Skip to content
×
Pro Members Get
Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
ANNUAL Save 54%
$32.50 /mo
$390 billed annualy
MONTHLY
$69 /mo
billed monthly
7 day free trial. Cancel anytime
×
Try Pro Features for Free
Start your 7 day free trial. Pick markets, find deals, analyze and manage properties.
All Forum Categories
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

All Forum Posts by: Eric Fernwood

Eric Fernwood has started 57 posts and replied 710 times.

Post: Selling & Buying with 1031

Eric Fernwood
Posted
  • Realtor
  • Las Vegas, NV
  • Posts 737
  • Votes 1,510

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.

Post: Seeking advice for starting out in real estate investing

Eric Fernwood
Posted
  • Realtor
  • Las Vegas, NV
  • Posts 737
  • Votes 1,510

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.

Post: August Las Vegas Rental Market Update

Eric Fernwood
Posted
  • Realtor
  • Las Vegas, NV
  • Posts 737
  • Votes 1,510

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.

Post: May Las Vegas Rental Market Update

Eric Fernwood
Posted
  • Realtor
  • Las Vegas, NV
  • Posts 737
  • Votes 1,510

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.

Post: LA Property with lots of Equity

Eric Fernwood
Posted
  • Realtor
  • Las Vegas, NV
  • Posts 737
  • Votes 1,510

Hello,

Great comments on this thread. However, I believe the focus is almost exclusively on “deals” and properties. I think this is looking through the wrong end of the telescope. Why?

Never, in the history of the world, has a property paid rent. The tenant who occupies the property pays the rent. The purpose of the property is to attract and keep what I call a reliable tenant. A reliable tenant is someone who stays for many years, pays rent on time, and takes good care of the property. My focus when selecting properties is to buy only those that my target tenant segment is willing and able to rent. Results over the last 17+ years:

  • Average tenant stays > 5 years.
  • Seven evictions in 17+ years out of a tenant population > 1,000.
  • During the 2008 financial crash, clients experienced no decrease in rent and no vacancies. It was similar during COVID and the eviction moratorium.

The process I followed is simple and virtually eliminates guessing and luck and has three steps:

  1. Identify a tenant segment with a high concentration of reliable people. You can identify this segment by interviewing multiple property managers. If anyone want to know the specifics, let me know.
  2. Once you know what and where this segment rents today, buy similar properties. This eliminates the guessing and luck associated with picking a property.
  3. Work with a property manager who has a track record of selecting reliable tenants. I know of only two property managers with the skill in Las Vegas. You need this skill because even in a tenant segment with a high concentration of reliable people, not everyone is reliable.

There is another consideration: where to invest. Most cities I have researched have rent growth of 1% to 2% per year. Buying properties in such locations is a fatal mistake. Why? Because the goal of real estate investment is financial freedom. Financial freedom is not just about replacing your current income; it requires an income that increases faster than inflation. No fixed amount of money will enable you to maintain your current lifestyle over time.

For example, suppose you buy a property where rents increase by 2% per year and inflation is 5%. If the rent is $1,000/Mo, what will be the buying power of $1,000 in five, ten, and fifteen years?

  • Five years: $1,000 x (1 + 2%)^5 / (1 + 5%) ^5 ≈ $865. So, even though rents increased by 2% per year, inflation was 5%, so your buying power declined. Buying power is not well understood. Suppose you go to the store today and the basket of groceries you need costs $100. If inflation is 5%, how much money will you need in 5 years to buy the same basket of goods because the purchasing power of the dollar declined due to inflation? $100 x (1 + 5%)^5 ≈ $127.63. This is why if rents do not increase faster than inflation, you can never maintain financial freedom because inflation is constantly eroding the buying power of the dollar.
  • Ten years: $1,000 x (1 + 2%)^10 / (1 + 5%) ^10 ≈ $748.36
  • Fifteen years: $1,000 x (1 + 2%)^15 / (1 + 5%) ^15 ≈ $647.39

What causes rents and prices to rise or fall? Population growth. In cities with declining or static populations, property prices are low because there is little demand so little appreciation. Rents follow prices, so where prices are low, there will be little rent growth. Only in cities with significant and sustained population growth will you find rents outpacing inflation.

