All Forum Posts by: Eric Fernwood

Hello @Jack B.

You are facing a problem many other investors in Portland, Seattle, and California have faced. It is really hard to make money in a location with high overhead and where you cannot control your own property.

As to where you should invest, it should be determined by your financial goal. If you are like most, your goal is financial freedom. Financial freedom is more than just replacing your existing income. It's about maintaining your current lifestyle for as long as you live. To achieve this, you need passive income that meets three requirements:

• Rents outpace inflation: If rents do not outpace inflation, no matter how many properties you own, you cannot achieve financial freedom because inflation is continuously eroding purchasing power.
• Income persistence: Financial freedom requires that your income lasts throughout your life.
• Income reliability: The rental income must continue, even in bad economic times. Income dependability depends on the tenants who occupy your property.

Rent and price growth are driven by housing demand, which is dependent on population growth. Rents and prices only outpace inflation if the city has significant and sustained population growth.

Income persistence depends on current and future jobs. All private sector jobs are temporary. Unless new companies move into the area and create replacement jobs that pay similar wages and require similar skills, sooner or later, all that will be left are low-paying service sector jobs. As higher-paying jobs vanish, area incomes fall, and city services are cut back. This results in higher crime and lower-quality schools, which causes more people to leave.

What conditions attract new companies to relocate to a city?

• Economic stability. This requires a metro population >1M. Smaller cities tend to be dependent on a single company or market sector. Wikipedia
• Low operating costs: The three most apparent costs for investors are state income taxes, property taxes, and insurance. Tax Foundation, Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage
• Low crime rate: Companies depend on attracting talented workers. Talented workers will not move to a high-crime city. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.
• Low risk of a natural disaster: I frequently read of entire cities devastated by a natural disaster. When a natural disaster hits a city, it destroys jobs, businesses, and homes. This forces people to move to a different city to find work and start over. So, even if your insurance rebuilds your property, there might not be anyone to rent it. Meanwhile, you still have to pay your mortgage, taxes, insurance, and maintenance costs. To avoid this, choose a location with low-cost homeowners insurance, which indicates a lower risk of natural disasters. Insurance - ValuePenguin
• Pro-business environment: Google search
• No rent control of any kind. Rent control is a strong indicator of an intrusive government: Google search.

Income reliability is dependent on the behavioral characteristics and occupations of the tenant segment who occupy your property. To maximize income reliability, your property must be continuously occupied by what I refer to as a reliable tenant. A reliable tenant stays many years, always pays the rent, and takes good care of the property. However, reliable tenants are the exception, not the norm.

At least one tenant segment will have a high concentration of reliable people. You can determine this segment through property manager interviews. If you would like interview questions, let me know.

Once you've identified the segment you want to target for your property, determine where and what they are currently renting. Then, buy similar properties.

We have delivered over 500 investment properties, all selected based on what our target tenant segment is willing and able to rent. This approach maximizes your odds of always having a reliable tenant in your property.

Summary

The image below illustrates the three steps to choose properties that can generate the income needed for financial freedom.

Follow the numbers to achieve financial freedom, not the opinions of others.

Every January, we publish our Las Vegas investment forecast for the upcoming year. Predicting what will happen in the future is hard; so many factors can impact the market - inflation, interest rates, economic performance, geopolitical events, unexpected events, etc. However, forecasts are still useful as they provide guidelines for investment planning.

I will start by reviewing what happened in 2023.

Looking Back at 2023

At the beginning of 2023, most economists and financial analysts expected a recession in 2023. There were fears that Las Vegas housing prices would crash and foreclosure waves would return.

In my 2023 Outlook, I stated:

In the near term, interest rates will be the key factor.

• If interest rates rise significantly, buyers will be choked off, and prices will fall slightly.
• If interest rates remain relatively stable, I believe prices will remain relatively static.
• If interest rates fall even slightly, the demand for homes will surge, and prices and rents will rise.

As it turns out, mortgage rates rose sharply from about 6.15% in Jan 2023 to 7.79% in Oct before coming down to 6.65% at the end of the year (source: Freddie Mac). In the chart below, the green line represents the 15-year fixed interest rates, while blue signifies the 30-year fixed interest rates.

Here’s what happened to the prices (note: this is only for the segment we target, not metro Las Vegas or other property types).

Sales - Median $/SF by Month

Despite significant interest rate hikes, $/SF increased in 2023. YoY is up 7.5%; YTD is up 9.5%.

It turns out that I was conservative about the Las Vegas housing market strength. I attribute the price increases to the persistently low inventory.

