All Forum Posts by: Eric Fernwood

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.

Hello @Kayde C.,

Losing $1,200 per month doesn't seem feasible. Therefore, I believe your best option could be a 1031 exchange.

There may be a few challenges in your situation.

• Can you sell the property with a tenant in place paying only $3,000/Mo?
• Can you get the tenant out and then sell the property to a home buyer?

Assuming you sell the property, where should you invest? It depends on your goal. If your goal is financial freedom, then you need to invest in a location where:

• Rents outpace inflation
• You will not outlive the income.

When Rents Outpace Inflation

Real estate prices depend on the balance between the number of buyers and sellers. If there are more buyers, prices go up. If there are more sellers, prices go down.

Rents follow the same pattern. High house prices mean fewer people can buy, so they rent instead. This makes rents go up. When house prices are low, more people can buy, so fewer people rent. This makes rents go down.

What causes the balance to shift? It's all about population. If more people are moving into an area, prices and rents go up. If lots of people are moving to a place and staying there, rents can even go up faster than general prices. So, here's our first criteria for choosing a location:

• Significant and sustained population growth, Wikipedia

You Will Not Outlive the Income

You'll only keep getting the income if your tenants keep their jobs. But most non-government jobs don't last forever. On average, companies only last for ten years. Large companies in the S&P 500 only last about 18 years on average.

So, your future income depends on businesses starting new operations in the city and creating new jobs. What factors make a city attractive to businesses?

• Economic stability. This requires a metro population of >1M. Smaller cities tend to be dependent on a single company or market sector. Wikipedia
• Low operating costs: The three biggest costs are income taxes, property taxes, and insurance. Tax Foundation, Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage
• Low crime rate: Companies are unlikely to invest in high-crime cities. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.
• Low risk of a natural disaster: Natural disasters can wipe out jobs, homes, and businesses, forcing people to relocate. This means that even if your property is restored, there may be no tenants. You'd still need to cover mortgage, tax, insurance, and upkeep expenses. To prevent this, pick a city with low homeowners insurance. Homeowner insurance rates are based on the probability of a major disaster. Insurance - ValuePenguin
• Pro-business environment: Google search
• No rent control of any kind. Rent control is a sign of an intrusive government that limits the ability of companies to compete with others in more business-friendly environments. Google search

Selecting a City for Financial Freedom

The process is straightforward. Start with any of the criteria, then apply all additional criteria, eliminating any that fail any criteria. A good place to start is cities with a population >1M. Wikipedia

Once you eliminate cities that fail any of the criteria, only a few will remain. The next criterion is an experienced investment team.

Experienced 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 wouldn't consider a city without an 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. Thus, there's no reason not to work with an experienced investment team.

Hello @Andreas Mueller,

I propose the following method to narrow the number of cities to consider based on the goal of 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 despite inflation continuously increasing prices. To achieve lifelong financial freedom, 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 due to inflation continuously eroding purchasing power.
• Income persistence: Financial freedom requires that your income lasts throughout your lifetime.
• Income dependability: The rental income must continue, even in bad economic times. Income dependability depends on the tenants who occupy your property.

In this post, I will explain how to select cities where rents will outpace inflation, and you will not outlive the income. I will not cover income dependability in this post.

Rents Outpace Inflation

In real estate, prices are determined by the imbalance between the number of buyers and sellers. When there are more buyers than sellers, prices rise until the number of buyers and sellers is balanced. On the other hand, when there are more sellers, prices decline until the balance is restored.

Rental rates follow prices. When home prices are high, fewer people can afford to buy, so they rent instead. This increases the demand for rental properties, resulting in higher rents. When prices are low, more people can buy. This decreases the number of renters, leading to a decrease in rent.

Under what conditions do rents increase? The primary driver for rising rents is population growth. If the population growth rate is significant and sustained, rent increases will outpace inflation. So, we have the first city selection indicator:

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

Income Persistence

Income persistence requires that your tenants keep their jobs and get paid a similar amount of money for as long as you need the rental income. However, jobs in the private sector are not permanent. The average life of a company is ten years, and even big companies like the S&P 500 last about 18 years. This means you need new companies to continuously move into the city and create equivalent replacement jobs for your tenants as their current employers die out.

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 income 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.

Elimination, Not Selection

There are too many potential cities to evaluate them all. Instead, I propose starting with cities with a population > 1M and then eliminating any city that does not meet all the additional requirements. This process is illustrated below.

Summary

In this post, I provided a straightforward method for selecting a location that meets the requirements for financial freedom.

Using a financial goal-based approach, you largely eliminate opinions and guesswork.

