All Forum Posts by: Eric Fernwood

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.

Hello @Todd Willhoite ,

You are on the right thought path. Trying to conform to arbitrary rules (2%, 1%, 20% below market, etc.) makes no sense to me. Also, deciding up front on the type of property is a problem as well. You need to establish a clear goal and then measure every thing you do by whether it gets you closer (to that goal) or further (from that goal). If your goal is long term financial freedom, then I believe that every property you consider must meet three criteria:

• Sustained profitability - With real estate your minimum horizon is at least 7 to 10 years so a buying based only on the current market situation is likely to leave you in a very bad situation in a few years.
• Located in an area likely to appreciate over time.
• Landlord friendly laws and taxes.

Below is an illustration of the process I would follow:

The first decision is location which may not be where you live. If where you live does not meet all the above criteria look somewhere else. Below is how I would evaluate a potential area.

• Population stability or growth. Here is a map showing growth trends of major cities. If people are generally moving out of an area, the value of your property and the rent you receive is likely to fall. If the population is growing then you passed this hurdle.
• Crime and stable demographics. High crime and long term profitability do not go together. That said, every place has crime. What you need to know is what types of crimes and how frequently crimes occurred close to the property. 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 police department or the sheriff's department.
• Stable or improving job market - A property is only as good as the jobs surrounding it. If major employers are leaving the area you should look somewhere else. Even if the number of jobs is stable, the earning power of the jobs must be stable or growing. For example, if the area is changing from high-paying manufacturing jobs to service sector jobs, potential tenant disposable income will decrease and property prices and rents will fall.
• 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 and cost thousands. In Las Vegas, the time to evict is typically less than 30 days and usually costs less than $500. No one ever considers evictions until one happens to you.

Unless the potential location meets all the above you need to look somewhere else. If the area passes all the above (there are more criteria but these are the main ones) then you are ready to consider what type, configuration, location and rent range do best in the area you are considering. Specifically, the minimum you need to know is:

• 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.

Note that this is local information, which you cannot get from podcasts, seminars, books or similar information sources. What is the best source for this type of information? Local property managers.

The local 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 in each city you are considering. Before you start making calls, 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 or any one else would like a copy.) Tell them that you are new to investing and are looking for a property manager to work with. 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. Remember that the property managers only make money when they collect rent so they want rentable properties too.

Once you talk to a few property managers you should now have a very good idea of what properties rent best and how much they rent for. The next step is to determine what such properties cost. The property manager may be able to help you here but if not you can use Zillow. Find recently sold properties that match the type, configuration and location you learned from your property manager interviews. Once you know typical costs, it is time 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. If you (or anyone else) are interested in using this tool, drop me an email and I will send you the link. 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.

At this point you will know where and what to consider based on data, not a supposition. You will also know whether a particular area is likely going to be profitable or not. One other comment, as long as you buy investment real estate in a good area, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases. (We strongly recommend only investing in areas with growing population and low crime.) Do not settle for a bad area just because the properties are physically close or inexpensive.

Todd, I hope the above helps.

Hello @Karen M. ,

The following is what I go through with my investor clients concerning risk management.

First, there is no way to avoid risk, you can only manage it. Everything you do has risks. While you are reading this email you could be struck by a meteor. (Note: a person was actually struck by a meteor in Sylacauga, Alabama on November 30th, 1954. She was injured but recovered. However, in 1911 a dog was killed in Egypt by a meteor. So, people and dogs are struck by meteors, but not very often.) So, you need to keep "the worst that could happen" in perspective. A lot of bad things could happen but most are unlikely so you have to consider the cost benefit. For example, I live in Las Vegas, Nevada. While there are earthquakes, I am not aware of any damage ever caused by an earth quake. Could a major earth quake happen here today? Yes. Likely? No. So I do not see the cost-benefit of earthquake insurance in Las Vegas. My point is to be reasonable and always consider the cost-benefit ratio.

I divide investor risk into a few different categories:

Hello @Matthew Fiebig ,

Before I talk about the deal process have you verified that apartments are the right choice in your area? Before you seriously consider anything I recommend you take a step back and take a wider view. Is the geographic area you are considering a good investment area? If it is a good area, are apartments the best type of property? Do not get caught up in some "technique"; every market is different and you need to look at the bigger picture before you zero in on anything. See this thread for the process that I would follow to identify the best area(s) and type(s) of properties to invest - http://www.biggerpockets.com/forums/12/topics/153168...