Sales - Availability by Month

Sales - Closings by Month

Sales - Months of Supply

Inventory remained at or just above one month for much of 2023. In Las Vegas, six months of supply indicates a balanced market where you can expect prices to be stable. Low inventory pushed up the prices despite rising interest rates.

Let’s look at how the rental market did in 2023.

Rentals - Median $/SF by Month

Despite a year-end typical holiday season dip, rents rose 3.5% YoY.

Rentals - List to Contract Days by Month

The median time to rent ranged between 20-30 days, back to pre-COVID trend.

Rentals - Availability by Month

This chart shows the average daily number of properties that were for rent in a particular month. Notice the sharp decrease in both MoM and YoY (down ~19%).

Rentals - Closings by Month

Rentals - Months of Supply

Inventory stayed under 1.4 months for much of 2023. Demand is still greater than supply.

In summary, 2023 was a (lot) better year than I thought.

Looking Forward to 2024 and Beyond

Much of the fear of an imminent recession has dissipated. The Fed even indicated possible rate cuts in 2024. What do I think will happen to the Las Vegas investment real estate in 2024 and beyond?

While past performance doesn't guarantee future results, it’s typically the best indicator. In my opinion, the period from 2015 to 2020 is the most comparable to conditions today. It took place after the effects of the 2008 financial crash had subsided and before COVID-19 and the subsequent unprecedented rate hikes by the Federal Reserve. This period closely mirrors our starting point in 2024, though it's not identical.

Appreciation

Below is a chart showing the $/SF for our property segment from 2012 through November 2023. Please note that these numbers are only for the segment we target, not the general Las Vegas market. The compound annual growth rate from 2015 to 2020 was 10.81%.

Rent Growth

See the chart below. The compound annual growth rate from 2015 to 2020 was 7.45%.

However, I anticipate stronger appreciation and rent growth from 2024 to 2029 compared to 2015 to 2020 due to the following reasons.

Stronger Economy

The chart below is from the Bureau of Labor Statistics. Employment has now surpassed the previous peak in January 2020, much higher than in 2015.

The unemployment rate was 7.7% in January 2015 and 5.1% in November 2023.

Growing employment and declining unemployment mean more people could buy a home, increasing demand for purchases.

Tighter Housing Market

Below is a chart from the Las Vegas Realtor Association MLS showing the historic supply levels for single-family homes. These levels roughly resemble our target property segment but include the entire metro area.

Inventories have been on a long-term downward trend. They were 4.8 months in January 2015 and 2.2 months in December 2023. The housing market has much more upward pressure on prices now than in 2015.

Las Vegas Growth Drivers

Job Growth

There is a direct relationship between jobs and price and rent growth. See the image below.

Jobs are what attract people to Las Vegas, and 2023 was a particularly good year. Las Vegas employment increased by 4,800 jobs (0.4%) since October, an increase of 42,600 jobs (3.8%) since November 2022.

Future Job Growth

Depending on the study you refer to, there is currently between $26B and $30B either under construction or slated to begin. These large projects will create thousands more jobs in the future. Some highlights:

• The impending relocation of the Oakland A’s and the construction of its future home stadium on the Strip.
• 11,000 workers will soon be hired to build high-speed Brightline rail from Las Vegas to California - While the hiring of employees to build the line is noteworthy, the impact of people from LA coming to Las Vegas will be even more significant. I believe Brightline will have a similar effect as the professional sports teams have had on Las Vegas’ desirability. While Las Vegas was once known as "Sin City,” it is now perceived as a great place to live and work.
• Amazon buys 300 acres near Boulder City for $48 million. - Amazon continues to expand in Las Vegas.
• The first F1 race in Las Vegas was in 2023 and plans to occur annually. Like the sports teams, this will expose more people to Las Vegas, which will bring more people and businesses to Las Vegas.
• NOVVA Data Center - Data centers continue to move into Las Vegas. In addition to no state income taxes and pro-business government, the cost of electricity is relatively low. For example, California's commercial energy rate in November 2023 was $.2314/KwH, while in Las Vegas, it was $.1128/KwH.
• California - The exodus of people and businesses from California is another factor to consider. See the infographic below showing where California companies are moving to (Source: Applied Analysis).

Population Growth

What's the current status of population growth?

The population continues to increase at an average rate of about 2.3% per year and is projected to continue growing for the foreseeable future.

• RedFin report: Las Vegas Tops List of Popular Homebuyer Destinations For First Time

How has new home construction kept pace with population growth?

