All Forum Posts by: Geoff Anfuso

Hello @Gaurav Mehta,

The goal of real estate investing is to get off and stay off the corporate treadmill. You can only achieve this goal if you have a dependable passive income. A dependable passive income must meet three criteria.

• Reliable - Your income continues even in difficult economic times.
• Inflation-Compensating - Rental income increases faster than inflation, compensating for rising prices.
• Persistent - Your income will last; you and your spouse won't outlive it.

To achieve all three criteria, you need to get three things right.

• Location - The location defines all long-term income characteristics.
• Tenant Pool - Defines income reliability and vacancy cost.
• Property- Defines return and maintenance costs.

In this post, I will only talk about choosing the location.

Choosing a location for investment should not involve personal opinions, luck, or feelings. It should be based on metrics. The key is eliminating locations that do not meet the three established criteria for reliable income. The remaining locations are then worthy of further examination. The process and necessary information sources are listed below.

1. Metro Population >1M - There are thousands of locations to consider; too many to evaluate. So, start with metro areas with a population >1M. Small towns may rely too much on a single business or market segment. Wikipedia - https://en.wikipedia.org/wiki/...
2. Both state and metro populations are increasing - Do not consider investing if the state or metro populations are static or decreasing. Wikipedia - https://en.wikipedia.org/wiki/...
3. Low crime - Cities with high crime levels and long-term profitability are incompatible. People and businesses avoid areas with high crime. The result is a lack of job opportunities and investment. Never invest in any city on Neighborhood Scouts' list of the 100 most dangerous US cities - https://www.neighborhoodscout....
4. Low operating costs - High operating costs can turn what appears to be a profitable property into a money pit. The two most apparent overhead costs are property taxes and insurance. Look for stats with low taxes and insurance. Insurance - ValuePenguin (https://www.valuepenguin.com/a...), Metro Property Taxes - LendingTree (https://www.lendingtree.com/ho...).
5. Limited urban sprawl - Many cities in the US, including Phoenix, Memphis, and Indianapolis, have large open areas surrounding them, enabling unlimited expansion through urban sprawl. This leads to a slow or stagnant increase in property prices and rents in established areas as people move further out and rent or buy newer homes.
6. Natural disaster risk - Natural disasters such as tornadoes, hurricanes, and earthquakes destroy communities. While insurance might rebuild your property, the bigger issue is the loss of jobs, local businesses, and essential amenities. Until the community is rebuilt, you will have an empty property, but mortgage payments, taxes, insurance, and other expenses will continue, with no income to offset these costs. The cost of homeowners insurance is the best indicator of the likelihood of a natural disaster in an area. Insurance - ValuePenguin (https://www.valuepenguin.com/a...)
7. Metro rent and price growth rate - To have the additional dollars you need to pay for inflated prices, rents must rise faster than inflation. Therefore, a critical location selection metric is that rents and prices are rising faster than inflation. If historical rental data is unavailable, you can use the rate of appreciation in the area as a proxy, as rents tend to follow prices. However, COVID-19 distorted markets, so only consider data from 2013 to 2020. Zillow research data - https://www.zillow.com/researc...
8. Landlord/tenant rules and regulations - Some locations have laws that limit how much you can raise rents, making it nearly impossible to keep pace with inflation. Similar regulations can also make it difficult to choose reliable tenants and evict non-performing ones. Don't invest in places with these restrictions. To find out if a place has these laws, talk to a local investment team.

The metro areas that remain are the ones to investigate further.

I went through this process, and here is how Las Vegas stacked up.

✅ Population: >2.2M

✅ Both state and metro populations are increasing.

✅ Low crime

✅ Low operating cost - I was initially drawn to cities in Nevada, Florida, and Texas. I made an overhead cost comparison based on state averages, as shown in the table below.

To show the impact of taxes and insurance, I compared costs on a $400,000 property in the three states. (Remember that these are state averages, and individual cities may impose additional taxes.)

So, due to higher property tax and insurance, you need a significantly higher cash flow in Texas and Florida to have the same net cash flow in Nevada.

✅ Limited Urban sprawl - Las Vegas is a small island of privately-owned land surrounded by an ocean of federal land. See the 2020 aerial video below. As you can see, there is little undeveloped land.

Soon, the only option for expansion will be redevelopment, which is already underway in some areas. The limited availability of land for expansion and the increasing demand for housing in Las Vegas almost guarantee that property prices and rents will continue to rise.

✅ Natural disaster risk - Nevada has the 10th lowest homeowner insurance cost in the nation.

✅ Metro rent and price growth rate - Between 2013 and 2020, appreciation averaged 14%/Yr, and rents increased by >8%/Yr.

✅ Landlord/tenant rules and regulations - Nevada and Las Vegas are pro-owner. The state is also pro-business.

So, based on my evaluation of all potential cities, I chose Las Vegas.

Gaurav, when you evaluate investment locations, you may have a different result. If so, I would appreciate hearing what city(ies) you selected.