I'm happy to share with you (or anyone else) if you are interested.

Travis, I hope the above helps get you started.

Hello @Matt Mahony ,

If your goal is achieving financial freedom as quickly as possible, there may be a better solution than multi-unit apartment complexes in the midwest. I see nothing wrong with multi-unit apartment complexes or any property type or location as long as every property meets the following criteria:

• It is located in an area likely to appreciate over time
• It is highly likely to have sustained profitability
• Located in an area with real estate investor friendly taxes and legislation

The process I recommend is to start with the location and then progressively narrow your focus down to specific properties. 

Location

The old adage that the three most important things in real estate are location, location, location is still true but areas change. Areas that are good today can decline and sometimes areas that were once bad get better. Is it possible to accurately predict what an area will be like in 15 or 20 years? No, but you can make a reasonable guess what an area will be like in 5 years and extrapolate from there. Three indicators I think you should watch are population, crime and job stability.

Population Migration

If people are moving out of the area, the housing prices and rental rates are likely to fall. If people are moving into an area, then there is likely to be appreciation and rising rents. Here is a website that shows population shift by area. Also, many areas have populations that are getting older. As people age they tend to want smaller properties and lower rents. If you are considering a home targeted towards families and the area is aging, you will likely find demand decreasing. So, also check the population demographics.

Crime

Stable or increasing property values and rents rarely occur in areas with high crime. People with sufficient income move from areas with high crime to areas with lower crime. The people who cannot afford to move tend to have lower incomes thus resulting in falling rents and property values. What you need to consider is the types and frequency of crimes in the area and how it is changing. Where can you find such data? Here are some sites: crimemapping.com, homefacts.com, crimereports.com and spotcrime. Depending on your city/area you may have such data available from the local police department or the sheriff's department. Remember that it is not just crime in the specific neighborhood that matters, you also have to consider areas near the property where people will shop and such. For example, I was evaluating a property in an area that I did not personally know so I was using Google Street View to check the drive path to the property. I noticed a strip mall near the property where I anticipated tenants would shop. When I checked that location on one of the crime sites I discovered that robberies and assaults occur frequently at the strip mall and that the situation appears to have been the same for the past few years. I rejected the property based on these findings. So, check the shopping areas that tenants would use. You should also check the sex offender database. See familywatchdog.us but there are likely many others. Some states/counties/cities have their own sex offender/crime websites. 

Job Quantity and Quality

In many parts of the US, manufacturing and similar jobs are going away and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing and similar jobs so the families of these workers have less disposable income. Less disposable income means that they cannot afford to pay the rents that they did in the past. Look at the major employers, what industries they are in and their future prospects. Another key indicator is inflation adjusted per capita income over the past few years. If you see a declining job market or dropping per capita income adjusted for inflation, you need to carefully consider the long term value of the property. On inflation adjusted numbers, "official" inflation during 2014 is at 1.7%. However, “official” inflation numbers do not include energy or food. Personally, I use energy and eat so the inflation I experience at the gas station and the grocery store is much higher than the “official” number. Depending on whose numbers you use, actual inflation is between 6% and 10% per year. Keep in mind that unless the per capita adjusted income is rising at or greater than the rate of actual inflation, your potential tenants disposable income is eroding. What this means is that if you buy a property that rents at the upper end of the rent range, you will likely have increasing time-to-rent and declining rents over time. 

Real Estate Investor Friendly Taxes and Legislation

Legislation concerning tenants vary by state, county or city and can have a huge impact on your return. An example is evictions. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict and cost thousands. In Las Vegas, the time to evict is typically less than 30 days and usually costs less than $500. The best source of this sort of information would be local property managers. 

State taxes and property taxes are another big factor to consider. For example, suppose you are considering three identical properties that rent for the same amount (yes, this is an over simplified and contrived example!). And, one is located in Austin, one is located in Indianapolis, and one is located in Las Vegas. Which one is better? Below is a table showing approximate state personal income tax (I will assume a person filing separately with a $50,000 income) and property tax rates for all the cities. (Note, please forgive me if I am off on the values. My goal is to communicate a concept, not accurate math.) Note: Property taxes source and state income tax source.