The current Clark County (Las Vegas metro) population is about 2.3M. The average population growth over the last 20+ years is 2.3%/Yr. If each residence accommodates 2.5 people, and 80% opts to buy or rent a single-family residence, the additional new homes needed in 2023 can be calculated as follows: 2.3M x 2.3% x 80% / 2.5, which is approximately 16,928. According to LVRdata.com, the number of new homes built in 2023 was 11,374. So, in 2023, metro Las Vegas fell further behind by 5,554 homes. The imbalance between the number of available residences and population growth is driving up prices and rents, a trend likely to continue for the foreseeable future.

Constraints to Expansion

The scarcity of available raw land for expansion is a contributing factor to the continued increase in prices and rents. As you can see in the aerial view below, Las Vegas is a small island of private land surrounded by a vast expanse of federal land; 90% of Clark County and 85% of the entire state of Nevada is federally owned.

Most of the remaining undeveloped land is situated on the metro area's outskirts and is less desirable. In more appealing areas, undeveloped land is above $1M per acre, resulting in the starting price of new homes over $550,000. Our target property segment lies between $320,000 and $475,000. As such, regardless of how many new homes are built, the inventory of homes within this price range remains largely unchanged.

Perfect Storm

Las Vegas presents an ideal situation for residential investors. The availability of jobs continues to attract people to the city, resulting in a rising population. Most jobs in Las Vegas are in infrastructure, paying between $60,000 to $85,000 per year. Many of these workers find the housing market too expensive and opt to rent instead. As such, the demand for rental properties continues to increase while the supply remains limited. I foresee continuous increases in prices and rents for the foreseeable future.

My Predictions

I believe the critical drivers for price and rent growth in 2024 will be interest rates and population growth.

I’ve discussed the population growth, which I anticipate will remain strong for the foreseeable future. Population growth will drive up prices and rents, and how fast prices and rents rise depends on interest rates.

Assuming interest rates remain stable, based on historical data plus my assessment of the current market and economic conditions, I expect the next 5-year average appreciation rate to be over 11% and the rent growth rate to be ~8%. Note that this is a five-year average. The appreciation and the rent growth rate could be higher or lower each year.

If interest rates drop meaningfully, I expect price and rent growth to accelerate.

If interest rates increase (as in 2023), based on how our segment performed in 2023, I expect modest to moderate appreciation and rent growth.

What About the Interest Rates?

In my blog post last week, I discussed my expectations for interest rates in 2024. I recommend reading the article for a detailed understanding, but here is a summary:

Risk Mitigation

Our clients invest in real estate to achieve financial freedom. Financial freedom is more than just replacing your existing income. It's about maintaining your current lifestyle for as long as you live. To achieve this, you need a passive income source that meets three requirements to mitigate long-term risk:

• Rents must outpace inflation. You will only have the necessary funds to maintain your standard of living throughout your life if rents outpace inflation.

  Rents for our segment have increased on average by >8%/Yr since 2013.
  

• Income persistence: Financial freedom requires that your income lasts throughout your life. Income persistence is dependent on not just current jobs but also future jobs.

  How long your income will persist depends on the current and future jobs. As shown earlier in this paper, the number of jobs in Las Vegas continues to increase and will continue to do so for the foreseeable future.
  

• Income dependability: The rental income must continue, even in bad economic times. Income dependability depends on the tenants who occupy your property.

The tenant segment we've targeted for 16+ years has proven to be very dependable.

• 2008 crash - Zero decline in rent and zero vacancies.
• COVID - Almost no impact
• Eviction moratorium - Almost no impact
• The average tenant stays over five years.
• Only six evictions in 16+ years out of a tenant population >1,000.

Summary

The perfect storm of rapid population growth and land shortage almost guarantees that Las Vegas prices and rents will continue to increase for the foreseeable future.

Many people remain concerned about interest rates. If you're planning on purchasing investment properties in 2024 with financing, my advice is not to wait for potential future interest rate reductions. Instead, set a target interest rate, such as 6.25% or 6.5%, and aim to buy down the rate to meet your goal. In this scenario, changes in mortgage rates will only impact your rate buy-down cost. If you come across a property that offers good returns at your target interest rate, don't hesitate to secure it. Later, if the interest rates decrease, you can refinance to improve cash flow. Waiting could result in higher costs for the same property.

It’s January, and it's time for another Las Vegas update. For a comprehensive view of the Las Vegas investment market, message me for my blog link. It contains more detailed information on investing insights, analytics, and, particularly, investing in Las Vegas.