Ask a few local property managers whether apartment buildings rent well, you will usually get an honest answer. The reason the property manager will answer honestly is that the last thing they want is another unrentable property. So, if you ask them what to buy they will be happy to tell you what type, configuration, location and rent range do best. They will also be able to tell you what the apartment you are considering should rent for if it is in market ready condition. Matthew, all we do is investment real estate and we never consider buying a property unless the property manager agrees.

Let's assume that all the property managers tell you that the apartment is a good investment. They will also be able to tell you that in market ready condition the units will rent (making the following up) for $600/Mo. for two bedrooms and $400/Mo. for one bedrooms. Also, that it should take about 45 days to rent a market ready apartment.

With this information you now have a very good understanding of the financial potential of the property. Based on this you can then calculate what the property is worth to you and this is the amount you should offer. When I first started out in real estate investing in Houston (many years ago) I followed this process. I made a lot of offers. Some people got angry, some people laughed but some accepted my offers. I made very good money from my Houston properties.

If your offer is accepted the due-diligence starts immediately after the contract is executed. During the due-diligence period you need to get the property manager, inspector and anyone else you need into the property. You also need to get the leases and have your property manager review them. @Brian P.  made an excellent point about getting the tax schedule for the property as well as the documents I mentioned in my last post. Once the inspections and document review is complete you need to look at the numbers again. Unless the numbers look good and the property manager agrees, cancel the contract.

Matthew, I hope the above helps to clarify the process.

Hello @Peter Smith ,

One of the most frequent reasons people do not want to invest in real estate vs. other types of investments (stocks, bonds, etc.) is that they do not understand the difference between real estate revenue streams and accumulate and draw-down, which is how other investment types work. I pasted in an article below which I recently wrote that compares real estate to other types of investments. Your feedback would be appreciated.

-----------------------------------------------------

Why Real Estate?

Real estate investment (not flipping) is the common mans easiest path to financial freedom. By financial freedom I mean a revenue stream which you (and perhaps your children) will not out live, is inflation friendly and tax advantaged.

Accumulate and Draw-Down vs. Revenue Stream

I am frequently asked by new investors, "Why real estate is better than dividend stocks, CDs, annuities, etc. for achieving financial freedom?" I will explain the difference using an (overly simplified) example where financial freedom is defined as a long term revenue stream of $5,000/Mo.

Accumulate and Draw-Down

Achieving financial freedom through traditional investments consists of accumulating a large quantity of funds and then drawing-down these funds over a fixed period of time. The amount you need to accumulate is totally dependent on how long you need the funds. If you plan on living another 30 years (I will assume zero inflation and zero working capital growth which I will explain later) the math is simple:

30 Years x $5,000/Month x 12 Months/Year = $1,800,000

So, if you accumulate $1,800,000 you can draw down $5,000/Mo. for 30 years with the understanding that at the end you will have zero funds. "What about capital appreciation?" Appreciation and inflation need to be considered together.

Official inflation during 2014 is about 1.7% (source). However, remember that the “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 currently between 5% and 10% per year(source 1, source 2, source 3 , source 4). For simplicity, let's assume that from now on inflation will be 5%. What this means is that you will need 5% more money each year just to have the same buying power as the previous year. Based on 5%, the amount you need to accumulate before draw-down increases from $1,800,000 to $2,000,000. Is 5% a reasonable guess as to future actual inflation? Not necessarily. During the 1980s the “official” inflation was over 14% (source). At 14% inflation the amount you need to accumulate before draw-down would be $6,500,000!

"But what about asset growth and assets that can handle inflation?" There is a tradeoff between the level of risk and gain. Conservative investments like CDs are currently paying about 1% thus with even the official inflation you are losing about 0.7%/yr in buying power. "What about a portfolio of stocks that can handle inflation?" While it is certainly possible to maintain such a portfolio even the big mutual funds have a hard time achieving it. But, suppose your investments could track inflation there are still two problems: 1) Every month that you draw-down funds you are reducing your working capital and thus potential gains. 2) In order to maintain the right portfolio mix you are going to have to frequently buy and sell stocks. Every time you sell stocks all profits are subject to capital gains tax which further decreases your working capital.