Below is a (oversimplified) formula for estimating cash flow assuming 100% occupancy, no maintenance, etc. in order to keep the numbers simple:

Cash Flow = Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice

And, to take into account state taxes:

Annual Cash Flow = (Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice) x (1 - StateTaxRate)

For Austin: ($1,000 x 12 - $600 x 12 - 1.9% x $150,000)x (1 - 0%) = $1,950/Yr

For Indianapolis: ($1,000 x 12 - $600 x 12 - 1.07% x $150,000)x (1 - 3.4%) = $3,086/Yr

For Las Vegas: ($1,000 x 12 - $600 x 12 - 0.86% x $150,000)x (1 - 0%) = $3,510/Yr

In summary:

Real return is about how much money actually flows to you, not gross rent or ROI. Property taxes and state taxes have a big effect on the real return.

What to Buy

Now that you have a (few) location(s) that appear(s) to be good, you need to know the best types of investment properties in that local. Where can you get highly detailed information on type, location, configuration and rent range in any location? Local property managers. Most new investors think of property managers as someone to collect the rent after they buy a property. I strongly disagree with this view. I consistently find properties for my clients that meet the dual goals of profitability and appreciation through processes and an investment team. The key member of any real estate investment team is the property manager. (I am a Realtor; I do not manage properties.) Below is a diagram showing four categories where a good property manager can help you be successful. Your initial interviews with three or four property managers will concern their local knowledge of: type, location, configuration and rent range.

Below is more detail on this four characteristics.

• 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.

Start by telling each property manager that you are just starting out and are looking for a property manager to work with. You need to have a well defined list of questions before you start interviewing and ask the same questions of three or four property managers. (I have a set of property manager interview questions that I'd be happy to share.) After these interviews you will have a pretty good idea of the local market and you may even have an opinion whether any of the property managers you talked to are people you would like to deal with in the future. Once you have a reasonable idea of type, location, configuration and rent range (which I call a property profile), you are in a position to determine whether you can achieve the other goal: profitability. 

Once you know the property profile you can use Zillow (or many other sites) to determine the typical sale price of properties in that local. With a reasonable knowledge of the rent and price of typical properties, you need to determine whether you can make a profit. In my practice I am almost constantly making what I call an investigate/forget decision. I do this so often that I created an online tool which enables me to instantly estimate a break-even price (where rent equals recurring expenses). Below is a screen shot of the tool. (I'm also happy to share it. There is no charge or obligation for using the tool.)

In the example above I entered the estimated rent and other factors and tapped Estimate. The result is that if the property were purchased for $185,000, the rent ($1,200/Mo.) would equal the recurring costs (debt service + taxes + insurance + property management fees + monthly fees). This means that if I thought I could get the property for $165,000 I would investigate further. If I thought I would have to pay $185,000 or more for the property I would forget this one and look for another. Remember that this tool is only for making a quick investigate/forget decision, not a purchase decision.

If you cannot make a profit, look somewhere else. Once you find a place that looks to have good potential, get the name of a local Realtor from the property manager(s). Tell the Realtor what you are looking for (type, location, configuration) and have her/him send matching properties. Be sure to send the properties that you are interested in to the property managers and get their opinion as to the property in general (will it make a good rental) and what is their estimate on the rent and time to rent. The answers from the property managers should be close. If everything looks good, I would travel to that location and meet with the property managers and the Realtor. These are the people who will be responsible for one of the more expensive assets you will own and you need to evaluate them and see some properties. 

Matt, let the numbers be your guide; do not start with a pre-conceived technique, property type or location.

I wish you the best.

Hello @Oliver Martin ,

I broke your questions into two parts:

• Condo vs. single family vs. four-plex 
• Using a HELOC vs. an investor loan

There are multiple factors to consider when you are comparing different types of properties (some of which are unique to the specific location and Las Vegas in general), two of which are:

• Sustained profitability
• Probable appreciation

Condo vs. Single Family vs. Four-Plex

Since all three types of properties are located in the same area I was able to put together a simplified comparison below using typical association fees, etc. for Las Vegas:

Notes:
1) Financing is not available for many condos. Requirements on most condo investor loans: 51% owner occupied, less than 15% HOA delinquencies, no structural litigation.
2) Four-plexs with an HOA fee (usually a converted apartment complex) are extremely difficult to finance.
3) Depreciation is mandated by the IRS and can be shown as an income or a negative expense.

Looking at just the numbers I think anyone would decide on the four-plex. However, this may be deceiving.

