All Forum Posts by: Eric Fernwood

Hello @Robert Flores,

Having to look for a property manager 4 or 5 times myself, I developed a process (I was an engineer so can’t help it) to ensure that I will always land with a good one. Below is the process that I followed.

Finding a good property manager starts with knowing what you need.

List Your Requirements

Make a list of the capabilities and services the property manager must have. For example, suppose you plan to buy residential properties on the southwest side of the city. You can eliminate all property managers that focus on commercial or do not cover the southwest.

Find Candidates

Search Engine

If you Google something like "Las Vegas Nevada property management companies," you may get too many hits to be practical. With Google, ranking is more of a popularity/marketing contest than any measure of the quality of service. In a smaller city, a search engine might be a great starting point. All you can do is try and see what you get.

Yelp Reviews

Yelp and similar sites only post reviews by tenants. The tenant is not the property manager's client; the property owner is the client. Therefore, a glowing review by a tenant could be a negative review in the eyes of a property owner. Read reviews through the eyes of an owner, not the tenant.

Networking

Read message boards on Biggerpockets or other real estate investment sites. Connect with people who already have properties under management in the area.

Important: just because someone tells you that XXX is a great management company does not mean they will be a great management company for you. Do your own due diligence.

Narrowing the Candidate List

Once you have a list of property manager candidates, check out their websites. If their website states they focus on commercial and you are planning to buy residential, eliminate them. A few minutes spent on each candidate's website before you start interviewing can save you a lot of time.

Select the best 5 or 10 property managers for interviews.

Interview Questions

Before starting, have your questions written down (no more than 10). Use one page for each property manager. Write their responses to each question. You will learn a lot by comparing responses.

Below are sample questions:

• How long have you been exclusively managing properties? (No part-timers)
• How many properties are you currently managing?
• What is your mix of properties (single-family, condos, commercial, etc.)?
• What geographical area do you service?
• Do you have a staff? Please tell me about them. How many are full-time?
• What is your average tenant stay for properties similar to [your property].
• What is your process for screening tenants?
• What are your most important tenant selection criteria?
• How do you keep owners informed? (monthly statements, website, etc.)
• Do you have a startup fee?
• What percentage of collected rent do you charge?
• Is there an annual fee?
• Do you charge a lease renewal fee?
• Are there other fees?
• Do you have an in-house maintenance staff? (If yes, end the call. You cannot afford an in-house maintenance staff. Maintenance is where property managers with an in-house repair staff make the most money, not rent collection.)
• Do you markup repair costs? (I am OK with a fixed fee, like $20/repair. I will NOT work with a property manager who marks up a percentage of the total repair cost. I do not want the property manager to have any financial incentive to increase my maintenance costs.)
• Do I receive a copy of the original bill from the contractor who performed the work?
• Under what conditions do you contact me for prior approval before authorizing the repair? (Usually based on the estimated cost. For example, for repairs costing less than $300, the property manager will proceed with the work. Above $300, they will contact you for prior approval.)
• How do you collect the rent?
• How do you deliver the rent to me? (direct deposit)
• On what day of the month do you send rent to owners?
• Tell me about the eviction process.
• How long does the entire process take?
• How much does an eviction cost?
• Do you have to go to court often? Is there an additional charge if you have to go to court?
• How many evictions have you had to initiate in the last 12 months?

Additional Considerations

• Selecting the lowest-cost property manager can be your most expensive option. One non-performing tenant will cost you more than several years of the incremental costs of a skilled property manager. Focus on the value delivered, not the lowest cost.
• I prefer medium-sized property managers. The big property managers don’t have time for individual owners. Mid-sized property managers have all the needed software and processes but will still have time to work with individuals.
• The most important skill of a property manager is the ability to select a reliable tenant. Understand their process for screening prospective tenants. Some property managers choose tenants based on FICO scores. A FICO score tells you nothing about how long they are likely to stay and if they take care of the property. Also, a high FICO score can mean they will be buying a home soon and will leave your property after only a short stay. The property manager should use one of the tenant screening services.
• Do not expect investment advice from a property manager. I've worked with many, and none knew how to analyze a property. The best source of such analysis is an investment realtor (NOT an "investor friendly" realtor).