Before proceeding, note that the charts only include properties that fit the following criteria unless stated otherwise.

• Type: Single-family
• Configuration: 1,000 SF to 3,000 SF, 2+ bedrooms, 2+ baths, 2+ garages, minimum lot size is 3,000 SF, one or two stories.
• 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.

Regarding the overall inventory of the Las Vegas real estate market, the chart below, provided by the MLS, encompasses ALL property types and price ranges. As of today, the inventory is below 2.5 months. In Las Vegas, a balanced market is defined by six months of inventory, indicating an approximately equal number of sellers and buyers. We remain in a seller’s market.

Rental Market Trends

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

Rentals - Median $/SF by Month

Rents declined slightly MoM, conforming to seasonal trends. YoY is up 3.5%.

Rentals - Availability by Month

There is a sharp decrease in the number of homes for rent both MoM and YoY (down ~19%).

Rentals - Median Time to Rent

The median time to rent increased MoM as expected for this time of the year, but is flat YoY.

Rentals - Months of Supply

Only about 1.2 months of supply for December. Demand is still greater than supply.

We saw a similar tight supply in sales as well. Now, only about 1.2 months of supply. This will continue to pressure up the prices.

Sales - Months of Supply

Sales - Median $/SF by Month

Despite high interest rates, $/SF is increasing. YoY is up 7.5%; YTD is up 9.5%.

Why invest in Las Vegas?

In short, to achieve financial freedom. However, financial freedom is not simply replacing your current income; it requires maintaining your current lifestyle for life. To attain lifelong financial freedom, you need to invest in a city where rents and appreciation outpace inflation.

What causes rents (and prices) to increase?

Supply & Demand

Unlike financial markets, real estate prices and rents are driven by supply and demand. In this post, I will briefly discuss the unique supply and demand situation in Las Vegas.

Supply

Las Vegas is unique in that 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 $320,000 to $475,000, so the supply of housing we target remains almost the same regardless of how many new homes are built.

Demand

The driver for housing demand is population growth.

The average Las Vegas annual population growth is between 2% and 3%. What is bringing people to Las Vegas are jobs. At the spring job fair, there were over 20,000 open positions. The annual average wage was $65,000, which is our target tenant segment.

Las Vegas has $30 billion in new developments either under construction or planned. This will create thousands of additional jobs, bringing more people to the city and increasing housing demand.

In Conclusion

With a fixed supply of properties in the range of $320,000 to $475,000, a rapidly growing population, and a growing number of jobs, it is almost certain that rents and prices will increase in the foreseeable future.

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

Hello @Sonu Sundar,

Before you decide what and where to buy, you need to first determine who you want to rent your property to.

This is how the commercial world works. Do you think Whole Foods, Walmart, or Target decides on a location because someone in management thinks this is a good location? No, they have a deep understanding of their customers and place stores where the customers want to shop to maximize sales and profits. You need to make decisions using the same principles as retailers.

One goal of a rental property is to have a reliable income. The only way you will have a reliable income is if a reliable tenant continuously occupies your property (your “customer”). A reliable tenant is someone who stays many years, always pays the rent on schedule, and takes good care of the property. And, because you will hold the property for many years, you will need multiple reliable tenants.

Reliable tenants are the exception, not the norm. The best way to have a reliable tenant in your property is to:

• Buy a property that attracts a tenant segment with a high concentration of reliable people.
• Work with a property manager who can consistently select reliable tenants. There are very few property managers with this skill. Over the last 16+ years of working with investors and property managers, I have encountered only two with this skill.

You can identify a tenant segment with a high concentration of reliable people through property manager interviews. If anyone would like sample property manager interview questions, let me know.

Once you identify the segment, determine what and where they rent today. From this, you can create what I call a property profile. A property profile is a physical description of a property. A property profile has at least four elements.

• Location - The locations where significant percentages of the target segment are renting today.
• Property type - The type of properties they rent today. Condo, high rise, multi-family, single family, the type does not matter. Only a reliable tenant matters.
• Rent range - What the segment is willing and able to pay.
• Configuration - Two bedrooms, three-car garage, large back yard, single-story, two stories?

Once you have a property profile, you can give this to any realtor, and they can find conforming properties.

However, just because a property conforms to the profile does not mean it is a good investment. Every property of interest must be evaluated based on current and future performance.