In summary, I do not believe that the average person can achieve a life-long revenue stream using the traditional accumulate and draw-down approach because:

• It is unlikely that the common man can accumulate the necessary millions.
• Accumulation and draw-down is a finite proposition; the income is only for a fixed number of years and what happens if you outlive your investments?
• Even moderate inflation can easily wipe out any fixed amount of accumulated funds over time.

Revenue Streams

According to The College Investor over 90% of the worlds millionaires created their wealth by investing in real estate. Why did they choose real estate? Revenue streams! I will start my explanation by estimating the amount of money necessary to create a life-long revenue stream of $5,000/Mo. Suppose you could purchase a property for $100,000 and rent it for $900/Mo. (This is very realistic in a lot of markets throughout the US and in some markets the returns can be higher. ) The monthly PITI (PITI stands for monthly principle, Interest, taxes and insurance) would be about $550/Mo (20% down, 30 year, 4.5%, 1% tax, 400/Yr insurance). (Warning, over simplification coming!) If I assume the property is always rented, the numbers work out to be: $900/Mo rent - $550/Mo PITI which results in a revenue stream of $350 per month. If I obtained 15 such properties I will have a revenue stream of $5,250/Mo.which never ends. And, the total capital I needed to establish such a revenue stream is 15x$20,000 = $300,000 compared to $1,800,000 in the accumulate and draw-down approach!

Here are some additional advantages of investment real estate:

• Cumulative: In the above example, each revenue stream will cost you $20,000. The positive cash flow from each revenue stream helps you buy additional revenue streams. Note that there are many financing alternatives to standard 20% down investor loans which include loans from smaller banks, seller financing and even government programs for first time home buyers, etc.
• Inflation: If you are using the accumulate and draw-down method, inflation is your enemy. With real estate, inflation is your friend. This is true because rents tend to track inflation but debt service is constant. Further, when inflation occurs interest rates increase thereby limiting people’s ability to purchase homes increasing demand for rental properties.
• Tax savings: With the accumulate and draw-down approach the IRS will love you (not good) because everything is visible and easy to tax. With real estate there are lots of expense deductions (Like coming to Las Vegas to check on your properties!). Another advantage of real estate is depreciation. (source). The IRS mandates that you depreciate the typical investment property over 27.5 years. (This is a phantom deduction because in the long run most real estate prices increase.) For our example property, deprecation will be about $2,900/year/property which offsets rental income. Many people have a positive cash flow from their real estate but still have tax losses.
• Leverage: While debt is bad leverage is good. Using common investor loans you can (in the example above) gain the income of a $100,000 property with only $20,000. There is no such leverage with other financial instruments.
• 1031 Exchange: Remember that every time you sell a stock you pay capital gains on profits. With investment real estate IRS rule 1031 ([source](http://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Section-1031)) enables you to sell (“exchange”) one type of property for another and, if handled correctly, is not a taxable event. So, if the best investment today is single family homes in Anchorage and the situation changes such that condo medical offices in Houston are now a better deal, you can sell the single family homes and buy the medical condos with no tax due if you adhere to the 1031 rules.
• Forgiving: As long as you buy investment real estate in a good area, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases. (We strongly recommend only investing in areas with growing population and low crime.)
• Requires little time: Once you buy good investment real estate it requires little personal time if you use a good property manager. If you choose to manage your own properties, be sure to watch for a forthcoming article titled, “How to Fail in Real Estate”.

Summary

The accumulate and draw-down method has serious problems including outliving your investments, taxes and inflation just to name a few. You never outlive real estate revenue streams and they are tax advantaged and inflation friendly. To me, there is no comparison when it comes to financial freedom, real estate is the clear winner.

------------------------------

Peter, I hope this helps. Please do not hesitate to contact me if you have questions.

Best Wishes,

Hello @Matthew Fiebig ,

I am a Realtor in Las Vegas and I do not know about Washington state contracts. However, the contracts should be similar so I will explain the process here.

The Las Vegas purchase contract has a period of time called the due-diligence period. I typically set the period to be 10 days with single family homes and 20 days with most multi-unit properties. During the due-diligence period the buyer can terminate the contract for any reason and get their earnest money back. You need to have similar verbiage in your purchase contract. If not, then you have the wrong contract. Below is the actual verbiage from the Las Vegas contract.