Robert, if you have questions, let me know.

Hello @Carlos Ptriawan,

A few comments:

“next few years appreciation would be 2-3% only per-Freddie Mac/Zillow/etc”

2-3% is a reasonable expectation for a national average. However, you do not buy a nationally average property; you buy a property in a specific location. In growing cities like Las Vegas, land shortage combined with rapid population growth and continuing large capital inflow mean that the appreciation rate will be much higher than the national average. 5% is a conservative estimate. YTD appreciation for the property segment we’ve targeted for over 16 years is >9%.

“it's almost impossible to beat 6% CD as average large public company earning yield is only 5.5%”

I did not compare CDs to public companies. I compared CDs to investment real estate in a city where prices continue to rise rapidly.

“When calculate the gain, make sure to substract 6-7% for real estate commision.”

Real estate is a long-term investment; there is no reason to sell. I will live off the cash flow from my properties as long as I live. When I die, they will go to family members. Why would you sell a performing asset that only does better over the years?

But let’s just say you decide to sell it in 5 years. Using the above example and subtracting 7% realtor commissions, your equity gain will be:

$587,090 x (1-7%) - $460,000 ≈ $85,994.

Your total gain, including cash flow, will be: $85,994 + $115,000 ≈ $200,994

This is still way better than a CD.

So, I do not agree with your comments.

Hello @John Peter,

I view investing in CD and real estate as being very different. An example will show what I mean.

Suppose you buy a $460,000 CD (or HYSA or T-bill) and a $460,000 rental property. What will be the five-year gain if the CD pays 5% and a rental property appreciates at 5%? (Our YTD appreciation is >9%, so 5% is conservative.)

CD gain:

Assuming a 35% marginal tax rate:

• Year 1: $460,000 x 5% x (1 - 35%) + $460,000 ≈ $474,950
• Year 2: $474,950 x 5% x (1 - 35%) + $474,950 ≈ $490,386
• Year 3: $490,386 x 5% x (1 - 35%) + $490,386 ≈ $506,324
• Year 4: $506,324 x 5% x (1 - 35%) + $506,324 ≈ $522,780
• Year 5: $522,780 x 5% x (1 - 35%) + $522,780 ≈ $539,770

Total gain: $539,770 - $460,000 ≈ $79,770

Rental property gain:

• Year 1: $460,000 x (1 + 5%) ≈ $483,000
• Year 2: $483,000 x (1 + 5%) ≈ $507,150
• Year 3: $507,150 x (1 + 5%) ≈ $532,508
• Year 4: $532,508 x (1 + 5%) ≈ $559,133
• Year 5: $559,133 x (1 + 5%) ≈ $587,090

Total gain: $587,090 - $460,000 ≈ $127,090

However, this represents only capital (equity) gain. You'll also receive cash flow from the property. Let's assume the cash flow from the property is 5% after all recurring expenses—a common (starting) figure among our client’s properties. To be conservative, I’ll assume there's no rent growth. However, appreciation and rent growth are driven by population growth. If there is appreciation, you will have rent growth.

• Year 1: $460,000 x 5% ≈ $23,000
• Year 2: $460,000 x 5% ≈ $23,000
• Year 3: $460,000 x 5% ≈ $23,000
• Year 4: $460,000 x 5% ≈ $23,000
• Year 5: $460,000 x 5% ≈ $23,000

Total cash flow in 5 years: $23,000 x 5 ≈ $115,000

The tax savings will probably shield the cash flow from taxes. Therefore, it will essentially be tax-free. So, the five-year gain from the property, including equity gain and cash flow: $127,090 + $115,000 ≈ $242,090

So, I do not see investing in a CD comparable to an investment property.

Hello @Jason Riddle,

I will respond to your post more broadly because there are a lot of things to consider when it comes to renovating a property.