Current Considerations

• Time to rent
• Renovation Cost & Risk
• Initial ROI and cash flow
• Purchase Price
• Maintenance cost
• Acceptable area rental restrictions
• In an area that is doing well and likely to do better in the future.
• In the migration path of urban sprawl.

Future Considerations

• The location has a track record of appreciation and rent increases.
• It physically matches the expected demographic changes for the foreseeable future.

Buy what your “customer” wants to rent, not what you think is a good property.

Hello @Mary Ainsworth,

As a realtor, my answer is no! How can you make an informed decision without seeing the property, whether directly or indirectly?

Below are the services and information a realtor must provide in order for you to make an informed decision.

Services

• The realtor works with you to create what we call a property profile, which is a physical description of properties that will match your financial situation and goals. A property profile has at least four components.
  • Location - The locations where significant percentages of the tenant segment you decided to target are renting today.
  • Property type - The type of properties they rent today. Condo, high rise, multi-family, single family, the type does not matter. Only a reliable income matters.
  • Rent range - What the segment is willing and able to pay.
  • Configuration - Two bedrooms, three-car garage, large back yard, single-story, two stories?

The realtor finds conforming properties and then analyzes the properties, only sending you properties that both match your property profile and meet financial goals such as cash flow and ROI. It is NOT your job to select properties. This is the job of the realtor.

Information for Every Property

The realtor should provide the following for each property:

• Video walk-through - We upload ours to YouTube so clients can review the property multiple times. This is easy with any modern cell phone. The videos are critical for the following reasons:
  • Too often, the photos on the MLS do not reflect the actual condition of the property.
  • Videos do not tell you everything - for example, a strong pet or smoke odor. The realtor making the video must provide their observations while they take the video.
  • Perspective - Without a video, you can’t get the flow of the property. Flow is very important.
• The opinion of the property manager they work with. Based on the video the realtor sent the property manager, they should provide:
  • Rent range after renovation
  • List of recommended renovation items - These are tenant segment-specific.
  • Pros and cons
  • Time to rent
• Sales comps and a recommended offer price range
• Basic cash flow and ROI analytics
• Estimated cost for the renovation - Note that until after the property is inspected during due diligence, you will not have an accurate renovation cost, but you need a good estimate to know if the property is viable.

Mary, you are not being unreasonable. You just may need a different realtor. One who has your interest in mind.

It’s December, and it's time for another Las Vegas update. For a comprehensive view of the Las Vegas investment market, message me for my blog link. It contains more detailed information on investing insights, analytics, and, particularly, investing in Las Vegas.

Before proceeding, note that the charts only include properties that fit the following criteria unless stated otherwise.

• Type: Single-family
• Configuration: 1,000 SF to 3,000 SF, 2+ bedrooms, 2+ baths, 2+ garages, minimum lot size is 3,000 SF, one or two stories.
• 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.

Overall Las Vegas Real Estate Market Inventory

The chart below, provided by the MLS, 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 declined slightly month-over-month, in line with the seasonal trend, but remained strong for November. YoY is up 5.4%.

Rentals - Availability by Month

The number of homes for rent continued the downward trend. YoY is down more than 11.5%.

Rentals - Median Time to Rent

Median time to rent was unchanged from October, showing a holiday season pattern. YoY is down 10%.

Rentals - Months of Supply

Only about 1.2 months of supply for our target rental property profile. Demand is greater than supply.

We saw a similar tight supply in sales as well. Now, only about 1.2 months of supply. This will continue to pressure up the prices.

Sales - Months of Supply

Sales - Median $/SF by Month

Despite increasing interest rates, $/SF climbed up in 2023. YoY is up 2.2%. YTD is up 5.9%. Prices dipped slightly in October and November, reflecting a back to pre-Covid seasonal trend.

Why invest in Las Vegas?

In short, to achieve financial freedom. However, financial freedom is not simply replacing your current income; it requires maintaining your current lifestyle for life. To attain lifelong financial freedom, you need to invest in a city where rents and appreciation outpace inflation.

What causes rents (and prices) to increase?

Supply & Demand

Unlike financial markets, real estate prices and rents are driven by supply and demand. In this post, I will briefly discuss the unique supply and demand situation in Las Vegas.

Supply

Las Vegas is unique in that 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 $320,000 to $475,000, so the supply of housing we target remains almost the same regardless of how many new homes are built.

Demand

The driver for housing demand is population growth.

The average Las Vegas annual population growth is between 2% and 3%. What is bringing people to Las Vegas are jobs. At the spring job fair, there were over 20,000 open positions. The annual average wage was $65,000, which is our target tenant segment.

