All Forum Posts by: Eric Fernwood

@Devin Conley,

At the current high interest rates (~7%), you will likely need to put 30% down to have a neutral cash flow. You could also put 25% down and buy down the interest rate to achieve the same. Another alternative is to have a negative cash flow by putting down less. I believe that within three years, rates will be much lower, and you can refinance.

Another consideration is that once you get a property under contract, you should immediately shop around for better rates. Many of our clients have done this and secured much better terms.

...Eric

This spreadsheet decision is based on what you can afford and when you expect interest rates to fall.

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

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

• 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.

What we are seeing:

The chart below, from the MLS, includes all property types and price ranges. The overall inventory is higher due to the season. However, sellers currently on the market are more likely to accept lower offers, giving us some room for negotiation.

Rental Market Trends

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

Rentals - Median $/SF by Month

Rents held steady from September to October, bucking the seasonal trend. YoY is up marginally.

Rentals - Availability by Month

The number of homes for rent increased slightly MoM, conforming to the seasonal trend.

Rentals - Median Time to Rent

Median time to rent increased slightly MoM, (28 days vs 27 days in September), conforming to the seasonal trend.

Rentals - Months of Supply

About 1.8 months of supply for our target rental property profile. This low inventory will continue to pressure up rents.

The sales market remains hot.

Sales - Months of Supply

There are about 1.5 months of supply for our target property profile. A six-month supply is typically considered a balanced market. This limited inventory will likely continue to drive prices upward.

Sales - Median $/SF by Month

The $/SF increased slightly MoM, bucking the seasonal trend. YoY is up 8.6%.

Why invest in Las Vegas?

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

What causes rents (and prices) to increase?

Supply & Demand

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

Supply

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

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

Demand

Population growth drives housing demand and price and rent increases. Las Vegas's average annual population increases by 40,000 to 50,000 per year. What attracts people to Las Vegas? Jobs. Ongoing construction projects valued between $26 billion and $30 billion fuel employment opportunities. The most recent job fair featured over 20,000 open positions.

In Conclusion

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

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

Welcome to our first Las Vegas REI Group virtual meetup. These meetups are intended to facilitate connections and brainstorming among investors. There will be no sales pitches. But each attendee will be expected to participate.

The topic of this first meetup is: Journey to financial freedom - What’s your strategy and why? Your successes and lessons learned.

If you are interested in attending, please register here.

Hello @Account Closed,

The adage, "Live where you like, but invest where you can make money," is true and remote investing works, if you have an experienced investment team.

We’ve run an investor services business in Las Vegas for over 17 years. Out of 180+ clients, only 8 or 9 were local. All the rest live in other states or countries. Does remote investing work? Our repeat business rate is >90%, so our clients are satisfied with our services.

The goal of real estate investing is financial freedom. This requires an income that allows you to maintain your standard of living throughout your life. The city where you invest determines all long-term income characteristics. To create rental income that enables financial freedom, you need a location that meets specific criteria.

• Rents increase faster than inflation: Prices and rents are driven by the imbalance between demand and supply. Significant and sustained population growth leads to demand exceeding current supply, causing prices to rise until there's a rough balance between sellers and buyers. As prices increase, fewer people can afford to buy homes, forcing them to rent. This increased demand for rental properties drives rents up. Only invest in cities with significant and sustained population growth.
• Lasts throughout your lifetime: For your rental income to last, your tenants must remain employed at similar wages. The challenge is that non-government jobs are often short-lived. Companies typically last only ten years on average. Even giant corporations like those on the S&P 500 only last about 18 years on average. This means that every non-government job your tenants have will likely end in the foreseeable future. Unless new companies create replacement jobs in the city requiring similar skills and pay comparable wages, your tenants may be forced to take lower-paying service sector jobs. The result could be limited, no rent growth or even rent decreases. Therefore, your long-term income depends on the city's ability to attract new companies. Companies have considerable flexibility in choosing where to set up new operations. So, only invest in cities that meet the following requirements:
  • Low crime: Companies are unlikely to choose high-crime cities. Never buy properties in any city on this list of the 50 most dangerous cities.
  • Low operating costs: Companies are less likely to choose cities or states with high operating expenses for new operations. This is why so many companies are leaving states like California.
  • Pro-business environment: Companies want to focus on their core business, not fight anti-business policies.
  • Significant infrastructure: Companies favor cities with substantial airports, freeway systems connecting to other cities, and more. This level of infrastructure typically exists only in cities with metro populations over 1M.