I will start with deciding what to renovate.

What to Renovate?

Renovation is where things can fall apart. People redecorate properties to their taste as if they will be living in the property, driving up costs and sometimes making the property less desirable to your target tenant segment.

So, how do you know what to renovate?

Consider what would be the ideal condition for your target tenant segment. List potential renovation items.

You will not have enough money to make this an “ideal” property, so prioritize renovation items in the following order:

1. Health and safety - Do all items necessary to provide a safe living environment. Not correcting all health and safety issues could result in injuries and litigation.
2. Attract the right tenant segment - Do what is necessary to attract your target tenant segment. Failing to do so may result in undesirable tenants and financial loss.

Enhancements:

• Sometimes required due to market competition: For example, if all similar properties on the market have granite counters in the kitchen and your property has laminate, you may need to install granite to rent the property at market rate.
• Cost-justifiable enhancements: Changes that increase rent and have a reasonable payback period.

The formula we use for estimating the payback period:

• Payback Months = (item cost) / (monthly savings or increased rent)

For example, suppose the property has laminate kitchen counters. With laminate, the rent will be $1,700/Mo. With granite, the rent will be $1,900/Mo. The cost to install granite counters is $2,500. What is the payback period?

• Payback Months = $2,500 / ($1,900/Mo - $1,700/Mo) = 12.5 Months

If I can recover the cost in less than three years, I will almost always do the enhancement. The shorter the payback period, the more inclined I am to spend the money.

Documentation, Documentation, Documentation

This is where it falls down. The biggest problem is not writing comprehensive specifications. For example, how would you specify painting the interior of a house?

The interior, ceilings, walls, doors, casings, and baseboards will be painted as follows:

• Walls: Sherwin Williams White Duck in eggshell sheen. The code is SW 7010.
• Ceilings: Behr Flat White ceiling paint.
• Doors, casings, and baseboards: Swiss Coffee, semi-gloss sheen.

The original receipts for all paint will be provided. The price includes labor and materials, as well as surface preparation and cleanup. All switch and plug cover plates will be removed and reinstalled after the paint is dry. All door knobs will be removed and reinstalled after the paint is dry. Doors will be removed, sanded, spray painted, and reinstalled. The hinges will not be painted.

An unopened one-gallon container of each of the three paint colors will be left in the garage, and the names and sheen will be marked on the top of each can.

Even when I document each task as I did above, I sometimes have the vendor walk through the property and describe each task they will perform, how they will do the tasks, how many people will be working each day, and approximately when the work and cleanup will be complete. I video this walk-through, and it becomes part of the documentation.

Occasionally, a vendor claimed they did not agree to do something and wanted to charge extra. I showed them the video, which ended the discussion.

Creating unambiguous documentation for every item is time-consuming but essential.

Overwatch

We do several renovations each month, so we have a dedicated person to overwatch what is happening and take a progress video every other day. Unless you have a trained person (working for you, not the GC) monitoring progress and quality, the renovation will cost more, take longer, and the quality will be less than desired. Also, if the vendor knows there will be frequent inspections, they do better quality work and are less likely to play schedule games.

Coordination of Vendors

The order in which work is performed is important. For example, you do not want the walls painted and then have the electrician cutting into the walls to install wiring.

Changes

Every time there is a significant change, it must be documented with a change order. The change order must include a description of the change, the additional cost (labor and materials), and how much more time will be required. If there is no signed change order, we do not pay for it.

Final Acceptance

The final acceptance standard must be in the documentation. This should include an evaluation of all items on the original work order plus all change orders. Until all items are complete and the job site is broom clean, there will be no final payment.

Payments

We generally pay 50% of the estimated cost upfront and the balance upon completion. Sometimes, if there are significant material costs, we will make a progress payment but hold back a significant percentage until final acceptance is complete.

Who Does the Work?

We have tried several GCs, and the work they provided was consistently overpriced and of poor quality. Additionally, they did not make any effort to adhere to the agreed-upon schedule.