"Due Diligence Period: Buyer shall have ____ calendar days from Acceptance to complete Buyer's Due Diligence. Buyer shall ensure that all inspections and certifications are initiated in a timely manner as to complete the Due Diligence in the time outlined herein. (If utilities are not supplied by the deadline referenced herein or if the disclosures not delivered to Buyer by the deadline referenced herein, then Buyer's Due Diligence Period will be extended by the same number of calendar days that Seller delayed supplying the utilities or delivering the disclosures, whichever is longer.) During this period Buyer shall have the exclusive right at Buyer's discretion to cancel this Agreement. In the event of such cancellation, unless otherwise agreed herein, the EMD will be refunded to Buyer. If Buyer provides Seller with notice of objections, the Due Diligence Period will be extended by the same number of calendar days that it takes Seller to respond in writing to Buyer's objections. If Buyer fails to cancel this Agreement within the Due Diligence Period (as it may be extended), Buyer will be deemed to have waived the right to cancel under this section."

A few thoughts on due-diligence of multi-unit properties:

• Add verbiage to the contract that the due-diligence period starts upon I have access, utilities are on, I have copies of all lease agreements and access to their record of rent deposits.
• Never believe anyone’s books. Not infrequently they have generated some just for the sale.
• Make a point to talk to all tenants. What you want to ask are things like: are there any maintenance issues of which you are aware. Are you planning to renew you lease? If not, why? How much are you paying per month? Are there any changes you would like to see to the building?
• Have an qualified inspector go over each unit and the building in detail. Pay special attention to the roof and drainage. Check the water pressure. I find a lot of (expensive) deferred maintenance issues on the multi-unit properties here so be careful.

Keep in mind that multi-family properties have different characteristics than single family properties. For example, multi-family properties are generally only purchased by investors. Investors determine the value of a property based almost exclusively on its rate of return (or cap rate). If rents don't rise then the property value does not rise. So, unlike single family properties, multi-family property appreciation is largely based on rising rents. This means that if you are in a market where rents have been (and are likely to remain) flat, you need to consider a multi-family property only for cash flow; not for appreciation.

Multi-family advantages:

• Lower rental risk. A single-family property is either 100% occupied or 100% vacant. With a multi-family property if one unit is vacant you still receive a portion of the rent. With multi-family properties, vacancy risk is distributed across multiple units.
• Per unit cost is much lower with multi-family than single-family homes.
• Multi-family properties with four units or less (currently) qualify for standard 20% down investor loans. This is very attractive. My understanding is that more than 4 units may require commercial financing which is a more complex and expensive financing option.

Single-family home advantages:

• In Las Vegas, tenants in single family homes tend to move less frequently than the single people who are the dominate renters of multi-family properties. I believe this is because people who rent single family homes tend to be families with children. Parents want to provide stability for their children and thus do not want to move them to another school district.
• When it comes the time to sell, you have two potential buying groups with single family homes: investors and home owners. You could be in a market where rents are not increasing (so CAP rate valued properties do not increase in value) but the prices of single family homes are increasing. Or, you could be in a market where rents are increasing but property values are static.
• Financing is usually easier with a single family home investment loan.

Other multi-family vs. single-family considerations:

• In Las Vegas, multi-family seems to appeal to a different market segment than single-family. Because of the different market segments, the vacancy rate can be very different between the two. For example, currently the vacancy rate for multi-family properties is about 15%. For single family homes it is closer to 5%.

Matthew, I hope the above helps. Do not hesitate to post questions or drop me an email if I can help.

Best Wishes,

Hello @Eric T. ,

Congratulations on making the mental leap to buy where you can make money. Too often people choose to buy in their own area just because it is physically close despite the (lack of) return. So you know my bias, I am a Realtor in Las Vegas and my practice is almost exclusively remote investors (other states or countries) so I obviously see no problem with remote investing provided you trust the team.

If financial independence is your goal then I recommend that you vet every property by the following criteria:

• Sustained profitability - With real estate your minimum horizon is at least 7 to 10 years so a buying based only on the current market situation is likely to leave you in a very bad situation in a few years.
• Located in an area likely to appreciate over time.
• Landlord friendly laws and taxes.