Summary

The odds of living in a city that meets all the requirements for financial freedom are low. Don't limit your future financial freedom to just where you live today.

Hello @Liam Alvarez,

You don't need any apps to select an investment city. The data is readily available, and I will provide the data source and its relevance.

To ensure we're on the same page, the goal of real estate investing is financial freedom. This isn't merely about replacing your current income—it's about creating an income stream that sustains your lifestyle indefinitely. To achieve this, the rental income must meet three requirements.

Rents Must Outpace Inflation

Inflation steadily erodes the purchasing power of a fixed amount of money. For example, if the inflation rate is 5%, what costs $100 today will cost $155 in 10 years. If rents don't keep pace with inflation, you won't have enough funds to cover these inflated prices.

Rents and prices are driven by supply and demand. Demand is a function of population change. In cities with significant and sustained population growth, rents and prices will rise faster than inflation, enabling financial freedom.

Conversely, rents and prices rise slowly in cities with static or declining populations because the current housing inventory is sufficient. Low property prices evidence this. No matter how many properties you own in such a city, you can't achieve financial freedom because inflation continuously erodes your purchasing power. Eventually, you'll have no choice but to get a job to maintain your standard of living.

Best source for population growth: Wikipedia

Last Throughout Your Lifetime

You cannot sustain financial freedom if your income doesn't persist throughout your life. However, your rental income depends on your tenants remaining employed at similar wages. The problem is that non-government jobs aren't permanent. On average, U.S. companies last only ten years. Large companies, like those on the S&P 500, last on average for 18 years. So, every non-government job your tenants have will end in the foreseeable future unless new companies move into the city and create replacement jobs that pay similar wages and require similar skills; Otherwise, soon all that will be left are lower-paying service sector jobs. Below are the key factors companies consider when choosing a city for investment:

• Low operating costs: Companies are unlikely to choose a location where state income taxes, property taxes, and insurance consume a significant portion of their potential profit. Sources for insurance and property taxes: Insurance—ValuePenguin, State Property Tax Rates—Rocket Mortgage. State income taxes: Here's a map showing state income tax rates.
• Low crime: Companies are unlikely to choose high-crime cities. Avoid investing in any city listed here: The Most Dangerous Cities in America, Ranked.
• Cities with a metro population >1M: Companies need significant infrastructure, which is only available in metropolitan areas with a population > 1 M. Wikipedia
• Pro-business environment: Companies are reluctant to set up operations in cities with burdensome regulations that hinder profitable operations. Google search.

Ability to buy multiple properties with minimal capital

You'll need multiple properties to replace your income. Let's consider an example. Say your monthly income requirement is $5,000/Mo, and each property generates $300/Mo. If each property costs $250,000 and the only acquisition cost is a 25% down payment, how much savings would you need?

• ($5,000/$300) x $250,000 x 25% = $1,062,500

For most people, this is an unattainable amount of after-tax savings.

If you buy in a city with a high appreciation rate, you can grow your portfolio through appreciation and cash-out refinancing. For example, if the first property costs $400,000 and your acquisition cost is a 25% down payment, you need:

• $400,000 x 25%. = $100,000

If the appreciation rate is 8%/Yr, how long will you need to hold the property before a 75% cash-out refinance to yield enough to have $100,000?