For the last ~350 properties, we’ve worked with a handyman service. Where needed, we have licensed people do the work (significant plumbing, electrical, roofing, etc.) We are a high ticket customer for the handyman, where we were just a noise level nuisance for GCs.

Remote Renovations

You need to work with an investment team. The team provides a lot of work to the GC. The GC knows that in order to keep the business of the team, they have to execute every job, big or small, on schedule and budget.

Summary

• What you like or don’t like is irrelevant; only what the target tenant segment wants is relevant.
• There are no verbal agreements; document everything. Consider videoing the GC walking the job.
• Your job is too small to matter to most GCs. Working with an investment team provides the leverage you need to get your renovation done.

Jason, I hope this helps you and others.

Hello @Carlos Quiros,

Instead of choosing the property first, I recommend starting with your financial objective and working backward to what and where you should buy. I will assume that your financial objective is a reliable income.

Reliable Tenant

You will only have a reliable income if a reliable tenant continuously occupies your property. A reliable tenant stays many years, always pays the rent on schedule, and takes good care of the property.

Reliable tenants are the exception, not the norm. And you'll need many of them over the years you own the property. To maximize the odds of always having a reliable tenant, buy a property that attracts a tenant segment with a high concentration of reliable people.

How do you find a tenant segment with a high concentration of reliable people? By interviewing multiple property managers. Let me know if anyone would like more information on interviewing property managers.

Once you identify a tenant segment, determine what and where they rent today. From these properties, you can derive what I call a property profile. A property profile has at least four components, as listed below.

• Location - The locations where significant percentages of the target segment are renting today.
• Property type - What type of properties are they renting today? Condo, high rise, multi-family, single family?
• Rent range - What the segment is willing and able to pay.
• Configuration - Two bedrooms, three-car garage, large back yard, single-story, two stories?

You can give the property profile to any realtor, and they can find conforming properties.

Carlos, if you buy a property that matches the property profile for a tenant segment, the majority of the people who apply will come from the segment you are targeting.

However, not all the people in a segment will be reliable. Only a skilled property manager with years of experience can consistently select reliable tenants. I've worked with many property managers in Las Vegas over the years, and I only know of two with this skill.

You might be thinking of saving money by managing your own property. You can't afford to do this. One bad tenant will cost you more than a property manager for years.

If you insist on managing your own property, I recommend you work with a property manager and get a reliable tenant in place. After the first year, take over the management. This way, you have a good tenant, all the necessary contracts, and the processes in place.

Carlos, I hope this helps.

Hello @Jamiru Mutebi,

Your most important investment decision is the location (city), not the property. The city is critical because it determines how fast rents (and prices) rise.

Financial Freedom

Financial freedom goes beyond simply replacing your current income; it requires maintaining your current lifestyle for the rest of your life. To attain lifelong financial freedom, you need a passive income that meets three requirements:

• Rents must outpace inflation
• Persistent: You will not outlive the income.
• Dependable: The rental income must come every month, even in bad economic times.

Whether rents outpace inflation and how long your income will persist depends on the city where you invest. Income dependability depends on the tenants and their employers. I will only talk about the location in this post.

The Allure of Low-Cost Cities

Why do properties cost less in some cities than others? Prices are determined by the imbalance between buyers and sellers. 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.

Prices determine rents. Fewer people can afford to buy when prices are high, so more turn to renting, driving up demand for rental properties and causing rents to rise. When prices are low, more people can buy, which reduces demand for rental properties, and rents fall.

What caused prices to be lower in some cities? Multi-year lack of buyer demand resulted in cities having low-cost real estate. Simply put, prices rose so slowly that they fell behind other cities. Rent follows prices, so where prices are low, rents will increase slowly.

You can never achieve financial freedom with properties in low-cost cities. An example will show the problem.

Suppose you buy a property in a city where rents rise 2% a year and inflation is 4%. You decided to buy this property because it has good cash flow. But what will inflation-adjusted cash flow look like in 5, 10, and 15 years? Let's assume the initial rent is $1,000 a month.