Focus on Your Goal

If your goal is financial freedom, focus on the tenant segment you want to occupy your property. Once you identify the segment, buy properties similar to what and where they rent today. Also, only buy in cities where rents and prices have consistently outpaced inflation for many years.

Sell (1031) or Refinance?

The decision to sell or hold depends on how the property has performed in the past. I created the following decision tree to simplify the process.

Ultimately, the decision to use a 1031 exchange or refinance and take out equity depends on your individual circumstances and investment goals.

Post: July Las Vegas Rental Market Update

Eric Fernwood
Posted
  • Realtor
  • Las Vegas, NV
  • Posts 737
  • Votes 1,510

We are now in Q3, and it is a good time to check in on the Las Vegas investment market's performance for the first half.

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

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

How’s the Market Doing in 2024?

Prices and rents continue to increase steadily.

Sales - $/SqFt by Month

(Click to enlarge.)

The median sales $/SF was up 9% YoY and 6.7% YTD.

Rentals - $/SqFt by Month

Rents rose 4.3% YoY and 6% YTD.

The Market Remains Hot

Following the rapid inventory decline starting in Q1, the number of days on the market for sales remained below 17 and for rentals below 19, indicating strong demand for both.

Sales - List to Contract Days by Month

Rentals - List to Contract Days by Month

Rental trends tend to follow sales. When prices are high, more people are forced to rent, which results in increased demand and rising rents.

Inventory has been frustratingly low and is not getting better

Sales inventory plummeted at the beginning of the year and has remained below one month in Q2. 6 months is considered a balanced buyer/seller market. We are firmly in a seller’s market.

The rental inventory had a similarly rapid decline in Q1 and has remained below one month in Q2.

The stubbornly low inventory for both sales and rentals can only mean one thing—rising prices and rents.

Interest Rates in 2024

The interest rate dipped by about 0.5% starting in mid-December 2023 and January, which triggered an unseasonal price rise for both months (See Q1 2024 Las Vegas Market Update). The 30-year fixed rate ranged between 6.625% and almost 7.25%. See the chart below.

[Source: Freddie Mac]

Where Will the Market Go for the Remainder of the Year?

Interest rates

With the cooling inflation reports, the Fed is expected to start cutting rates in September. Whether that will happen remains to be seen. Additionally, lower Fed rates do not necessarily translate into lower mortgage rates. If the Fed does not increase buying of mortgage-backed securities, the mortgage rates will not drop significantly. I expect mortgage rates to remain within the same range as we have seen throughout 2024.

Prices and rents

Assuming interest rates remain stable for the remainder of the year, given the sub-one-month inventory for both sales and rentals, I expect the prices and rents to continue to rise for the remainder of the year. However, the rate of increase may be lower than that of Q1 and Q2. We’ve noticed a slight increase in inventory in July and a slight increase in time on the market. Time will tell whether that’s a blip or a trend. Based on our participation in the market in July, good properties priced correctly are still selling within days. Attractively priced properties still receive multiple offers, often above the asking price. The demand is still very strong.

Summary

The investment market in Las Vegas grew strongly in the first half of 2024 and is expected to continue growing, though potentially slower in the second half of the year (as long as the interest rate does not change significantly).

Post: Looking for a less volatile market for my first investment property

Eric Fernwood
Posted
  • Realtor
  • Las Vegas, NV
  • Posts 737
  • Votes 1,510

Hello @Saeed J.,

What you should buy depends on your goals. If your goal is financial freedom you need an income that meets four requirements:

  • Rent increases faster than inflation: Only if rents increase faster than inflation will you have sufficient dollars to pay inflated prices in the future.
  • Sufficient to replace your current income: You must have sufficient income to replace your current income.
  • Lifelong income: It must continue throughout your life.
  • Low operating costs: Every dollar you lose to operating costs is a dollar less for you to live on.