Las Vegas has $30 billion in new developments either under construction or planned. This will create thousands of additional jobs, bringing more people to the city and increasing housing demand.

In Conclusion

With a fixed supply of properties in the range of $320,000 to $475,000, a rapidly growing population, and a growing number of jobs, it is almost certain that rents and prices will increase in the foreseeable future.

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

Hello @Bryan H.,

You've raised a valid point. I hadn't considered the impact of losing the depreciation deduction after 27.5 years. Accurately predicting future tax regulations and market conditions is indeed challenging. Additionally, I hadn't accounted for the fact that most mortgages are paid off by year 30. It's fair to say that predicting anything beyond yesterday is speculative. Nonetheless, you've made an excellent point.

In response to your question, "How do you find the data to know if your rents are outpacing inflation over time," you would likely need to consult an investment realtor who can provide the necessary historical rental data. Even if you've acquired the data, deriving property segment rental performance against inflation over time isn't straightforward. I'll outline the issue and our approach to solving it.

The Problem

You can usually obtain historical metro rental data. The problem with such metro averages is that they combine dissimilar properties together. For example, $1M properties have different rental characteristics than $300,000 properties. Condos, townhomes, and single-family homes each have distinct rental characteristics.

Because metro data averages encompass varied property types, the resulting data has little relevance to any specific property segment within the average. Below is an excerpt from an article I wrote about the issues with using average metro prices to evaluate a sub-segment of the averaged properties.

Imagine you followed the prices of ten properties for one year. The table below shows how their market values changed.

Based on metro averages, prices fell by 5.8% over the reporting period. While mathematically correct, the result is invalid. A more accurate statement would be:

• Properties priced at $300,000 rose by 6%
• Properties priced over $1M fell by 14%
• Proeprties priced at $100,000 fell by 10%

My point is that the metro average of a 5.8% decrease does not apply to any of the properties.

How We Solved the Problem

I developed software that calculates the average monthly rent growth for our targeted property segment. The data is sourced from downloaded MLS historical rental data. The software filters properties that align with our targeted segment and calculates the average monthly $/SF. This allows me to compare the inflation rate for a particular month with the rent growth.

I didn't suggest a method to determine if your rents are outpacing inflation over time. The only solution I can offer is to consult with an investment realtor. They can provide the historical rental data that you need.

Hello @Matthew Vanhorn,

1031 does seem like a cheat code. It is used when you want to exit a property (or properties) and redeploy your equity into better performing property (properties), without tax consequences. No other investment vehicle has this tax advantage. Many of our clients exchanged properties in California, Seattle, or Portland for properties in Las Vegas.

Another equally big advantage of real estate is cash-out refinance. Cash-out refinance is how many of our clients have grown their Las Vegas property portfolios with minimal additional capital investment.

Before I continue, here's a brief background: we've delivered over 490 investment properties to more than 180 clients. We've completed about eighty 1031 exchanges and helped numerous clients grow their portfolios through cash-out refinance purchases. This experience gives us a solid understanding of both options.

A frequent question I receive concerns whether they should do a 1031 or a cash-out refinance. Which is the best option depends on whether the property is performing and the amount of equity. Because this is a frequent question, I put together the following decision chart.

1031 or Cash Out Refinance?

The first and most important decision is based on whether rents and prices have outpaced inflation and if the property is in a landlord-friendly environment. If the property has not met both requirements, 1031 or sell the property.  If rents and prices have outpaced inflation and the regulations are favorable, keep the property. The next question is whether the proceeds from a cash-out refinance, plus your savings, are enough to purchase another desirable property. If no, do nothing for now; continue to accumulate equity. If there is enough equity to buy another property, do a cash-out refinance.

Other Considerations - 1031

• You are not allowed to use the proceeds from the relinquished property to pay for renovations. Some of our clients have opted to pay capital gains tax on a portion of the proceeds and use that money for the renovation.
• If you only identify the replacement property during the 45-day identification period and you cannot close on any of the identified properties, you lose the tax exemption. We minimize this risk by coordinating the sale of the relinquished property with the purchasing of the replacement property. Using this approach, we usually close on the replacement property within about four weeks of the exchanged property closing. With this approach, if the replacement property falls out, we have time to get another property and complete due diligence before the end of the 45-day identification period.
• Not all purchase contracts include 1031 exchange verbiage. Have your listing agent obtain the correct verbiage from your exchange agent for your state and include it in the agent-to-agent remarks, specifying that the 1031 text must be included in the offer.
• To fully defer the capital gains tax on all the proceeds, you must reinvest all the proceeds from the sale into the replacement property.
• If there is existing mortgage debt on the relinquished property, it's important to consider how it will be handled during the exchange. Any reduction in debt or cash received may be treated as taxable boot, resulting in potential tax liabilities. Talk to your 1031 exchange agent.
• The relinquished and replacement properties must meet the requirement of being held for investment or used in a trade or business. Personal residences or properties primarily held for personal use do not usually qualify for a 1031 exchange.
• It's important to understand the state-specific regulations regarding like-kind exchanges. Some states may not recognize or fully conform to the federal provisions. Consult with a tax professional familiar with your state's laws.