• In Las Vegas, most of the four-plexes that I have seen for sale have significant deferred maintenance. The few that I explored in depth had rehab costs in the $10,000 to $30,000 range. Remember that these types of property have only one buyer: investors. To investors, everything is based on the cap rate. And, if the investor is making money on a property, they do not sell them. 
• Depending on who you ask, average condo/multi family vacancy rate is about 16%. However, this is misleading. The new large apartment complexes (which are sprouting up all over the city) are offering huge discounts and incentives making it very hard for individual condo investors to compete. Typical incentives I have seen include one to two months free rent and discounted rent. Another factor is that since you will be competing with the large new complexes, you will have much fewer applicants from which to choose so you tend to get more problematic tenants thereby increasing your maintenance costs and increasing your vacancy rate. I did not know how to represent this in the table above so I used 20% on the condo vacancy rate and 15% on the four-plex vacancy rate which may or may not be a valid estimate.
• Potential appreciation: You buy for cash flow, never just appreciation. However, in the future you will likely sell the property (1031?) so appreciation is very desirable. With multi-unit, the only buyers are investors. Investors value a property based almost exclusively on CAP rate. In Las Vegas, rents have been stable for many years (However they are increasing somewhat at this time). What this means is that even if residential properties increase in price, multi-unit properties may not increase as much because investors buy on CAP rate. In other words, no rent increases, no appreciation. This is not entirely true but is largely true.

People buy real estate as a path to financial independence which requires long term profitability. Factors to consider include:

• Crime: Long term profitability and high levels of crime do not occur together. Many of the multi-unit and reasonably priced condos are in higher crime areas. Before you buy any property, check both the specific area in which the property is located and the nearby major shopping areas. Not too long ago I was checking a property for a client and while the specific neighborhood was OK, the nearby strip mall was not. When I checked the strip mall on one of the crime sites I discovered that robberies and assaults occurred frequently and that the situation appears to have been the same for the past few years. I rejected the property based on these findings. So, check the shopping areas that tenants would use. You should also check the sex offender database. See familywatchdog.us but there are likely many others. Some states/counties/cities have their own sex offender/crime websites.
• Long term tenants: Single people and couples tend to be a significant percentage of condo/multi-family residents. Families (children) tend to be a significant percentage of the single family home residents. Singles and couples in the Las Vegas market tend to move more frequently than families because families want stability for their children. So, expect more turnover with condos and multi-family properties than single family homes.
• In general, people with lower income rent lower priced properties. People with lower incomes typically tend to live in a "cash" based mode as opposed to people with higher incomes who tend to live in a "credit" based mode. People who live in a cash based mode have little to fear from collections agencies and negative credit reports; they have little to fear if they damage the property or skip out on a lease. So, in general, lower income properties tend to have more damage and more maintenance. That is why I used $4,000/yr for the 4-flex maintenance provision in the table. Whether this is high or low would depend on the specific property.

Oliver, I hope this gives you some ideas on evaluating a condo vs. a single family vs. a four-plex. 

Using a HELOC

A lender I regularly work with just provided me with an update on HELOCs:

• HELOCs can only be used on a primary residence.
• Maximum amount is 80% of the market value.
• The interest rates are reasonable but they adjust each month. Adjustable interest rates are a big concern for me. The official inflation rate for 2014 is 1.7%. However, the official inflation rate does not include energy or food. Personally, I use electricity and drive a car plus I eat so the official inflation rate means little to me. The actual inflation rate is between 6% and 10% depending on whose numbers you believe. I believe that the government can only manipulate interest rates (which is a factor of inflation) for so long and then the actual interest rate will come into effect. During the 1980's interest rates exceeded 18% source. Below is a comparison of the monthly payment on a $100,000 loan based on the interest rate.

So, while the HELOC is easier to obtain, it is not what I would call permanent financing. One of the big advantages of real estate is that if you have a fixed rate loan, inflation can be beneficial to cash flow. Historically, rents and property prices have tracked inflation but your debt service is constant. This would absolutely not be the case with a HELOC. Other than the ease in obtaining the funds, I see nothing to recommend using a HELOC as a long term financing alternative.

Oliver, I hope the above helped answer some of your questions.

Hello @Seneca Stephens ,

A good question. Before I continue, know that I am a Realtor in Las Vegas and my practice is almost exclusively remote investors. In my practice I frequently deal with whether to recommend a tenant occupied property or a vacant one. Below are my thoughts on the pros and cons.

Pros

• Immediate income - Since the tenant is already in the property you start receiving income from day one.
• The tenant already signed a lease so you can get a copy and know the terms.
• Possible existing relationship with a property manager that already knows the property and its maintenance issues.
• You know the rent amount so it is easy to determine whether the property will generate a profit.

