All Forum Posts by: Eric Fernwood

Hello @Sandra Feurtado,

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

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

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

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

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

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

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

Summary

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

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

Hello @Frankie Paterno,

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

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

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

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

Rents Rise Faster Than Inflation

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

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

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

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

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

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

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

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

With limited rent growth:

• $5,000/$300 ≈ 17 properties.

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

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

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

Sufficient Income

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

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

• 17 x $250,000 x 25% ≈ $1,062,500

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

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

• 25% x $400,000 ≈ $100,000

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

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

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

Lasts throughout Your Lifetime

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

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

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

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

Summary

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

Hello @Brick Biermann,

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

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

Hope this helps with your decision.

Hello @Chizitem Ibeneme,

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

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

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

Hello @Daniel Windingstad,

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

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

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

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

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

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

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

What we are seeing:

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

Rental Market Trends

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

Rentals - Median $/SF by Month

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

Rentals - Availability by Month

The number of homes for rent remained flat MoM.

Rentals - Median Time to Rent

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

Rentals - Months of Supply

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

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

Sales - Months of Supply

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

Sales - Median $/SF by Month

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

Why invest in Las Vegas?

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

What causes rents (and prices) to increase?

Supply & Demand

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

Supply

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

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

Demand

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

In Conclusion

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

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

Hello @Sam Liu,

We've completed over eighty 1031 exchanges and know well the scramble that can occur during the 45-day identification period. It's challenging to find and get one or more good properties under contract in just 45 days. Moreover, if you're unable to or decide not to continue with the purchase, you'll likely lose the tax deferral. Because of this struggle, we implemented a safer 1031 exchange method. Our process is illustrated below.

Below are step details

1. Choose an investment location. Find an experienced investment team and learn about the market. Select a 1031 exchange agent and obtain necessary exchange terms for the purchase contract of the relinquished property. Estimate the sale price and collaborate with the exchange agent to determine the reinvestment amount. If financing part of the replacement property(ies), secure pre-approval. Place the relinquished property on the market for sale.
2. Relinquished property goes under contract.
3. Identify replacement property(ies).
4. Relinquished property contingencies end.
5. Place replacement property(s) under contract.
6. Relinquished property closes. The 45-day identification period begins.
7. Close on the replacement property(ies) as soon as possible after relinquished property closes.
8. If for any reason you are unable to close on a replacement property, find another property and get it under contract. Complete inspections before the end of the identification period.
9. Replacement properties closed before the end of the 45-day identification period.

1031 Considerations

Below are some 1031 exchange considerations that you should be aware of:

• Before listing the relinquished property, select a 1031 exchange agent. They'll provide crucial information, including the total amount you need to reinvest. We can recommend experienced 1031 exchange agents we've worked with previously.
• The funds from the sale of the relinquished property must go directly from the closing escrow company to the 1031 exchange agent. If the funds come into your direct possession at any point, you'll likely lose the tax deferment. When you purchase the replacement properties, the funds will flow from the 1031 exchange agent straight to the escrow company.
• The proceeds from the relinquished property cannot be used to pay for renovations. However, some of our clients have chosen to pay capital gains tax on a portion of the proceeds and use that money for renovations.
• Not all contracts include 1031 exchange language. Get the correct wording from your exchange agent for your state. Ask your listing agent to include these terms in the agent-to-agent remarks, stating that the 1031 text must be part of any offer.
• If the relinquished property has a mortgage, it's crucial to determine how it will be handled during the exchange. Any reduction in debt or cash received might be treated as "taxable boot," potentially resulting in tax liabilities. Consult your 1031 exchange agent for guidance.
• Both the relinquished and replacement properties must be held for investment or used in a trade or business. Personal residences or properties primarily held for personal use typically don't qualify for a 1031 exchange.
• Understanding state-specific regulations for like-kind exchanges is crucial. Some states may not fully recognize or conform to federal provisions. It's advisable to consult a tax professional who's familiar with your state's laws.

Sam, I hope this helps.

Hello @Marc Uber,

You mentioned only properties. The problem with focusing solely on the property is that properties don't pay rent—tenants do. If your goal is financial independence, you need reliable tenants. A reliable tenant stays for years, pays rent on time, and takes good care of the property. Reliable tenants are the exception, not the norm.

A common mistake is assuming that all renters are alike so the property type is not critical. This isn't true. Below is a diagram illustrating the three main tenant segments in Las Vegas.

If you unknowingly purchased a property that attracts the Transient tenant segment, turning a profit will be nearly impossible due to high vacancy costs. Additionally, tenants in this segment have low-paying, low-skill jobs and are the first to be laid off and the last to be rehired, during economic turbulence.