Other Considerations - Refinance

• When you refinance the property, will it still provide a positive cash flow?

Summary

Cash-out refinances, and 1031 exchanges are powerful tools for investors. Primarily:

• Use 1031 to replace poorly performing properties.
• Use cash-out refinance if the property has performed and you want to reinvest the equity.

Hello @Ramon Vargas,

You are right to focus on the location. The location is the most important investment decision you will make because financial freedom is more than just replacing your existing income. It's about maintaining your current lifestyle for as long as you live. To achieve this, you need a passive income that meets two requirements:

• Rents must outpace inflation: If rents do not outpace inflation, no matter how many properties you own, you cannot achieve financial freedom due to inflation continuously eroding purchasing power.
• Income persistence: Financial freedom requires that your income lasts throughout your life.

Whether rents outpace inflation and how long the income lasts depends on the city where you invest.

Start with an initial list of potential cities and then eliminate any city that does not meet additional criteria. I started with cities with a metro population >1M.

✅ Economic stability. This requires a metro population >1M. Smaller cities tend to be dependent on a single company or market sector. Wikipedia

✅ Significant and sustained population growth. Use Wikipedia for population growth data.

✅ Low overhead costs: The three most apparent costs for investors are income taxes, property taxes, and insurance. Tax Foundation, Insurance - ValuePenguinState Property Tax Rates - Rocket Mortgage This is really important, so I will provide an example below.

✅ Low crime rate: Companies depend on attracting talented workers. Talented workers will not move to a high-crime city. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.

✅ Low risk of a natural disaster: The issue isn't your property. Insurance will cover the cost of rebuilding. The real problem lies in the community: jobs, stores, roads, healthcare services, gas stations - everything has been destroyed. Your previous tenants had no choice but to relocate. Without employment opportunities and essential services, they won't return. Meanwhile, debt service, taxes, insurance, maintenance, and other expenses persist without interruption. The best indicator of the probability of a natural disaster is the relative cost of homeowners insurance. The lower the cost, the less likely a natural disaster. Use this national homeowner insurance cost comparison site to compare insurance costs. Never buy in a state with high-cost homeowners insurance.

✅ Pro-business environment: Google search

✅ No rent control of any kind. Rent control is a strong indicator of an intrusive government: Google search

Overhead Cost Comparison

It's not about how much you gross but how much you net. When choosing an investment city, don't rely solely on simple return calculations; consider all major recurring costs. Property taxes and insurance are typically the two biggest recurring costs. Below is a comparison of three states with no state income tax.

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

To show the impact of taxes and insurance on net rental income, I compared the overhead costs of a $400,000 property. (These averages represent state-level data, and individual cities may levy additional taxes.)

To achieve the same level of cash flow as a property in Nevada, you would need to generate a higher cash flow in Texas and Florida to offset the higher operating costs.

• Texas: The property must generate $5,700 ($9,194 - $3,494) more cash annually to compensate for the higher operating costs in Texas.
• Florida: The property must generate $2,123 ($5,617 - $3,494) more cash annually to compensate for the higher operating costs in Florida.

Overhead costs can have a large impact on cash flow.

Next Step - Investment Team

Why is it essential to work with a local investment team? Podcasts, books, seminars, and websites only provide general information. You will purchase a specific property in a specific city with specific local conditions and regulations. Only an experienced local investment team has the local knowledge, processes, resources, and skills you need to be successful. I would consider another city if there is no existing investment team.

Also, working with an investment team usually does not cost more. For instance, we have delivered over 490 investment properties and charged our clients a fee on only four or five, which were exceptional circumstances. In all other cases, our fees were paid by the seller's listing agent, not by our client.

Ramon, I hope this helps.

Hello @Colin Carey,

Renovation is confusing unless you’ve had significant experience. In this post, I will share some lessons from completing over 500 renovations.