Possible Cons

• Tenant qualifications - How was the tenant screened? This is critical. Checking credit score alone is not enough. For example, recently a prospective tenant had a credit score in the mid 500's. However, all the negative items were medical collections. Apparently the daughter became very sick and there was no way they could pay the huge amount owed. If you took away the medical collections, their score was in the high 700's. Another applicant had a low 700's credit score but in the past had collections for unpaid rent. What the property manager must screen for in addition to a detailed credit inspection is: 

• Criminal history (national, state, county, city and sex offender). If they are on any of these lists, you do not want them.
• Employment history - Are they job hoppers? You do not want them. Also, their income must be sufficient to handle the rent and their other obligations.
• Back child support and alimony. If it comes down to them paying money to the court or you, guess who is going to lose? 

If the seller just wanted to get "anyone" in the property so they could sell it "with tenant" you could be facing a real nightmare. Also:

• Is the tenant paying market rent? I have heard of situations where the property is sold and the tenant is (for example) paying $1,000/Mo. rent. A few months after close the tenant skips and the buyer discovered that the market rent of the property was $600/Mo.
• Property condition - With a tenant in the property it can be difficult to determine the actual condition of the property if there is collusion between the tenant and the current owner.

My Experience

About 50% of the time when one of my clients buys a property with an existing tenant we end up evicting them, usually for non-payment of rent. So, unless I know the property manager and their management characteristics, we will not buy a property with an existing tenant. I would only consider a tenant occupied property where there is no property manager involved if the tenant has been in the property for multiple years, their credit shows no late payments on utilities, they have been at the same job for multiple years and the property is in good condition.

In Summary

While buying a tenant occupied property sounds good, they can be a nightmare unless you know the property manager managing the property and their screening process. Another factor to consider is how long evictions take and cost in your area. For example, in Las Vegas an eviction typically takes less than 30 days and costs less than $500. I understand that in California if the tenant resists, it can take up to one year. In some parts of New York state, up to 18 months. So, be very careful buying a tenant occupied property unless you have a very good reason to know that they are good renters.

I hope the above helps.

Hello @Donald M. ,

Your concerns on high-rises are valid. I've looked at them several times for potential investors and the numbers never work due to high HOA fees. I looked at a typical unit in one of the towers you mentioned and what I found for this property is similar to the others that I have looked at in the past.

Based on the above with 20% down and typical loan your return will be approximately -6%. Or, you will have a negative cash flow of about $250/Mo.: Rent - Debt Service - Property Tax - HOA - Management Fee - Insurance. So, financially it is not a good investment. I called the HOA and they have changed their policy now in that you can use any property management company you wish. So, things have improved.

In general, I have not found any of the high-rises to even break even. I have a further problem with the high rises here since I have lived in high rises in other cities and countries. To the best of my knowledge none of the high rises here includes the basic ecosystems like a grocery store, pharmacy, restaurants, etc. When I lived in NYC I could pretty much get what I needed within the building complex or within walking distance. Not here. You will need a car to go buy just about anything you need which reduces the desirability of living in a high rise in my opinion. 

Several of my clients who originally considered high rises instead purchased town houses in some of the nicer communities. These offer a similar level of security but some you can walk to shopping and have a positive cash flow. 

Some of my other clients who started with high rises decided to go with smaller single family homes in guard gated communities. In some cases the reason they wanted the high rise was not to have to deal with maintenance. The way homes are built here (to handle the high temperatures, etc.) there is not much in the way of maintenance unlike what I see on the east coast. Below is a typical Las Vegas property. With properties like these we are seeing 4% to 8% return.

Donald, I hope I answered some of your questions. If you have more, feel free to post another question. 

Best Wishes.

Hello @Matthew Fiebig ,

Use Google to search for property managers. For example, according to your profile you live in Edgewood, Washington. I Googled "Edgewood Washington property management" and got several pages of hits. Click here to see the search results. I next tried "Las Vegas Nevada property management" and got similar results. So, that is how I would get a list of property managers. (Phone book? I have not seen a phone book in years.) After you look through a few property manager websites you will start to have an idea about their services and possibly even their fees and such. Choose 4 or 5 that look interesting to call. Tell the property manager that you are new to investing and you are looking for a property manager to work with.

Before you start making calls, develop a list of 10 to 15 questions. This is important: ask each property manager the same questions and compare the answers. You will quickly know who is providing facts and who is providing fiction. This is your method of validating what they tell you. I have a list of property manager interview questions. Drop me an email (or anyone else who would like a copy) and I will send you the list. The list includes a lot of questions, far more than you will be able to ask in a 20 to 30 minutes initial interview.