• After one year: $400,000 × (1 + 8%)^1 × 75% - $300,000 ≈ $24,000. For simplicity, I've assumed no principal paydown on the original $300,000 mortgage.
• After two years: $400,000 × (1 + 8%)^2 × 75% - $300,000 ≈ $49,920
• After three years: $400,000 × (1 + 8%)^3 × 75% - $300,000 ≈ $77,914
• After four years: $400,000 × (1 + 8%)^4 × 75% - $300,000 ≈ $108,147

While the above example is oversimplified, the concept is valid. Many of my clients and I have grown our portfolios through appreciation and cash-out refinancing with minimal additional capital.

Zillow Data is one of the most reliable sources for analyzing appreciation rates at the zip code level.

Summary

No special apps are necessary. A process is far more important. The information required to select an investment location that enables financial freedom is readily available and straightforward. To choose an optimal investment location, follow these steps:

1. Select a city with a metro population >1M and sustained and significant population growth. Wikipedia
2. Choose a state with low operating costs. Every dollar spent on operating expenses reduces your potential income. Insurance—ValuePenguin, State Property Tax Rates—Rocket Mortgage. State income taxes: Here's a map showing state income tax rates.
3. Low crime: Avoid investing in any city listed here: The Most Dangerous Cities in America, Ranked.

I will add one more location consideration

1. Never buy in a city with any form of rent control. Google search.

Liam, I hope this helps.

I learned the hard way that properties don’t pay rent—tenants do. My first property, a C-Class multi-family in Houston, seemed like a great investment, but it turned out to be a money pit. I underestimated tenant behavior, facing issues like property damage, lease violations, and evictions.

Once I realized the importance of focusing on the right tenant segment rather than properties, everything changed. I targeted renters who pay on time, stay long-term, and care for the property. I researched this segment to discover what types of properties they preferred and where they lived. Understanding my customer, I bought similar properties to what they were currently renting.

This strategy is similar to how national retail chains operate: identify your target customers and provide what they want. For example, McDonald's sells poi in Hawaii and wine in France, adapting to local preferences.

In my approach:

• I chose property types based on what my target segment was renting. I did not choose.
• I selected configurations similar to what they were renting—for example, 3-bed, 2-bath, yard space, etc.
• I focused on locations where they were currently living.
• I set rent prices within their budget.

Summary

I became successful at real estate investing once I understood that what matters is the tenant segment who occupies the property. Properties do not pay rent; people do.

Hello @Van K Tran,

Real estate markets are not homogeneous. There can be a surplus of $1M homes simultaneously with an acute shortage of $400,000 homes. The numbers you find in the news are usually for all properties combined, which tells you very little value.

In 2005, we selected a specific tenant segment that has proved to be a highly reliable source of income for our clients. Below is a general description of the properties they are willing and able to rent:

• Type: Single-family
• Configuration: 3+ bedrooms, 2+ baths, 2+ car garages, 1,100 to 2,500 SF, one or two stories, lot size 3,000 SF to 7,000 SF.
• Rent range: $1,900/Mo to $2,400/Mo
• Location: See the map below for the general areas

Today, these properties cost between $350,000 and $475,000. Because real estate information from other sources is often too broad, we generate our own statistics. Below is the months of supply for our target segment.

Sales - Months of Supply

Six months of supply is considered "balanced," where the number of sellers roughly equals the number of buyers. Today, there are about 1.5 months of inventory for our target property segment.

There is a typical seasonal increase in inventory, but it remains a strong seller's market. Correctly priced, desirable properties stay on the market for only 3-5 days before going under contract. Consequently, there's no "bargain hunting" for good properties. Las Vegas's population growth is robust and is likely to continue into the foreseeable future. The increasing demand for housing absorbs everything that comes on the market in our segment.

So, don't believe everything you hear on the news. You need to focus on the situation for the properties that attract your target tenant segment.

Hello @Philip Anderson,

The goal of real estate investing is financial freedom, not owning a specific property type. Financial freedom isn't a one-time achievement—it's about creating an income stream that sustains your lifestyle indefinitely. This rental income must meet two key requirements, which depend on the city where you invest.