Combined, these three requirements are not easy to fulfill. Below is a high level view of the process:

Below are the steps I would follow:

• Choose a city that has experienced sustained growth and is likely to continue to grow. Here is a map showing growth trends of major cities.  
• I would limit the locations to major cities with airports so you can easily get there. Also, I would choose a place where you would like to visit because (check with your accountant) trips to check on your properties are probably tax deductible and you might want to check your properties as part of a vacation.
• State/city/county income taxes. Most states have a personal income tax which can significantly impact your return. Nevada, Texas, Washington and Wyoming are among the few states with no personal income taxes.
• 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. Also, older properties tend to have more maintenance.

Once you have your top 5 cities, the next thing you need to know for each of your candidate cities is the type, configuration, location and rent range of the best rental properties. How can you find this information? Talk to 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 in each city you are considering. Before you start making calls, 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 or any one else would like a copy.) Tell them that you are new to investing and are looking for a property manager to work with. 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. Remember that the property managers only make money when they collect rent so they want rentable properties too. The specific information 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: eviction process and costs, rent controls, state/local income taxes, etc.

You should now have a very good idea of what properties rent best and how much they rent for. The next step is to determine what such properties cost. The property manager may be able to help you here but if not you can use Zillow. Find recently sold properties that match the type, configuration and location you learned from your property manager interviews. Once you know typical costs, it is time 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. If you (or anyone else) are interested in using this tool, drop me an email and I will send you the link. 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.

At this point you will know whether you can make an acceptable profit in a certain market. If yes it is time to dig deeper and start looking for a local Realtor that you can trust. If not move onto the next city.

Eric, I hope the above will get you started. Feel free to contact me if you have questions. 

Best Wishes,

Hello @William Roberts ,

I worked for Hewlett-Packard and IBM for over twenty years and one thing they continuously emphasized was to set a clear goal and then measure everything you do by whether it gets you closer or further from your goal. I think the same is true in real estate investing. The goal of the investors I work with is a life long revenue stream sufficient to meet their basic needs plus enough additional monies to enable them to do the things they want to do (travel, education for their children, etc.). If financial independence is your goal then you should measure every property by the following criteria:

• Sustained long term profitability - With real estate your minimum horizon is at least 7 to 10 years so a buying based only on the current market situation is likely to leave you in a very bad situation in a few years.
• Located in an area likely to appreciate over time.

If a property does not meet these criteria then you cannot afford to buy it no matter how inexpensive it is. If the property meets the criteria then the price does not matter. Some of the key indicators for sustained profitability and likely appreciation are:

• Population migration - Are people moving into the area or moving out? If people are generally moving out of the state/county/area then the rent and market value of your investment is going to decrease over time. Here is a page that provides population shifts by city.
• Jobs - The value of a property is no better than the jobs around it. This does not mean just the availability of jobs. The average income from these jobs needs to be stable or increasing. For example, if the state/county/area trend is from manufacturing jobs to lower-paying service jobs, your rent is going to go down as will the value of your property. Consider looking at ten year net income trends adjusted for inflation. 
• Property price trends - If property prices are trending down in an area, that is because there is less demand. If there is less demand to purchase, then there will likely be less demand for renting in that area too. Check the historical price trends (adjusted for inflation) for the area you are considering.
• Crime - Long term profitability and appreciation will not be found in high crime areas. There are websites that can provide this data.

Another important point is that before you decide where and what to buy (I call this property profile), talk to 4-5 mid-sized property managers in your area to find out what are the best rental properties (in your area). Property managers are a gold mine for local information on what rents and what doesn't plus they know the market trends and other issues affecting profitability. See this tread: http://www.biggerpockets.com/forums/12/topics/1527...

In summary, I think if you evaluate each property based on whether it gets you closer or further from your goal, your decision will be more straight forward.

Best Wishes,

Eric Fernwood

Hello @Cassandra Boyett ,

Buying turnkey can be an excellent purchase method but remember that this is only a purchase method, it does not assure you that you are buying in a “long term good” location, getting a good property or that you are going to get good tenants.

