All Forum Posts by: Eric Fernwood

Hello @Imani Naomi,

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

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

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

To maximize your success, follow the steps illustrated below. 

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

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

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

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

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

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

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

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

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

The only properties this segment will rent are:

• Type: Single-family

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

• Rent range: $1,800/Mo to $2,300/Mo

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

  
  

What has been our results following this process?

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

Summary

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

Hello @Vinay Sanapala,

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

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

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

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

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

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

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

Hello @Ben Stanley,

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

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

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

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

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

Hello @Christopher Mooney,

In the last 17+ years, I’ve worked with many investors. Occasionally, I'm asked about two or more people pooling their resources to buy properties. This can work, but there is a potential pitfall: assumptions.

NOTE: I am not an attorney or business advisor. The following is a list of topics I've encountered in teaming agreements, although it's not exhaustive. I advise working together to identify and agree on potential issues collaboratively. Afterward, have the document reviewed by an attorney.

For example, suppose two friends decide to pool resources and invest together. They have known each other for many years, so no issues are anticipated. A few months later, the refrigerator breaks down at a property. One wants to install a used refrigerator to save money, while the other wants a new refrigerator with a warranty. Although this seems trivial, I have seen friends argue over less. How do you minimize future problems? By writing and signing an agreement that covers as many potential issues as possible. Below are some items I’ve seen in teaming agreements.

1. Ownership Interest: Clearly define the percentage of ownership each party has in the property. This is usually based on the proportion of the down payment, mortgage payments, and other costs each party contributes.
2. Financing Details: Define who will pay for what. This includes the mortgage, who will be named on the mortgage, and how you'll split the mortgage payments. Also, explain how you'll share the acquisition costs, such as the down payment, renovation, and closing costs.
3. Payment Responsibilities: Explain how to divide and pay for regular costs like mortgage, property taxes, insurance, homeowners association fees (if applicable), and upkeep expenses.
4. Management and Maintenance: Agree on how property maintenance, repairs, and improvements will be handled, including decision-making processes, funding for these activities, and responsibilities for performing or managing the work.
5. Single Decision Point: For example, I've seen situations where one person agreed to replace an appliance while another strongly opposed it. This kind of indecision is harmful when running a business. One individual needs to make the final decisions.
6. Dispute Resolution: Define and agree on a method for resolving disputes that may arise, such as mediation or arbitration, to avoid litigation.
7. Change in Marital Status: What happens to the ownership if a party gets married or divorced? What happens if a party dies or becomes incapacitated?
8. Exit Strategy: Include provisions for what happens if one party wants to sell their interest in the property. This could involve a right of first refusal for the other party, buyout terms, and a method for determining the sale price.
9. Rental and Use: Define the rules for renting out the property or parts of it, including how income and expenses will be divided. Also, agree on how the property will be used, who can live there, and under what conditions.
10. Contribution Reconciliation: Determine a process for handling situations where one party cannot meet their financial obligations or if there are significant discrepancies in contributions to expenses.
11. Legal and Professional Fees: Decide how legal and other professional fees related to the purchase and management of the property will be shared.
12. Taxes: How will the tax advantages be divided?
13. Signatures and Legal Advice: All parties must sign the agreement, and each party is advised to seek independent legal advice to fully understand their rights and obligations.

Summary

The hours you spend creating the agreement will likely save your friendship and legal fees.

Hello @Sandra Feurtado,

Do you need to visit the city where you're considering investing? I'm not sure what you'd learn that you can't find online. When it comes to individual properties, maybe—especially if you don't have an experienced and trusted investment team in place.

Before I continue, what is the goal of goal of real estate investing?