So the process is:

1. Develop a list of 10 to 15 questions designed to understand the property manager's focus (specific area, commercial, industrial, etc.), number of properties under management and the type, configuration, location and rent range that do best. I would choose mid sized property managers. They will have enough properties under management to know the market but small enough to be interested in a new client (you).
2. Google the name of the city/state plus the words "property management" of the area you are considering to get an initial list of property managers.
3. Look through their websites and see what types of properties (commercial, only high-rise, etc.) they primarily manage. You want property managers that focus on the type of property you are considering.
4. Look at their geographical coverage, they may not cover the specific area where you are considering.
5. Read their "corporate profile" and listen for the "ring of truth". I looked through a few of the property manager websites and some were puffing and I would discount them.
6. When you have a short list of 5 to 10, prioritize them and, starting with the lowest (not top) call and set up a phone appointment. Tell them you are new in real estate and are looking for a property manager to work with. Make notes of their answers. After you go through 2 or 3 you will have a pretty good idea of what is happening in that area and the type, configuration, location and rent range which do best. Remember that you are not just looking for "facts", you are trying to determine if this is an individual you can trust with your money.

Matthew, I hope this helps. Feel free to ask if you have more questions.

Hello @Lafontant Cherilus ,

I hear a lot about "rules" on some of the forums. However, in my option, there are no "rules". For example, the "50% rule" states that at some point at least 50% of your rental income will be spent on expenses. You have no control over the cost of debt service and property taxes but you have some degree of control over maintenance costs. Maintenance costs are driven by:

• Age and condition of the property (deferred maintenance)
• Quality of the property manager
• Quality of the tenant
• Climate
• Construction

For example, I live in Las Vegas and below is how a typical single family home is constructed.

In my experience, between $500/year and $1,000/year is on the high side of what most of my clients experience. However, I know of situations where tenants were improperly screened and they did thousands of dollars of damage to a property. You need to determine the condition of the specific property you are considering before you buy or you purchase a maintainance nightmare. Have the property inspected by a good property manager and then get estimates from a good contractor on rehabbing the property before you buy. For example:

• Roof condition - Has the roof had multiple repairs and is at the end of it's useful life?
• Plumbing - Leaks? Is the sewer pipe connecting the property to the sewer main damaged by tree roots or corroded over time to the point where you need to have it replaced?
• Windows - Wooden windows only last so long (especially if they are not maintained) and need to be replaced.
• Exterior siding - Does it need to to be scrapped and painted or replaced?
• Interior - What is the condition of the floor treatments, electrical, appliances, etc.

In summary, depending on the property, the tenant, construction, deferred maintenance, etc. you could spend 10 x the collected rent on expenses. Your living at the property and doing the work yourself will help reduce the labor component of some of the repairs but there are many tasks you may not be able to do like replacing the roof or rewiring/replumbing the property.

Hope this helps.

Best Wishes,

Hello @Kujtim Beganaj ,

The first property is always the scariest. @Gerald Harris brought up some important points on rehab costs and such. One of the great things about real estate is that as long as you buy in a good area, all but the worst mistakes will be corrected over time through inflation and rent increases. So, the question is whether the property is in a good area and whether the property is profitable. I recommend vetting all properties by the following three criteria:

• Located in an area likely to appreciate over time
• Sustained profitability
• Real estate investor friendly taxes and legislation

So, before you decide to proceed I recommend you look closely at the area.

Location

The old adage that the three most important things in real estate are location, location, location is still true. However, areas that are good today can decline and sometimes areas that were once bad get better. Is it possible to accurately predict what an area will be like in 15 or 20 years? No, but you can make a reasonable guess what an area will be like in 5 years and extrapolate from there. Three indicators I think you should watch are population, crime and job stability.

Population Migration

If people are moving out of the area, the housing prices and rental rates are likely to fall. If people are moving into an area, then there is likely to be appreciation and rising rents. Here is a website that shows population shift by area. Also, many areas have populations that are getting older. As people age they tend to want smaller properties and lower rents. If you are considering a home targeted towards families and the area is aging, you will likely find demand decreasing. So, also check the population demographics.

Crime

Stable or increasing property values and rents rarely occur in areas with high crime. People with sufficient income move from areas with high crime to areas with lower crime. The people who cannot afford to move remain in the area with increasing crime but they tend to have lower incomes thus resulting in falling rents and property values. What you need to consider is the types and frequency of crimes in the area and how it is changing. Where can you find such data? One site is crimemapping.com. There is also good data on homefacts.com. Depending on your city/area you may have such data available from the local police department or the sheriff's department. Remember that it is not just crime in the specific neighborhood that matters, you also have to consider areas near the property where people will shop and such. For example, I was evaluating a property in an area that I did not personally know so I was using Google Street View to check the drive path to the property. I noticed a strip mall near the property where I anticipated tenants would shop. When I checked that location on one of the crime sites I discovered that robberies and assaults occur frequently at the strip mall and that the situation appears to have been the same for the past few years. I rejected the property based on these findings. So, check the shopping areas that tenants would use. You should also check the sex offender database. See familywatchdog.us but there are likely many others. Some states/counties/cities have their own sex offender/crime websites.