The formula to calculate future value is:

• FV = PV x (1 + r)^n / (1 + R)^n

Where:

• r: growth rate
• R: decrease rate
• n: number of years into the future
• PV: present value

Using the above formula, I will calculate the rent for 5, 10, and 15 years with 2% growth.

• 5 years: $1,000 x (1 + 2%)^5 ≈ $1,104
• 10 years: $1,000 x (1 + 2%)^10 ≈ $1,219
• 15 years: $1,000 x (1 + 2%)^15 ≈ $1,346

In our example, rents are rising by 2% each year, but inflation is reducing the buying power of your money by 4%/Yr. Here are the combined effects of a 2% rent growth and 4% inflation.

• 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.

This is the result of buying in a city where rents do not outpace inflation. No matter how many properties you own in such cities, it is only a matter of time before you will be forced to get a job.

What if you buy in a city where rents increase faster than inflation? For example, suppose you buy in a city where rents increase 6%/Yr, and inflation is 4%, and initial rent is $1,000/Mo.

• 5 years: $1,000 x (1 + 6%)^5 / (1 + 4%)^5 ≈ $1,100
• 10 years: $1,000 x (1 + 6%)^10 / (1 + 4%)^10 ≈ $1,210
• 15 years: $1,000 x (1 + 6%)^15 / (1 + 4%)^15 ≈ $1,331

Despite inflation, your buying power is increasing, so you maintain (and improve) your standard of living. Said another way, only if you buy properties in cities where rents outpace inflation can you achieve financial freedom.

The Most Important Criteria

There are several criteria for selecting a city to achieve financial freedom. The most important is population growth.

As I stated earlier, prices only increase when there are more buyers than sellers. This only occurs when the population is increasing. And, for rents to rise faster than inflation, population growth must be significant and sustained. Here is one source for population growth: Wikipedia

Jamiru, if you buy in a city where rents are increasing faster than inflation, rent growth and appreciation will correct all but the worst mistakes over time. If you buy in a city where rents do not outpace inflation, there is nothing you can do but sell the property and buy in a better location.

Let me know if anyone wants to see the process for selecting a city for financial freedom.

Hello @Nitin Gove,

I believe you may be putting the cart before the horse. You should choose an investment location based on your financial goals, not proximity to where you live.

I will assume the reason you will invest in real estate is financial freedom. However, financial freedom goes beyond simply replacing your current income; it requires maintaining your current lifestyle for life. To attain lifelong financial freedom, you need to invest in a city where:

• Rents must outpace inflation.
• Your rental income lasts a long time; you will not outlive your income.

If you invest in any city where rents do not outpace inflation, you can not achieve financial freedom. Here is the problem. Suppose you invest in a city where rents increase at 2%/Yr, inflation is 4%, and the initial rent is $1,000/Mo, what is the inflation-adjusted adjusted rent (or buying power) in 5, 7, and 10 years?

To calculate the future buying power, use the formula: FV = (1 + r)^n / (1 + R)^n where:

• r is the rate of increase
• R is the rate of decrease (inflation)
• n is the number of years into the future

Inflation-adjusted (buying power) rent at:

• 5 years: $1,000 x (1 + 2%)^5 / (1 + 4%)^5 ≈ $907
• 7 years: $1,000 x (1 + 2%)^7 / (1 + 4%)^7 ≈ $873
• 10 years: $1,000 x (1 + 2%)^10 / (1 + 4%)^10 ≈ $824

Because inflation is outpacing rent growth, your buying power continuously declines. The ugly truth is that no matter how many properties you own in locations where rents do not outpace inflation, you will sooner or later be forced to get a job.

What causes rents to increase?

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 roughly balanced. When there are more sellers than buyers, prices decline until the number of buyers and sellers is roughly balanced.

Rents follow prices. When prices are high, fewer people can afford to buy and are forced to rent, increasing demand for rental properties so rents rise. When prices are low, more people can buy, resulting in decreased demand for rental properties so rents fall.