You have heard the old adage that the three most important things to consider in real estate are location, location and location. This is still true. When you are considering a property in any “location” you need to think long term. Do your homework and make an informed guess whether the state/city/area is still likely to be a good place to own a property in 15 or 20 years? What is happening today or this year is almost irrelevant because real estate is a long term (multiyear) proposition. Some of the key indicators you should consider are:

• Population migration - are people moving in or out? If they are generally moving out of the state/county/area then the value of your investment in 5 or 10 years is going to be much less than today. Here is a page that provide population shifts by city.
• The value of a property is no better than the jobs around it. This does not mean just that there are jobs, the earning power of jobs needs to be stable or increasing. For example, if the state/county/area trend is from manufacturing jobs to lower paying service jobs, your rent is going to go down and the value of your property will fall.
• Property price trends - If property prices are trending down in an area, that is because there is less demand. If there is less demand to purchase, then there will likely be less demand for renting in that area too. And, if property prices are going down, rents will also go down and even if you decide to cut your losses and sell you probably can’t even sell the property at break even.

The following two points are not criteria but something to keep in mind. 1) As long as you buy in a good area (see all the above), all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases. However, if you buy in a bad (or trending down) area, there is little or nothing you can do to make money over the long term. 2) To quote a former president, "Trust, but verify"; never take others claims at face value. With the internet, you can validate any claims made by others. The data is there and all you have to do is to spend sometime and the claims will be either validated or you will know that you need to find someone else to deal with.

Below is the process model I recommend. The property profile and profitability are explained in details in this thread - http://www.biggerpockets.com/forums/12/topics/1527...

Best Wishes,

Eric Fernwood

Hello @Cassandra Boyett ,

Based on how you asked your question I can tell that you have made the mental leap that you have to buy where you can make money. Too often people choose to buy in their own area just because it is physically close despite the return. So you know my bias, I am a Realtor in Las Vegas and my practice is almost exclusively remote investors (other states or countries). So I see no problem with remote investing if you have a team that you can trust.

There is no easy answer but I will tell you how I would look for the right properties. I think it is important to establish clear criteria so that you can quickly vet potential properties. Once you have a clear criteria (what I call a property profile) the search becomes easier because you know exactly what you are looking for. You may have additional characteristics but I would recommend three at a minimum.

1) The property must generate a sustained positive cash flow.
2) The property must be located in an area likely to appreciate.
3) Landlord friendly laws and taxes

Combined, these three requirements are not easy to fulfill. I will provide a little detail on each of the three criteria:

• Sustained positive cash flow - The rent is high enough compared to the purchase price so it generates a profit and the time to rent is low. There is a lot more I could say but for the sake of brevity I will stop here.
• Likely to appreciate - In order for a property to appreciate you need a stable or growing job market and stable or increasing population.
• 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 and cost thousands. In Las Vegas, the time to evict is typically less than 30 days and usually costs less than $500.

Next: where and what to buy and can you make a profit? The process is illustrated below:

The steps I would take are as follows:

• I would choose a city that has experienced sustained growth and is likely to continue to grow. Here is a map showing growth trends of major cities.
• I would limit the locations to major cities with airports so you can easily get there. Also, I would choose a place where you would like to visit because (check with your accountant) trips to check on your properties are probably tax deductible.
• State/city/county income taxes. Most states have a personal income tax. This can significantly impact your return. Nevada, Texas, Washington and Wyoming are among the states with no personal income taxes.
• 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. 

Once you have your top 5 cities, the next thing you need to know for each of your candidate cities is the type, configuration, location and rent range of the best rental properties. How can you find this out easily? Talk to 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 in each city you are considering. 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 or any one else 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 managers only make money when they collect rent so they want rentable properties too. The specific information 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: eviction process and costs, rent controls, state/local income taxes, etc.

You should now have a very good idea of what properties rent best and how much they rent for. The next step is to determine what such properties cost. The property manager may be able to help you here but if not you can use Zillow. Find recently sold properties that match the type, configuration and location you learned from your property manager interviews. Once you know typical costs, it is time 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.

In the example above I entered the estimated rent and the 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 (or anyone else) are interested in using this tool, drop me an email and I will send you the link. There is no charge or obligation for using the tool.

At this point you will know whether you can make an acceptable profit in a certain market. If yes it is time to dig deeper and start looking for a local Realtor that you can trust. If not move onto the next city.

Casey, I hope the above will get you started. Feel free to contact me if you have questions.

Best Wishes,

Eric Fernwood