Job Quantity and Quality

In many parts of the US, manufacturing and similar jobs are going away and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing and similar jobs so the families of these workers have less disposable income. Less disposable income means that they cannot afford to pay the rents that they did in the past. Look at the major employers, what industries they are in and their future prospects. Another key indicator is inflation adjusted per capita income over the past few years. If you see a declining job market or dropping per capita income adjusted for inflation, you need to carefully consider the long term value of the property. On inflation adjusted numbers, "official" inflation during 2014 is at 1.7%. However, “official” inflation numbers do not include energy or food. Personally, I use energy and eat so the inflation I experience at the gas station and the grocery store is much higher than the “official” number. Depending on whose numbers you use, actual inflation is between 6% and 10% per year. Keep in mind that unless the per capita adjusted income is rising at or greater than the rate of actual inflation, your potential tenants disposable income is eroding. What this means is that if you buy a property that rents at the upper end of the rent range, you will likely have increasing time-to-rent and declining rents over time.

Real Estate Investor Friendly Taxes and Legislation

Legislation concerning tenants vary by state, county or city and can have a huge impact on your return. An example is evictions. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict and cost thousands. In Las Vegas, the time to evict is typically less than 30 days and usually costs less than $500. The best source of this sort of information would be local property managers.

State taxes and property taxes are another big factor to consider. For example, suppose you are considering two identical properties that rent for the same amount (yes, this is an over simplified and contrived example!). And, one is located in Austin and one is located in Indianapolis. Which one is better? Below is a table showing approximate state personal income tax (I will assume a person filing separately with a $50,000 income) and property tax rates for both cities. (Note, please forgive me if I am off on the values. My goal is to communicate a concept, not accurate math.) Note: Property taxes source and state income tax source.

In order to have some numbers to work with I will use the following.

• Purchase price $150,000
• Rent: $1,000/Mo.
• Financing: 20% down, 4.5% interest, 30 year term.
• Down Amount: $30,000
• Debt Service (PI): $600/Mo

Below is a (oversimplified) formula for estimating cashflow assuming 100% occupancy, no maintenance, etc. in order to keep the numbers simple:

Cash Flow = Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice

And, to take into account state taxes:

Annual Cash Flow = (Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice) x (1 - StateTaxRate)

For Austin: ($1,000 x 12 - $600 x 12 - 1.9% x $150,000)x (1 - 0%) = $1,950/Yr

For Indianapolis: ($1,000 x 12 - $600 x 12 - 1.07% x $150,000)x (1 - 3.4%) = $3,086/Yr

In summary, if the property is in a good area, you follow Gerald's advice and the property is profitable, you should be OK.

Best Wishes,

Hello @JJ Buckner ,

Whether you buy a property from a bank (foreclosure), an individual, turnkey or any other source is not the important factor. Before you buy anything, I recommend that you clearly define your end goal in real estate investing. If that goal is financial independence then you will want to vet each property by whether it gets you closer to or further from that goal. Keep in mind that in order to achieve financial freedom, you need properties that will generate profits for many years, not just today. I believe you should evaluate each property based on whether it meets the following criteria:

• Located in an area likely to appreciate over time
• Real estate investor friendly taxes and legislation
• Sustained profitability

Buying a property that does not meet all three of the criteria is likely to be a long term financial problem.

Location

The old adage that the three most important things in real estate are location, location, location is still true. However, areas that are good today can decline and sometimes areas that were once bad get better. Is it possible to accurately predict what an area will be like in 15 or 20 years? No, but you can make a reasonable guess what an area will be like in 5 years and extrapolate from there. Three indicators I think you should watch are population, crime and job stability.

Population Migration

If people are moving out of the area, the housing prices and rental rates are likely to fall. If people are moving into an area, then there is likely to be appreciation and rising rents. Here is a website that shows population shift by area. Also, many areas have populations that are getting older. As people age they tend to want smaller properties and lower rents. If you are considering a home targeted towards families and the area is aging, you will likely find demand decreasing. So, also check the population demographics.