What causes the imbalance between buyers and sellers? Population change.

For rents to outpace inflation. the rate of population growth must be significant and sustained. Also, for the location to be economically stable, a metro population >1M is necessary. Smaller cities tend to be dependent on a single company or market sector. The source for metro population size and population change: Wikipedia

Remote Investing

Does remote investing work? Yes, but only if you have an experienced local investment team. Here is the problem. Everything you learn from podcasts, books, seminars, and websites is general knowledge. You will purchase a specific property in a specific location, subject to specific local rules and regulations. The only source for the information, processes, experience, and resources is a local investment team.

We have an investor services business and have delivered over 490 investment properties. 96% of our clients are remote investors; they live in other states or countries. >90% of our clients buy more than one property from us and our largest source of new clients is referrals from existing clients. So, remote investing works, if you have a good local investment team.

And, working with an investment team typically does not cost more than other realtors. For example, of the 480+ properties we've delivered, we only charged our clients a fee on four or five occasions; these were exceptional circumstances. In all other cases, the listing agent covered our fees, not our clients.

In Summary

If you invest in any city where rents do not outpace inflation, inflation will continuously erode your buying power, and sooner or later you will be forced back on the treadmill.

Hello @Debbie Palmer,

Welcome to Biggerpockets. I have some additional considerations for you.

Mid-Term Rentals (MTRs)

Regulations concerning STRs appear to change constantly, making the long-term viability somewhat uncertain. Also, STRs are primarily occupied by tourists, so the state of the economy can have a significant impact on occupancy. Another consideration is the overhead cost of frequent turns and ongoing maintenance costs; many tourists rent STRs for “party weekends.”

An alternative you may want to consider is MTRs. MTRs provide similar income to STRs, once you factor in STR vacancy. Also, MTRs require much less work due to longer tenant stays. And, at least in Las Vegas, because of the minimum 30-day stay, you are less likely to have problems with most HOAs.

I’ve studied the Las Vegas MTR market, and I believe the best tenant segment to target is traveling nurses. Traveling nurses get a 13-week initial contract with possible extensions.

If you are targeting traveling nurses, the location is very important. It must be within about 5 miles of one or more hospitals with trauma level 1 or 2 care. In Las Vegas, there is an area within 5 miles of two hospitals that employ a significant number of traveling nurses.

Another advantage of MTRs is that should you decide to have the property professionally managed, cost-effective management is available, at least in Las Vegas.

Financial Freedom

The goal of most real estate investors is financial freedom. Financial freedom is more than just replacing your existing income. It's about maintaining your current lifestyle for as long as you live. To achieve this, you need 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.

What happens if you invest in a location where rents do not outpace inflation? I will show the problem with an example.

Suppose you have a property and the monthly rent is $1,000, the rent growth rate is 2%, and inflation is 4%. What will be the rent's present value (purchasing power) at 1, 5, 10, and 15 years?

First, I will calculate rents at 2% rent growth.

• Year 1: $1,000
• Year 5: $1,000 x (1 + 2%)^5 ≈ $1,104
• Year 10: $1,000 x (1 + 2%)^10 ≈ $1,219
• Year 15: $1,000 x (1 + 2%)^15 ≈ $1,346

Next, I will calculate the future rent's inflation-adjusted value (buying power), including 4% inflation.

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

So, in the 10th year, the rent is expected to be $1,219, but inflation reduced its purchasing power to what you can buy today for $824. This is the long-term financial trap of buying properties in locations where rents do not outpace inflation.

If rents do not outpace inflation, no matter how many properties you own, you cannot achieve financial freedom.

Investment Team

You need to work with an experienced local investment team, no matter if your investments are local or across the country. Why?

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.

Summary

Financial freedom depends on investing in locations where prices and rents outpace inflation. If you invest anywhere else, no matter how many properties you own, you will be forced to look for a job sooner or later.