The goal of real estate investing is lifelong financial independence. Financial independence requires an income that enables you to maintain your standard of living throughout your life. Such an income must meet three requirements:

• Rents outpace inflation: Every time you go to the store, it takes more money to buy the same goods. Unless your rental income outpaces inflation, you won't be able to pay inflated future prices and you'll soon have to return to work. For rents to increase faster than inflation, there must be significant and sustained population growth.
• Sufficient income to replace your current income: This will require multiple properties. If you buy in a city with significant and sustained population growth, i.e., with high appreciation, you can use cash-out refinancing to buy additional properties with minimal additional capital from your savings.
• Lasts throughout your lifetime: For your tenants to continue paying similar rent, they must remain employed at comparable wages. However, most non-government jobs are temporary. The average company only lasts ten years, and even large companies listed on the S&P 500 typically survive just 18 years. This means that in the foreseeable future, every non-government job your tenants have will likely end. Your tenants will only be able to continue paying their current rent if new companies move into the area, creating replacement jobs with similar wages and skill requirements. Companies have considerable flexibility in choosing where to set up operations. Four of the major criteria they consider when selecting a location are:
  • Low crime: Companies are unlikely to establish new facilities in high-crime cities. Never invest in any city on this list.
  • Low operating costs: Every company faces competition. To succeed, they must keep their operating costs low. Many cities have high overhead costs that consume a large portion of generated revenue. Avoid investing in cities with high operating costs.
  • Pro-business environment: Companies prefer locations where they can operate smoothly without excessive government interference. It wouldn't make sense to choose a city where you'd spend significant time and money battling regulations just to conduct normal business operations. Avoid investing in cities with anti-business environments.
  • Metro population >1M: Companies require significant infrastructure. This is not available in smaller cities.

You can evaluate all these criteria from anywhere in the world using the internet. Here's a summary of what you need to know:

• Population greater than 1M and growth rate: The source for metro population size and population change: Wikipedia
• Crime.
• Operating costs: State income taxes are a good indicator of government efficiency. Here's a map comparing income tax rates by state.
• Rent control: Never invest in any city that imposes significant limits on your ability to manage your own properties. Use Google to research for this information.

Once you select an investment city, you need to find an experienced investment team. The team is crucial because all the information you acquire from seminars, podcasts, books, and websites is general. You'll be buying in a specific location, subject to local rental regulations and other unique factors. An experienced local investment team can provide you with all the in-depth local information and resources you need.

Summary

So, you can do all the research you need without visiting the city. In our case, we've delivered over 530 properties to clients worldwide. Of the 200+ clients we've worked with, fewer than 10 were local; all the rest lived in other states or countries. We've never met more than 60% of our clients in person, and few have ever come to see their properties.

In my opinion, you're better off researching potential cities online and interviewing potential investment teams via Zoom than traveling to the city.

Hello @Frankie Paterno,

You're focusing on day-one cash flow, but you'll likely hold a property for as long as you live. Therefore, you need to adopt a longer-term perspective.

Real estate is a long-term investment. ROI and cash flow only predict how a property is likely to perform on day one of a lifetime hold. I believe that what happens beyond day one, is far more important than day one. I will explain my thought.

The goal of real estate investing is financial freedom. Financial freedom isn't just about replacing your current income; it's about maintaining your desired lifestyle for the rest of your life. This requires an income that meets four requirements. (Click to enlarge.)

As you can see, financial freedom has two primary dependencies. The first is the investment city or location. All long-term income characteristics are determined by the city. The second is a reliable tenant segment. In this post, I will focus only on the location requirements.

Rents Rise Faster Than Inflation

Inflation erodes the value of money over time, causing prices for goods and services to rise. To maintain your current standard of living, your rental income must increase faster than inflation. If rents don't outpace inflation, you can't achieve financial freedom—no matter how many properties you own.

For example, let's say you buy property in a city where rents increase by 2% annually, while inflation averages 4% per year. How will your financial situation look after 5, 10, and 15 years? I will assume an initial rent of $1.000/Mo.

• 5 years: $1,000 x (1 + 2%)^5 / (1 + 4%)^5 ≈ $907
• 10 years: $1,000 x (1 + 2%)^10 / (1 + 4%)^10 ≈ $824
• 15 years: $1,000 x (1 + 2%)^15 / (1 + 4%)^15 ≈ $747

So, every year, the amount of goods and services you can buy will decrease, even though rents increased each year. The problem is that rents did not increase faster than inflation.

What if you buy in a city where rents increase by 8% per year?

• 5 years: $1,000 x (1 + 8%)^5 / (1 + 4%)^5 ≈ $1,208
• 10 years: $1,000 x (1 +8%)^10 / (1 + 4%)^10 ≈ $1,459
• 15 years: $1,000 x (1 + 8%)^15 / (1 + 4%)^15 ≈ $1,761

The amount of goods and services you will be able to afford increases over time.