• Rents must outpace inflation: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to outpace inflation, you can never achieve financial freedom.
• Lifelong: The rental income should persist longer than you do. To continue paying rent at current levels, tenants must be employed in similar jobs. However, most jobs aren't permanent. On average, U.S. companies last only ten years. Large companies, like those on the S&P 500, last on average for 18 years. Unless new companies move into the city and create jobs that pay similar wages and require similar skills, soon all that will be left are lower-paying service sector jobs.

Summarizing the location requirements for financial freedom:

• Significant and sustained population growth. Wikipedia
• Conditions that attract new companies to set up operations and create replacement jobs:
  • Low crime: Companies have many options when choosing where to set up operations. They are unlikely to select a city with high crime rates. Never invest in any city on this list: The Most Dangerous Cities in America, Ranked.
  • Low operating costs: Companies compete with each other continually. They are unlikely to choose a location where operating costs would consume a significant portion of their profit. I would start with insurance and property taxes: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.
  • Pro-business government: Companies avoid cities or states with regulations that hinder profitability. Research the city's business climate online. Never invest in any city with any form of rent control.
  • Metro population > 1M: Companies require significant infrastructure, such as interstates, highways, major airports, talent pool, and other facilities. These are rarely found in cities with metro populations of less than 1 million. Wikipedia

After selecting an investment city, the most crucial decision is to select the right tenant segment to target. Remember, properties don't pay rent—people do. A property is merely a vessel housing rent-paying individuals. I recommend identifying a tenant segment with a high concentration of "reliable people." Reliable tenants stay for many years, pay the rent on schedule, maintain employment even during economic downturns, and take good care of the property. However, reliable tenants are the exception, not the norm. So, how do you find a segment with a high concentration of dependable renters?

Ask 10 to 15 experienced property managers, "Which properties would you purchase to attract long-term tenants who pay rent consistently and maintain the property well?" I asked this question when I launched my investor services business in Las Vegas in 2005. Surprisingly, 13 out of 15 property managers described identical property types.

Once you've identified where and what this tenant segment rents, purchase similar properties. Don't be constrained by dogma about the "best" property type. The best property type and location enable you to achieve financial freedom. Note that the best property type will likely vary depending on the city.

However, even if you buy properties that attract a tenant segment with a high concentration of reliable people, you still need to work with a property manager who can consistently select dependable tenants. In Las Vegas, I only know of two property managers I would trust to choose tenants for my properties. They possess the rare skill of selecting reliable tenants—something you can't do yourself. Remember, one bad tenant can cost you far more than the fees associated with professional property management.

Summary

Philip, I hope this post has provided guidance on selecting an investment city and the types of properties that will generate reliable income. Remember to focus on the ultimate goal—financial freedom—rather than adhering to any particular dogma.

Hello @Tiffany Makiya,

Many investors compare properties using the ratio of annual rent to property price. However, this method often fails because it doesn't account for operating costs. Let me demonstrate why you should not rely on this approach.

Suppose you want to compare two properties.

Property A:

• Rent: $1,800/Mo
• Price: $300,000
• Taxes: $2,000/Yr
• Insurance: $1,500/Yr
• Assoc Fee: $250/Mo

Property B:

• Rent: $1,600/Mo
• Price: $300,000
• Taxes: $800/Yr
• Insurance: $600/Yr
• Assoc Fee: $35/Mo

Calculating the rent price ratio for both properties

• Property A: $1,800 x 12 / $300,000 = 7.2%
• Property B: $1,600 x 12 / $300,000 = 6.4%

So, Property A is the better property! Or is it?

Calculating the cash flow for both properties:

• Property A: $1,800 x 12 - $2,000 - $1,500 - $250 x 12 = $15,100/Yr
• Property B: $1,600 x 12 - $800 - $600 - $35 x 12 = $17,380

Property B is the better property once operating costs are included.

Summary

Because the rent price ratio does not include recurring costs, it almost always provides invalid results.

Hello @Tyler Bailey,

The decision to sell depends on how the property has performed in relation to the requirements for an income enabling financial freedom. The income requirements and the dependences are illustrated below. (Click to enlarge.)

I've created the following decision tree to help determine the best option based on your situation. (Click to enlarge.)

I hope this helps with your decision.