Hello @Michelle Artmeier,

I recommend choosing an investment location based on your financial goal, not convenience. If your goal is financial freedom, then the investment location is the most important investment decision you will make. In addition to the location, there are two more components: the tenant segment and the property. The process is outlined below. If you would like specifics, let me know.

The process begins with identifying a location where rents outpace inflation. Next, select a tenant segment that has the right characteristics. Then, select a property that the selected segment is willing and able to rent.

There is a straightforward process for selecting the location, tenant segment, and property. Let me know if you would like specifics.

I do want to comment on overhead costs. You mentioned property taxes being a major issue, but depending on the city, insurance costs may also be a problem. Below is a comparison of overhead costs 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 tax and insurance costs on cash flow, I compared the annual overhead costs of a $400,000 property.

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.

Invest Where It Leads to Financial Freedom

Real estate investing is a business, not unlike a retail store. Companies do not choose store locations based on the convenience of driving to the location from headquarters. They choose locations based on expected financial performance.

The odds that you live in a city that meets all the requirements for financial freedom are small. So, to achieve financial freedom, you will need to invest remotely. Remote investing works, provided you work with an experienced local investment team. Why work with a local investment team?

• You can invest in a location based on your financial goals.
• 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.
• Trying to do everything on your own does not make sense. For example, if you needed surgery, would you start medical school? No, you would find a surgeon that specializes in the procedure you need. And, you would not choose a local surgeon with no experience in the procedure you need just because their office is just down the road.

So, I encourage you to invest based on financial goals, not opinions or convenience.

It’s November, and it's time for another Las Vegas update. For a more in-depth view of the Las Vegas investment market, DM me for my blog site, which contains more information on investing in general, analytics, and investing in Las Vegas in particular.

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.
• 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 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 remained strong in October. YoY is up 6%.

Rentals - Availability by Month

The number of homes for rent continued the downward trend.

Rentals - Median Time to Rent

Median time to rent increased in October, showing a slower rental market as the holiday season approaches.

Rentals - Months of Supply

Only about one month 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 one month of supply. This will continue to pressure up the prices.

Sales - Months of Supply

Sales - Median $/SF by Month

Despite increasing interest rates, $/SF is climbing up. YoY is up 3.9%. YTD is up 7.7%. Prices dipped slightly in October MoM, 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 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 @James Figliozzi,

Low-priced cities are enticing if your goal is not financial independence. Here is the problem.

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 to invest in a location where 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.

What Determines the Price of Properties?

The imbalance between buyers and sellers determines prices. When there are more buyers than sellers, prices increase until the number of buyers and sellers is roughly equal. Conversely, when more sellers than buyers exist, prices drop until the number of buyers and sellers is roughly equal.

What caused prices to be lower in some cities? A multi-year lack of buyer demand results in cities having low-cost real estate. Simply put, prices rose so slowly that they fell behind other cities.

Prices determine rents. When prices increase, fewer people can afford to buy, forcing more people to rent. The increased demand for rental properties subsequently causes rents to rise. When prices are low, more people can buy, which reduces demand for rental properties, and rents fall.

Why You Can Never Achieve Financial Freedom in Low-Priced Cities

An example will show the problem. Suppose you buy a property in a city where rents rise 2%/Yr (average for many midwestern cities) and inflation is 4%. What will inflation-adjusted purchasing power, compared to today, be in 5, 10, and 15 years? I will assume the initial rent is $1,000 a month.

The formula to calculate future value is:

Using the above formula, I will calculate the future value of the rent in today’s dollars.

• 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

What does this mean?

• In 5 years, the rent will be $1,104, but it will only buy what $907 buys today.
• In 10 years, the rent will be $1,219, but it will only buy what $824 buys today.
• In 15 years, the rent will be $1,346, but it will only buy what $747 buys today.

Las Vegas

I was living in NYC in 2004 when I decided to create an investor services business. After a lot of research, I chose Las Vegas. Why?

Like everywhere else, supply and demand drive prices and rents. What is the current 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. Approximately 90% of Clark County is federally owned. See the 2020 aerial view below.

As you can see, there is very little undeveloped private land remaining, and land in desirable areas costs more than $1 million per acre. Due to the high cost of land, new homes in our targeted locations start at $550,000. The homes our target tenant segment is willing and able to rent cost between $320,000 and $475,000. Therefore, no matter how $550,000+ new homes are built, the housing stock we target remains almost constant. This differs from most cities with virtually unlimited expansion potential, where the construction of new homes limits the growth of rent and home prices of existing properties.

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. The spring job fair had over 20,000 open jobs. There are already new projects worth approximately $30B under construction or planned. These projects will create thousands of additional jobs as they come online.