Investing in cities with high rent growth rate decreases the number of properties you will need to reach financial freedom. For example, suppose you need $5,000/Mo to replace your current income and the cash flow from each property is $300/Mo. How many property will you need?

With limited rent growth:

• $5,000/$300 ≈ 17 properties.

What if you buy in a city with 8%/yr rent growth? Assuming a $2000/Mo starting rent and a $1700/Mo expense:

• Year 0: $2,000 x (1 + 8%)^0 - $1,700 ≈ $300: $5,000 / $300 = 17 properties
• Year 1: $2,000 x (1 + 8%)^1 - $1,700 ≈ $460: $5,000 / $460 = 11 properties
• Year 2: $2,000 x (1 + 8%)^2 - $1,700 ≈ $633: $5,000 / $633 = 8 properties
• Year 3: $2,000 x (1 + 8%)^3 - $1,700 ≈ $819: $5,000 / $819 = 6 properties
• Year 4: $2,000 x (1 + 8%)^4 - $1,700 ≈ $1,021: $5,000 / $1,021 = 5 properties

While the above is over simplified, the concept is sound.

Sufficient Income

You'll need income from multiple properties to replace your current earnings. If you invest in a low or no-appreciation location (i.e., cities without significant and sustained population growth), every investment dollar must come from your savings.

As in the prior example, if you require 17 properties and each property costs $250,000 and your only acquisition cost is a 25% down payment, how much capital will you need?

• 17 x $250,000 x 25% ≈ $1,062,500

Over a million dollars in after-tax savings is impossible for most people. However, what if you purchase property in a city with high appreciation?

In such a location, you can use cash-out refinancing. So, how much will it cost to buy your first property? Let's assume a $400,000 property with a 25% down payment.

• 25% x $400,000 ≈ $100,000

If the appreciation rate is 8%, how long will you need to let the property appreciate until a cash-out refinance yields the needed $100,000? I'll assume no principal pay down and simplify by assuming the next property will also cost $400,000. This isn't realistic because all properties are appreciating in such a city.

• After one year: $400,000 x (1 + 8%)^1 x 75% - $300,000 ≈ $24,000
• After two years : $400,000 x (1 + 8%)^2 x 75% - $300,000 ≈ $49,920
• After three years: $400,000 x (1 + 8%)^3 x 75% - $300,000 ≈ $77,914
• After four years: $400,000 x (1 + 8%)^4 x 75% - $300,000 ≈ $108,147

So, after four years, you can use the proceeds from a cash-out refinance to buy your next property. Then, you will have two properties appreciating at 8% per year. Using cash-out refinancing, you can grow your portfolio with minimal additional cash from savings.

Lasts throughout Your Lifetime

Your rental income depends on your tenants maintaining similar wages throughout your lifetime. However, all non-government jobs have a finite lifespan. On average, companies last about 10 years. Even large corporations, such as those listed on the S&P 500, survive for an average of only 18 years. Consequently, every non-government job your tenants currently hold will eventually end. For tenants to continue paying comparable rent, new companies must move into the city and create replacement jobs with similar wages and skill requirements. This means the location must possess the right characteristics to attract new businesses.

If the city fails to attract new companies, soon only low-paying service sector jobs will remain. As average incomes decline, city revenues fall. Cities then have no choice but to reduce services. This service decline leads to increased crime and an exodus of those who can afford to move away. The result is a downward spiral of falling average incomes and further cuts to city services—a financial death spiral from which few cities ever recover.

Where Are You Most Likely to Find Properties With Initial Cash Flow?

Cities with declining or stagnant populations have lower-cost properties and higher initial cash flow. This is because rents follow prices. Today's rents reflect property values from two to five years prior. This lag between rents and prices results in higher initial cash flow. Conversely, cities experiencing significant, sustained population growth have rapid appreciation and rent growth. Because rents lag behind prices, current rents reflect lower prices from the past. The result is lower initial cash flow. Consequently, you must choose between immediate cash flow or future rapid rent growth and appreciation. You cannot have both.