Rents Increase Faster Than Inflation

We live on buying power, not a fixed number of dollars. For example, if today you require $100 per week in groceries and inflation is 4% per year, how much will you need in 5 and 10 years?

  • In 5 years: $100 x (1 + 4%)^5 ≈ $122 or a 22% increase.
  • In 10 years: $100 x (1 + 4%)^10 ≈ $148 or a 48% increase.

Unless your rents increase faster than inflation, you will not have the dollars to pay inflated prices and sooner or later you will have to go back to work.

The key factor for rent growth is significant and sustained population growth.

Sufficient to Replace Your Current Income

You will likely need multiple properties to replace your current income. How much capital you will need depends on the appreciation rate. Two examples.

Example #1: The appreciation rate is low, characterized by low cost properties. In such a city, every investment dollar must come from your savings. For example, if you need 25 properties to replace your current income and each property costs $300,000 and your only cost is a 25% down payment, the total amount from your savings for down payments will be:

  • $300,000 x 25 x 25% = $1,875,000

$1,875,000 is a lot of post tax capital to accumulate

Example #2: The appreciation rate is 7%/Yr. each property costs $400,000, and you will put 25% down. The first property will cost:

  • $400,000 x 25% = $100,000

Due to rapid appreciation, you can use cash out refinance to pay for additional properties. At 7 %/Yr, how many years will you need to hold the property before a 75% cash out refinance will yield $100,000? For simplicity, I will assume the payoff of the mortgage is the original amount of $300,000.

  • After one year: $400,000 x (1 + 7%)^1 x 75% - $300,000 ≈ $21,000
  • After two years: $400,000 x (1 + 7%)^2 x 75% - $300,000 ≈ $43,470
  • After three years: $400,000 x (1 + 7%)^3 x 75% - $300,000 ≈ $67,513
  • After four years: $400,000 x (1 + 7%)^4 x 75% - $300,000 ≈ $93,239

So, after about 4 years, a 75% cash-out refinance will pay for the down payment. Also, the property and the additional property will continue to appreciate, and you can continue to repeat the cash-out refinance process. Investing in high appreciation markets enables you to acquire the number of properties you need at a fraction of the cost of buying in a low appreciation location.

Lifelong Income

Many people face the nightmare of outliving their money. To avoid this, you need your rental income to last throughout your life. This requires that your tenants remain employed at similar wages. The problem is that all private-sector jobs are relatively short-lived. The average life of a company is 10 years. The average life of large corporations, like those on the S&P 500, is only 18 years and falling. So, in the foreseeable future, every non-government job your tenants have will vanish. Unless companies set up new operations in the city creating replacement jobs, all that will remain are lower-paying service sector jobs, which pay much less.

When average incomes fall, so do rents and property prices. City services are dependent on property taxes and sales taxes. If city revenues fall, their only option is to cut back on services, which includes police and schools. This results in increased crime and people leaving the city. This starts a downward spiral from which few cities have recovered.

The most important metric is crime. Never buy properties in high crime cities, which you will find here.

Low Operating Costs

It's not about how much you gross but how much you net. 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.

In order to demonstrate the impact of taxes and insurance on net rental income, I compared the overhead costs of a $400,000 property in three different states. (These averages represent state-level; 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 $5,752 ($9,256 - $3,504) more cash flow annually to compensate for the higher operating costs in Texas.
  • Florida: The property must generate $2,343 ($5847 - $3,504) more cash annually to compensate for the higher operating costs in Florida.

Overhead costs can have a large impact on cash flow.

A Process For Selecting an Investment City

There are too many potential cities to evaluate each one. However, you can start with a list of potentially good investment cities and remove those that fail to meet additional criteria. Below is the process I used.

If you follow this process, you will have a short list of cities for further investigation.