What Is the Goal of Renovation?

Renovation is not about making the property pretty; renovation is about cost-effectively changing the property to:

• Attract the right tenant pool
• Increased rent
• Decreased time to rent
• Increased tenant stay
• Reduced maintenance cost

Estimating Renovation Cost

After 500+ renovations, we’ve standardized most items into unit costs and have long relationships with all the vendors. Below is how I would create a renovation estimate if I started from scratch today.

You must work with a good property manager. A good property manager (there are very few) can tell you what to change to maximize rent. You communicate the property condition and such to the property manager by sending them detailed videos, inside and out. Based on the video, the property manager can provide a list of renovation items. Below is a sample list of renovation items from a property manager:

• Paint all cabinets
• Install 9 blinds
• Replace the missing drawer front in the kitchen
• Interior paint - 100% (specify the specific paint to use)
• Install smart key locks (4)
• Replace the master bedroom ceiling fan (use fan #XXXX)
• Remove the trim around bathroom mirrors
• Replace 8 brass door knobs with brushed nickel
• Outlet covers and switch cover plates - several
• Rice paper on the fogged window (1)
• Replace thermostats (2)
• Cut back trees from the structure

You now have a list, but no costs. To get cost estimates, send the video to the various trades for their cost estimates. You must provide the information the trades need in order to estimate. For example, when replacing a drawer front, I videoed a measuring tape on a similar drawer front and provided the additional information they needed. On flooring, I laid measuring tapes on the edges and provided details by which they could estimate costs.

When the property is under contract, have each trade person come to the site and provide quotes.

Also, I would not necessarily use a contractor for everything. During the first few years, I primarily used licensed contractors. My experience with licensed contractors was:

• Very low-quality work. In several cases, I kicked contractors off the job site. And, unless I was on the job site at all times, they constantly did things like diluting the paint with water.
• They did not even pretend to be working towards the schedule. They might not show up for a week or two. This was because my job was too small to garner much interest, so they only worked on my job when they had idle people.
• Hiring licensed contractors is approximately three times more expensive than employing a handyman for similar work. However, a licensed professional is still necessary for some tasks (plumber, electrician, roofer, etc.)

After years of frustration with licensed contractors, we now use handymen when possible and licensed people only where needed. This not only reduced the renovation cost significantly, but it also improved the quality of the work.

Below is an example of a sample cost estimate (combined from multiple tradespeople). Note that for each line item, I would specify the materials, and they would quote the labor and the material I specified.

Lessons Learned

• Price is no indication of quality - Small handyman services often outperform licensed contractors regarding work quality, cost, and maintaining schedules.

• If you get your quotes by sending the video to the various trades, they will be far more willing to work with you than if you expect them to go to each property.

• Use investment team leverage - Your job is likely too small to attract most renovation companies. Only your investment team can provide the leverage you need to get the work done right.

• Scheduling - You'll need to plan when each job is done. The order matters. For instance, if you're changing the kitchen countertop, arrange for the cabinets to be painted after the new top is in place. Paint the walls before the carpet is installed.

• Use appropriate vendors - Use handymen for most tasks to control costs and only bring in licensed contractors when necessary.

• Contracts - Document all details (start date, duration, paint brand and colors, materials, permits, etc.) in writing. If it's not in the contract, it won't happen.

• No drugs, smoking, or alcohol on-site in the contract - I've fired contractors in the past due to workers being under the influence. Also, smoking can damage the property and lead to costly odor removal.

• Licensed and insured - The contract must include copies of their license and insurance.

• Fixed Price for each line item - You cannot afford to pay by the hour, no matter how low the rate.

• Overwatch - Without a construction knowledgable person going on-site at least every other day, your job will take longer to complete, the quality will suffer, and the price will increase.

• Payment terms - 50% payment upfront, remaining upon final acceptance.

• Renovation creep - Do all that the property manager recommends and nothing additional. You will not live there, so what you like or do not like does not enter into it.

• When estimating renovation costs, you must include a pad for the unexpected.

• Renovation risk - Renovation risk is a serious consideration. I've seen people buy properties with high-risk repair items, assuming that "it can't cost more than $X to fix it." For example, they might budget $2,000 to repair the problem, and $25,000 later the work is still incomplete. Below are examples of high and low-risk items.

Summary

Renovation can go seriously wrong if you do not do your homework. Remember that this property will not be your home, so what you like or do not like does not matter. You must work with a good property manager; they can tell you what you need to do to maximize your rent.

Let me know if you have any questions.