Overhead Cost

You mentioned Texas, Tennessee, Indiana, and Ohio. Below is the state average insurance and property tax for these states and Nevada. The sources for the data are: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

Below are the state averages.

To put this in perspective, below are the average annual costs.

Every dollar you lose to overhead is a dollar less for you to live on.

So, Las Vegas is and should continue to be a great option for financial freedom.

Hello @Jesse Scheidel,

I assume you're looking for a city to purchase real estate in. If that is the case, population growth is only one factor.

Select the investment city based on your goal, which I will assume to be financial freedom.

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 that meets three 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.
• Income dependability: The rental income must continue, even in bad economic times.

The city you invest in determines whether rents outpace inflation and how long the income will last (income persistence). Income dependability depends on the tenant(s), which I will not cover in this post.

Rents Outpace Inflation

In real estate, prices and rents are determined by the imbalance between the number of buyers and sellers. When there are more buyers than sellers, prices rise until the number of buyers and sellers is balanced. On the other hand, when there are more sellers, prices decline until the balance is restored.

Rental rates follow prices. When home prices are high, fewer people can afford to buy, so they rent instead. This increases the demand for rental properties, resulting in higher rents. When prices are low, more people can buy. This decreases the number of renters, leading to a decrease in rent.

The critical driver for rising prices and rents is population growth. If the population growth rate is significant and sustained, rent increases will outpace inflation. So, we have the first city selection indicator.

✅ Significant and sustained population growth.

Income Persistence

Income persistence depends on your tenants remaining employed at similar wages for as long as you live. However, all private sector jobs are short-lived. The average lifespan of a company is about ten years. Even S&P 500 companies only have an average lifespan of about 18 years. So, whether your income persists is not about the present jobs. It is about future replacement jobs.

What conditions are necessary to 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.

✅ Low overhead costs: Overhead costs are readily available at the state level, which is a good first pass.

To demonstrate the process, I will compare the overhead costs of Texas, Florida, Arkansas, and Nevada. The sources for this information are Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

The main recurring costs for investors are insurance and property taxes, which are below.

To put these into perspective, below are the state averages for a $400,000 property.

• Texas: $2,536 + $400,000 x 1.80% ≈ $9,736
• Florida: $2,207 + $400,000 x 0.89% ≈ $5,767
• Nevada: $1,144 + $400,000 x 0.60% ≈ $3,544

Every dollar you lose to overhead is less for you to live on.

✅ Low crime rate: Companies will unlikely choose a high-crime city to set up a new operation.

✅ Low risk of a natural disaster

✅ Pro-business environment

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

There is data for each of these indicators, which I will show shortly. For now, the question is how to use these indicators.

An Elimination Approach

Start with the easiest criteria and then eliminate cities based on additional criteria, as illustrated below.

The criteria and sources:

✅ Cities with a metro population greater than 1M. Wikipedia

✅ Significant and sustained population growth. Wikipedia

✅ Low crime rate. Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.

✅ Low risk of a natural disaster - Homeowners insurance rates are a good indicator of the potential for a natural disaster to occur. The higher the rate, the higher the probability of a natural disaster. Insurance - ValuePenguin

✅ Pro-business environment - Google search

✅ No rent control of any kind - Google search

✅ Low operating costs - Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage

You Need an Investment Team

One additional city selection criteria is an experienced local investment team. Podcasts, books, seminars, and websites only provide general information. You will buy a specific property in a specific city, subject to specific local conditions. The only source for the local knowledge, skills, processes, and experience needed to identify, validate, renovate, and manage properties is a local investment team. By working with a team, you also gain real-world investment training.

Jesse, I hope this helps,

…Eric

Hello @Dan N.

When I started investing, the only value realtors provided was sending MLS data sheets for the properties I selected. Once I decided on a property, they facilitated closing. In my opinion, they contributed almost no value.

I do not agree that the order should be to find a good agent and buy where they are located. If your goal is financial freedom, then the investment location is the most important decision you will make.

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 operating costs: The three most apparent costs for investors are 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: 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

After filtering out cities that fail any of the above criteria, you will have a short list of potential cities. The next criterion is the existence of an experienced investment team.

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.

The leader of an investment team is an investment realtor.

Investment Realtor vs. Residential Realtor

While there are usually thousands of residential (or "investor friendly") realtors in a metro area, there are usually only one or, at most, two Investment Realtors.

Residential realtors enable people to buy or sell homes. The process is simple. Homebuyers select properties, and the residential realtor provides access. Once selected, the residential realtor facilitates the offer and the closing process. Some residential realtors occasionally sell real estate that will become rental properties. However, residential realtors provide limited value beyond supplying MLS data sheets.