We purchase properties that attract a subsegment of the Permanent segment. Our average tenant stay exceeds five years, and we've had just seven evictions in over 16 years out of more than 1,000 tenants. During the 2008 financial crash, property prices plummeted, but our clients experienced no decrease in rent or vacancies.

My point is that the tenant segment your property attracts makes a huge difference in income reliability.

What do I recommend?

Select the Tenant Segment First

Start by identifying a tenant segment with a high concentration of reliable people. Once you identify this segment purchase properties similar to those they are currently renting. You can target a specific tenant segment by matching the segment’s housing requirements.

Each tenant segment has specific housing requirements and is unlikely to rent properties that don't meet all these requirements. For example, in the illustration below, the tenant segment's housing requirements are listed on the left. On the right are four similar properties, but only one matches all the segment's housing requirements. The other three properties will not be considered by the segment.

So, focus on selecting a tenant segment with a high concentration of reliable individuals and purchase properties that meet their housing requirements.

How to Identify a Tenant Segment

The process for identifying the segment for income reliability is straightforward. Ask several experienced property managers: “What properties would you buy if you wanted tenants who stay many years, pay rent on time, and take good care of the property?” I did this, and most identified the same properties. These are the properties you need to buy if you want a reliable income.

Once you've identified your target segment, purchase properties that match their housing requirements. This approach eliminates guesswork and luck because you're buying properties that attract a segment with reliable people. If you buy a random property, you are just hoping the tenant segment the property attracts is reliable.

It’s August and time for another Las Vegas update. For a more in-depth view of the Las Vegas investment market, DM me for a link to our blog site which contains more information on investing in general and investing in Las Vegas in particular.

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

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

What we are seeing:

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

We're observing the typical seasonal slowdown in prices and inventory that starts in July because fewer people are buying properties and moving as school resumes in mid-August.

Rental Market Trends

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

Rentals - Median $/SF by Month

Rents had a slight drop MoM ($1.19/SF vs $1.20/SF). YoY is up 2.6%.

Rentals - Availability by Month

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

Rentals - Median Time to Rent

Median time to rent increased slightly compared to Q2, but is still at 20 days. YoY is flat.

Rentals - Months of Supply

About one month of supply for our target rental property profile. Demand is greater than supply. This will pressure up the rents.

We saw a similar trend in sales as well. A slight slowdown in terms of prices and days on market but inventory remains very tight (1 month).

Sales - Months of Supply

There is one month of supply for our target property profile. A 6 months supply is considered a balanced market. This will continue to drive up the prices.

Sales - Median $/SF by Month

The $/SF also had a slight drop MoM. YoY is up 6.7%.

Why invest in Las Vegas?

In short, to achieve and maintain financial freedom. However, financial freedom isn't just about replacing your current income. Financial freedom requires maintaining your lifestyle for life. This requires an income that rises faster than inflation, or you will not have the additional dollars you will need to pay future inflated prices.

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 $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

Population growth drives housing demand. Las Vegas's average annual population growth is between 2% and 3%. What draws people to Las Vegas? Jobs. Depending on the article, there is between $26B and $30B under construction, and the last job fair had over 20,000 open jobs.

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.

Hello @Dexter Belleza,

So everyone knows where Sloan is, see the map below (click to enlarge). There is an unincorporated area known as Enterprise, northwest of Sloan. Enterprise is one of the few areas remaining in Las Vegas where there is undeveloped land.

I checked south of the existing developments in Enterprise, and like most undeveloped areas around Las Vegas, it is federal land. 90% of the land in Clark County is owned by the federal government. See the map below. Las Vegas is a small island of privately owned land in an ocean of federal land. The land shortage and rapidly increasing population are why prices and rents continue to rise quickly.

Could the land be transferred from the federal government? Over the years, there have been many proposals to transfer land from federal to private ownership, but it rarely happens.

There are other considerations about development south east of Enterprise.

• Raw land in desirable areas sells for between $1M to $3M per acre. As a result, most new homes start at $550,000. The tenant demographic we've targeted for the last 16+ years can only afford to rent properties currently priced between $350,000 and $475,000. So, even if the land came into private hands and homes were built, it would not increase the number of properties our target tenant segment can afford.
• Access will be an issue. As you can see, there are no major roads south of HWY 160 or near the Sloan area. The further south you go from HWY 160, the longer it takes to get to shopping, jobs, etc. This is part of the reason that we (our clients) have few properties well south of HWY 160.
• Infrastructure will be a long term issue. Stores, schools, all such developments are based on rooftop density in an area. It will take a long time to have a sufficient population density in this area to justify significant development.

In summary, I do not believe the area south of Enterprise and the Sloan area will be developed in the foreseeable future.