An Additional Consideration

One additional consideration is an experienced investment team. Everything you learn from books, seminars, podcasts, and websites is general information. However, you will buy a specific property, in a specific location, subject to specific conditions. The only source for all the resources, expertise, and processes is a local investment team.


Saeed, I hope this helps you select an investment location that will enable financial freedom.

Post: First 1031 Exchange - Looking at a variety of markets

Eric Fernwood
Posted
  • Realtor
  • Las Vegas, NV
  • Posts 737
  • Votes 1,510

Hello @Breanna Green,

I recommend first determining your financial goal and then selecting a location that best supports that goal. If your goal is financial freedom, choosing the right location is the most important investment decision you will make because it affects all long-term income aspects, including:

  • Whether rents keep pace with inflation is crucial. If rents don't keep up with inflation, owning multiple properties in such locations won't matter because buying power decreases daily. We live on buying power, not a fixed income. This is evident from price increases every time you go to the store. Unless rent growth outpaces inflation, you will either have to continuously reduce your standard of living or get a job. The best indicator is whether the city has significant and sustained population growth. Wikipedia

  • How long will your income last? Too many people face the nightmare of running out of money during retirement, a time when they are least able to reenter the workforce. Income persistence requires that your tenants remain employed at similar wages. The problem is that all non-government jobs are relatively short-lived. The average life of a company is 10 years. The average life of large corporations, like those on the S&P 500, is only 18 years and falling. So, in the foreseeable future, every non-government job your tenants have will vanish. Unless companies set up new operations in the city creating replacement jobs, all that will remain are lower-paying service sector jobs. Crime is a major factor companies consider when selecting cities for investment; companies are unlikely to set up new operations in high-crime cities. Rank of the top 50 most dangerous US cities.

  • Operating costs. Every dollar you lose to operating costs is a dollar less you have to live on. There are direct costs and indirect costs. The major direct costs are property taxes and insurance. Below is a comparison of average annual property insurance and property taxes for 5 states:

    • Texas: average insurance: $2,536, property tax percentage of value: 1.68%
    • New York: average insurance: $1,418, property tax percentage of value: 1.40%
    • California: average insurance: $1,839, property tax percentage of value: 0.75%
    • Nevada: average insurance: $1,144, property tax percentage of value: 0.59%
    • Florida: average insurance: $2,207, property tax percentage of value: .91%

    To put these costs into perspective, below is a comparison of the annual cost for a $400,000 property.

    • Texas: $2,536 + 1.68% x $400,000 ≈ $9,256
    • New York: $1,418 + 1.40% x $400,000 ≈ $7,018
    • California: $1,839 + .75% x $400,000 ≈ $4,839
    • Nevada: $1,144 + .59% x $400,000 ≈ $3,504
    • Florida: $2,207 + .91% x $400,000 ≈ $5,847

    Sources: Homeowners insurance, state average property taxes

    Indirect costs: Rent control is a hidden tax that may limit your ability to select the best tenant, remove a non-performing tenant, and increase rents enough to compensate for inflation. The best source for information is a Google search for the specific city or state.

Breanna, I urge you to not narrow your focus to a city based on your familiarity. Instead, choose a city that best supports your long term financial goal.

Post: House Hacking Partnership

Eric Fernwood
Posted
  • Realtor
  • Las Vegas, NV
  • Posts 737
  • Votes 1,510

In the last 16+ years, I’ve worked with many investors. Occasionally, I'm asked about two or more people pooling their resources to buy properties. This can work, but there is a potential pitfall: assumptions.

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

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

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

Summary

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

Post: Elite Investment Real Estate Team Looking to Hire an Investor Agent

Eric Fernwood
Posted
  • Realtor
  • Las Vegas, NV
  • Posts 737
  • Votes 1,510

Hello Michael,

Your comment on unlearning is well-founded. The last person we added to the team was unlicensed. Today, we have an increased volume of clients, so we need a licensed person. 

If you know someone who might make sense, please send them our way.

...Eric