Investment realtors enable people to buy rental income properties. Investment realtors are always part of a team because only a team of experts can provide all the knowledge, processes, and services needed for you to consistently buy performing properties. As an example, below is the process we follow.

Below is how we work with the property manager to validate investment properties.

How to Find an Investment Realtor

There is a process for finding an investment realtor. It starts with compiling a list of candidates. Get names of realtors from:

• Real estate investing websites (such as Biggerpockets.com)
• Property managers
• Local investors
• Real estate brokers
• Google searches
• Local meetups

Once you have a pool of candidates, the next step is to identify the investment realtor by using a set of interview questions.

Ask each candidate the same questions and record their responses. Below are some sample questions. It is unlikely to find a candidate with the "perfect" response to every question, but they should provide reasonable answers.

• Tell me about your investment team - You're looking for a response like, "I've worked with X property manager for years. We've completed X properties." "I work with several renovation companies...”
• Do you or have you owned investment properties? - If the candidate has not personally owned investment properties, I would reject them.
• How many investment properties did you close in the last 12 months? - Some realtors only sell two or three properties per year. However, this level of sales does not provide enough repetition to develop the necessary processes, experience, and resources. In my opinion, being proficient in this field requires selling a minimum of 12 investment properties per year.
• Did you or your client select the properties? This is an important question. Residential and investment-friendly realtors do not choose properties. Instead, they send MLS data sheets for the properties requested by the client. The client evaluates the properties and selects one or more to make an offer. If you do all the work, the realtor adds very little value. Reject any candidate if the client chooses the property.
• What were your primary selection criteria? - It could be the initial return, appreciation, tenant pool, or something else. You're looking for a plausible answer based on analytics, not opinion or “feelings.”
• How did you estimate rent and time to rent? - They should be able to describe a process like, "I look at recently rented comparable rentals." Another good answer is that they work with a property manager who supplies this information. If they answer Zillow, Redfin, Rentometer, etc., they do not know how to evaluate investment properties. Next candidate.
• Tell me about your renovation process. - You are looking for an answer similar to, “I work with the property manager to determine a list of renovation items. Next, I work with XXX renovation company.”

These should get you started.

Final Words

The most important investment decision you will make is the location. If you choose to invest in a city where rents have not outpaced inflation, no matter how many properties you own, your income will continuously decline until you are forced back on the daily worker treadmill.

Hello @Tyler Lingle,

Great chart.

In this post, I will provide what I hear from my clients and the cost of waiting.

We have 180+ clients, and when I talk to them, I always ask their opinion concerning the interest rate situation. Below are the most common opinions I’ve received:

1. Interest rates will fall before the 2024 elections. The logic is that politicians always operate in their own best interest. Falling interest rates are their only ability to get elected or reelected.
2. There will be a token decrease by the 2024 elections, but it will be 3+ years before interest rates decrease significantly.
3. Interest rates will decrease when the Federal Reserve no longer pursues a restrictive policy. This typically occurs during a recession, periods of low inflation or deflation, or when the unemployment rate increases. However, none of these indicators are currently evident.
4. In high-demand markets like Las Vegas, as soon as interest rates start to fall, people who have waited for 2+ years to buy a home will enter the market. Increased demand will result in rapidly increasing property prices and rents.

Buy Now or Wait

A question I frequently receive is whether it makes more sense to buy now or wait.

Waiting only makes sense if either:

• Interest rates significantly decrease
• Prices significantly decrease

No one can predict when interest rates will decrease significantly, but it could be in 3 or 4 years. Thus, it doesn’t make sense to wait.

What about prices? Whether prices increase, decrease, or stay the same depends on the city where you invest. For example, since the beginning of this year, the prices of Las Vegas properties in our target segment increased by >9%.

What Is the Cost of Waiting?

An example will hopefully help.

Suppose property prices increase by 5 %/Yr, and it takes five years before rates fall to 5%. What is the cost of waiting?

I will assume a $400,000 property to have numbers to work with. The table below displays the increasing market value from appreciation and accumulated equity. By waiting, you lose over $110,000 in equity growth.

There is another problem with waiting. In five years, prices will be higher due to the 5% appreciation rate, so buying the same property will cost more. See the table below.

Waiting five years costs you:

• Lost equity: $110,513
• Increased down payment due to appreciation: $33,154
• Debt service savings due to lower interest rate: -$39/Mo

What if you purchased today and refinanced in 5 years?

As an investor, it makes the most sense to me to buy now and refinance when rates decrease.

Many hesitate due to the fear of negative cash flow. However, we are still identifying properties with a first-year ROI between 0% and 1%. For cash purchases, ROI ranges from 4.5% to 5.5%.

So, I see no advantage to waiting.