Summary

Frankie, to achieve financial freedom, you need to evaluate investment locations based on their likely performance over the next 30+ years, not just day-one cash flow. I hope this post provides insight into the self-defeating reality of investing in low-cost locations with static or declining populations.

Hello @Brick Biermann,

What do you think of the rent growth rate going forward? If you believe the appreciation has plateaued, rents will typically follow suit. If the appreciation and rent growth lag inflation, the value and income of this property are actually decreasing.

Below is a decision tree I created which I hope will provide some guidance. (Click to enlarge.)

Hope this helps with your decision.

Hello @Chizitem Ibeneme,

While the unemployment rate is an interesting statistic, population growth is far more important.

Prices and rents are driven by demand. When people move into a city, they increase demand for homes and rentals, causing prices and rents to rise. If population growth is static or decreasing, prices and rents tend to remain flat or fall.

Also, unemployment figures can be misleading. For example, consider a 10% unemployment rate. If your tenants have a gross annual income between $60,000 and $85,000, and the majority of the unemployed earn $30,000 to $40,000, this will have little impact on your rental properties. However, if most of the unemployed fall within the $60,000 to $85,000 range, you're likely to face problems.

Hello @Daniel Windingstad,

Live where you like but invest where you can make money.

Out-of-state investing is often your best option if your goal is financial freedom through real estate, because the chances of living in a city that can support this goal are slim. Financial freedom goes far beyond simply replacing your current income. It requires an income that meets four specific requirements and their dependencies, as shown in the illustration below. (Click to enlarge.)

Unless the city where you live meets the requirements shown above, you'll need to invest out of state to achieve financial freedom.

If you would like a process for finding a city that does support financial freedom, let me know

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

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

• Type: Single-family
• Configuration: 1,000 SF to 3,000 SF, 2+ bedrooms, 2+ baths, 2+ garage, minimum lot size is 3,000 SF.
• Price range: $320,000 to $475,000
• Location: All zip codes marked in green below have one or more of our client’s investment properties.

What we are seeing:

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

Rental Market Trends

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

Rentals - Median $/SF by Month

Rents had another slight drop MoM ($1.18/SF vs $1.19/SF). YoY is up 3.5%.

Rentals - Availability by Month

The number of homes for rent remained flat MoM.

Rentals - Median Time to Rent

Median time to rent continued to increase MoM but still at a very reasonable 22 days. This conforms to the traditional seasonal trend.

Rentals - Months of Supply

The supply for our target rental property profile stands at about 1.2 months, remaining flat year-over-year. With demand outpacing supply, we expect rents to continue rising.

In terms of the sales market, we saw a similar slight slowdown in days on market compared to the hot Q2 but prices are held steady. Inventory remains tight (1 month).

Sales - Months of Supply

There is just over one month of supply for our target property profile. Year-over-year, we've seen a slight drop. A six-month supply is typically considered a balanced market. This limited inventory will likely continue to drive prices upward.

Sales - Median $/SF by Month

The $/SF increased MoM. YoY is up 8.5%.

Why invest in Las Vegas?

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

What causes rents (and prices) to increase?

Supply & Demand

Unlike financial markets, real estate prices and rents are driven by supply and demand. What is the supply and demand situation in Las Vegas?

Supply

Las Vegas is unique because it is a tiny island of privately owned land in an ocean of federal land. See the 2020 aerial view below.

Very little undeveloped private land is left in the Las Vegas Valley, and desirable areas cost more than $1 million per acre. Consequently, new homes in these locations start at $550,000. Homes that appeal to our target tenant segment range from $350,000 to $475,000, so the supply of housing we target remains almost the same regardless of how many new homes are built.

Demand

Population growth drives housing demand and price and rent increases. Las Vegas's average annual population growth ranges from 2% to 3%. What attracts people to Las Vegas? Jobs. Ongoing construction projects valued between $26 billion and $30 billion fuel employment opportunities. The most recent job fair featured over 20,000 open positions.

In Conclusion

While nothing is guaranteed, the combination of population growth and limited land for expansion virtually assures that prices and rents will continue to increase.

Thanks for reading my post. Reach out if you have questions or would like to discuss investing in Las Vegas.