Crime

Stable or increasing property values and rents rarely occur in areas with high crime. People with sufficient income move from areas with high crime to areas with lower crime. The people who cannot afford to move remain in the area with increasing crime but they tend to have lower incomes thus resulting in falling rents and property values. What you need to consider is the types and frequency of crimes in the area and how it is changing. Where can you find such data? One site is crimemapping.com. There is also good data on homefacts.com. Depending on your city/area you may have such data available from the local police department or the sheriff's department. Remember that it is not just crime in the specific neighborhood that matters, you also have to consider areas near the property where people will shop and such. For example, I was evaluating a property in an area that I did not personally know so I was using Google Street View to check the drive path to the property. I noticed a strip mall near the property where I anticipated tenants would shop. When I checked that location on one of the crime sites I discovered that robberies and assaults occur frequently at the strip mall and that the situation appears to have been the same for the past few years. I rejected the property based on these findings. So, check the shopping areas that tenants would use. You should also check the sex offender database. See familywatchdog.us but there are likely many others. Some states/counties/cities have their own sex offender/crime websites.

Job Quantity and Quality

In many parts of the US, manufacturing and similar jobs are going away and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing and similar jobs so the families of these workers have less disposable income. Less disposable income means that they cannot afford to pay the rents that they did in the past. Look at the major employers, what industries they are in and their future prospects. Another key indicator is inflation adjusted per capita income over the past few years. If you see a declining job market or dropping per capita income adjusted for inflation, you need to carefully consider the long term value of the property. On inflation adjusted numbers, "official" inflation during 2014 is at 1.7%. However, “official” inflation numbers do not include energy or food. Personally, I use energy and eat so the inflation I experience at the gas station and the grocery store is much higher than the “official” number. Depending on whose numbers you use, actual inflation is between 6% and 10% per year. Keep in mind that unless the per capita adjusted income is rising at or greater than the rate of actual inflation, your potential tenants disposable income is eroding. What this means is that if you buy a property that rents at the upper end of the rent range, you will likely have increasing time-to-rent and declining rents over time.

Real Estate Investor Friendly Taxes and Legislation

Legislation concerning tenants vary by state, county or city and can have a huge impact on your return. An example is evictions. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict and cost thousands. In Las Vegas, the time to evict is typically less than 30 days and usually costs less than $500. The best source of this sort of information would be local property managers.

State taxes and property taxes are another big factor to consider. For example, suppose you are considering two identical properties that rent for the same amount (yes, this is an over simplified and contrived example!). And, one is located in Austin and one is located in Indianapolis. Which one is better? Below is a table showing approximate state personal income tax (I will assume a person filing separately with a $50,000 income) and property tax rates for both cities. (Note, please forgive me if I am off on the values. My goal is to communicate a concept, not accurate math.) Note: Property taxes source and state income tax source.

In order to have some numbers to work with I will use the following.

• Purchase price $150,000
• Rent: $1,000/Mo.
• Financing: 20% down, 4.5% interest, 30 year term.
• Down Amount: $30,000
• Debt Service (PI): $600/Mo

Below is a (oversimplified) formula for estimating cashflow assuming 100% occupancy, no maintenance, etc. in order to keep the numbers simple:

Cash Flow = Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice

And, to take into account state taxes:

Annual Cash Flow = (Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice) x (1 - StateTaxRate)

For Austin: ($1,000 x 12 - $600 x 12 - 1.9% x $150,000)x (1 - 0%) = $1,950/Yr

For Indianapolis: ($1,000 x 12 - $600 x 12 - 1.07% x $150,000)x (1 - 3.4%) = $3,086/Yr

In summary, I would be less concerned about the cost of the property and more concerned about the long term value and whether it will get you closer to or further from your goal.

Best Wishes.

Hello @Guillaume Derouet ,

I see a lot of emphasis on ROI in those forums and want to add my thoughts on why ROI alone can be misleading. Most investors hold properties for many years: 10, 15, 20+ but ROI is a snapshot of the property as it is at this moment in time, not what it's likely to be in 5 or 10 years. If your goal is to achieve financial freedom through real estate, I think you need to consider more than just the current ROI. I think you should measure each property by at least the following criteria:

• Located in an area likely to appreciate over time
• Sustained profitability 
• Real estate investor friendly taxes and legislation

Location

The old adage that the three most important things in real estate are location, location, location is still true but areas change. Areas that are good today can decline and sometimes areas that were once bad get better. Is it possible to accurately predict what an area will be like in 15 or 20 years? No, but you can make a reasonable guess what an area will be like in 5 years and extrapolate from there. Three indicators I think you should watch are population, crime and job stability.