Debbie, I hope this helps. Reach out if I can help, or you can find more investing insights, methodology, and processes in my (free) weekly blog: ericfernwood.substack.com

...Eric

Hello @Masud Khan,

How much total capital you will need to acquire multiple properties depends on the appreciation rate in the city where you invest. If you buy in a city with a low appreciation rate, every investment dollar must come from your savings. I will use the following example to demonstrate the problem.

Suppose you invest in a city with low appreciation. I will assume you need 20 properties to replace your current income. Each property costs $200,000, and the down payment is 25%. I will ignore all other costs other than the down payment.

The total capital from savings required for down payments will be 20 x $200,000 x 25% = $1,000,000. Also, the $1,000,000 is post-tax dollars. If your marginal tax rate is 40%, you will have to earn approximately 1,666,667 to have $1,000,000 after-tax dollars to have the money for down payments on 20 properties.

Alternatively, what will be the total capital required to acquire 20 properties in a high-appreciation city? For this example, I will assume each property costs $400,000, you need 20 properties, and you will put 25% down. The down payment for the first property is $400,000 x 25% = $100,000.

Because you purchased in a location with rapid appreciation, the market value rises rapidly. Suppose the appreciation rate is 8% (FYI: The YTD appreciation rate for the property segment we target in Las Vegas is >9%). How long before a 75% cash-out refinance will yield the $100,000 needed for the down payment on your next property? For simplicity, I will assume there was no principal paydown on the mortgage; the mortgage payoff remains $300,000.

• Year 2: $400,000 x (1 + 8%)^2 x 75% - $300,000 ≈ $49,920
• Year 3: $400,000 x (1 + 8%)^3 x 75% - $300,000 ≈ $77,914
• Year 4: $400,000 x (1 + 8%)^4 x 75% - $300,000 ≈ $108,147

So, after four years, a 75% cash-out refinance yields the $100,000 you need for the down payment for the next property. Also, loans are not taxable, so you can use the full amount.

This is the method I and my clients have used to grow our portfolios. Also, as you accumulate properties, the rate at which you can buy additional properties increases. See the diagram below. In the diagram, property #1 is refinanced to buy property #2. Next, properties #1 and #2 are refinanced to buy properties #3 and #4, etc.

So, if you purchase in a location with high appreciation, you can use cash-out refinance to make down payments for additional properties. Theoretically, ignoring all costs other than down payments, you only need $100,000 to buy 20 properties. Despite the higher property prices in high-appreciation locations, this is the least expensive way to acquire multiple properties.

If the Appreciation Rate Is Low, the Rent Growth Rate Is Low

If your goal is financial freedom, buying properties in a city with a slow appreciation rate poses another 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, rent growth must outpace inflation. An example will show why this is true.

Suppose you buy a property and the monthly rent is $1,000, the rent growth rate is 2%, and inflation is 4%. What will be the rent's present value (purchasing power) at 1, 5, 10, and 15 years?

First, I will calculate rents at 2% rent growth.

• Year 1: $1,000
• Year 5: $1,000 x (1 + 2%)^5 ≈ $1,104
• Year 10: $1,000 x (1 + 2%)^10 ≈ $1,219
• Year 15: $1,000 x (1 + 2%)^15 ≈ $1,346

Next, I will calculate the future rent's inflation-adjusted value (buying power), including 4% inflation.

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

So, in the 10th year, the rent is expected to be $1,219, but inflation reduced its purchasing power to what you can buy today for $824. This is the long-term financial trap of buying properties in locations where rents do not outpace inflation.

No matter how many properties you own in locations where rent growth is less than inflation, you cannot achieve financial freedom because your inflation-adjusted (buying power) rent is continuously declining.

Conclusion

If your property is in a city with a low appreciation rate, consider using a 1031 exchange to purchase a replacement property in a city with a high appreciation rate where you can use cash-out refinance to buy more properties and where your rents will outpace inflation.

Hello Paul,

We've completed more than eighty-1031 exchanges. There are three exchange agents I recommend. DM me if you would like their contact details.

...Eric