Population Migration

If people are moving out of the area, the housing prices and rental rates are likely to fall. If people are moving into an area, then there is likely to be appreciation and rising rents. Here is a website that shows population shift by area. Also, many areas have populations that are getting older. As people age they tend to want smaller properties and lower rents. If you are considering a home targeted towards families and the area is aging, you will likely find demand decreasing. So, also check the population demographics.

Crime

Stable or increasing property values and rents rarely occur in areas with high crime. People with sufficient income move from areas with high crime to areas with lower crime. The people who cannot afford to move remain in the area with increasing crime but they tend to have lower incomes thus resulting in falling rents and property values. What you need to consider is the types and frequency of crimes in the area and how it is changing. Where can you find such data? One site is crimemapping.com. There is also good data on homefacts.com. Depending on your city/area you may have such data available from the local police department or the sheriff's department. Remember that it is not just crime in the specific neighborhood that matters, you also have to consider areas near the property where people will shop and such. For example, I was evaluating a property in an area that I did not personally know so I was using Google Street View to check the drive path to the property. I noticed a strip mall near the property where I anticipated tenants would shop. When I checked that location on one of the crime sites I discovered that robberies and assaults occur frequently at the strip mall and that the situation appears to have been the same for the past few years. I rejected the property based on these findings. So, check the shopping areas that tenants would use. You should also check the sex offender database. See familywatchdog.us but there are likely many others. Some states/counties/cities have their own sex offender/crime websites. 

Job Quantity and Quality

In many parts of the US, manufacturing and similar jobs are going away and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing and similar jobs so the families of these workers have less disposable income. Less disposable income means that they cannot afford to pay the rents that they did in the past. Look at the major employers, what industries they are in and their future prospects. Another key indicator is inflation adjusted per capita income over the past few years. If you see a declining job market or dropping per capita income adjusted for inflation, you need to carefully consider the long term value of the property. On inflation adjusted numbers, "official" inflation during 2014 is at 1.7%. However, “official” inflation numbers do not include energy or food. Personally, I use energy and eat so the inflation I experience at the gas station and the grocery store is much higher than the “official” number. Depending on whose numbers you use, actual inflation is between 6% and 10% per year. Keep in mind that unless the per capita adjusted income is rising at or greater than the rate of actual inflation, your potential tenants disposable income is eroding. What this means is that if you buy a property that rents at the upper end of the rent range, you will likely have increasing time-to-rent and declining rents over time. 

Real Estate Investor Friendly Taxes and Legislation

Legislation concerning tenants vary by state, county or city and can have a huge impact on your return. An example is evictions. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict and cost thousands. In Las Vegas, the time to evict is typically less than 30 days and usually costs less than $500. The best source of this sort of information would be local property managers. 

State taxes and property taxes are another big factor to consider. For example, suppose you are considering two identical properties that rent for the same amount (yes, this is an over simplified and contrived example!). And, one is located in Austin and one is located in Indianapolis. Which one is better? Below is a table showing approximate state personal income tax (I will assume a person filing separately with a $50,000 income) and property tax rates for both cities. (Note, please forgive me if I am off on the values. My goal is to communicate a concept, not accurate math.) Note: Property taxes source and state income tax source.

In order to have some numbers to work with I will use the following.  

• Purchase price $150,000
• Rent: $1,000/Mo.
• Financing: 20% down, 4.5% interest, 30 year term.
• Down Amount: $30,000
• Debt Service (PI): $600/Mo

Below is a (oversimplified) formula for estimating cashflow assuming 100% occupancy, no maintenance, etc. in order to keep the numbers simple:

Cash Flow = Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice

And, to take into account state taxes:

Annual Cash Flow = (Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice) x (1 - StateTaxRate)

For Austin: ($1,000 x 12 - $600 x 12 - 1.9% x $150,000)x (1 - 0%) = $1,950/Yr

For Indianapolis: ($1,000 x 12 - $600 x 12 - 1.07% x $150,000)x (1 - 3.4%) = $3,086/Yr

The lesson is that while ROI is a good tool to compare properties with the same property tax rates, income tax rates and real estate legislation, it is not a good tool for comparing properties in areas with different property or income taxes or different real estate legislation.

In summary, while the current ROI is important, you need to take a long term view of the areas in which you are considering buying properties as well as considering other factors. So, if you have three locations with similar ROI numbers, long term considerations may make your selection much easier.

Your feedback is appreciated.