All Forum Posts by: Eric Fernwood

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

Hello @Benjamin Sulka,

We’ve operated a one-stop investor services business in Las Vegas for over 15 years. To provide all the necessary services, we assembled a team of experts in addition to our four core team members. Our expanded team includes:

• Property manager
• Renovation company
• property inspector
• Multiple trades like roofers and plumbers, which we call upon as needed
• Lenders

Not Just Rent Collectors

If your only expectation of a property manager is rent collection, you have extremely low expectations.

We expected the property manager to become integral to our core team. For example, the property manager we work with plays a key part in our property evaluation, in addition to managing our clients’ properties. See the diagram below.

Our core team manages everything until the renovation is complete. After renovation, the property manager takes over. She then does the most important task a property manager provides: markets the property and finds a reliable tenant. Our average tenant stay is over five years, while most other property manager tenants stay for two years or less. This is the difference a good property manager makes.

Our current property manager is our 5th. When property managers’ performance declined, we replaced them. After the first two replacements, being engineers, we developed a process for finding a property manager with the needed skills. This post contains an overview of this process. If anyone would like a free copy of the full guide, DM me.

List Your Requirements

“If you don’t know what you want, you will likely get something else.” paraphrased from Yogi Berra.

Start by listing the capabilities and services the property manager must have. Below are some of our requirements:

• Highly skilled at selecting reliable tenants
• They already manage many similar properties in the areas where our current and future properties are located.
• Already fully automated and has an owner portal.
• Will evaluate potential investment properties and provide estimated rent, time to rent, and renovation items in a timely manner.
• Will handle payment to the HOA and resolve issues between the tenant and the HOA.
• Practively manage property maintenance to keep maintenance costs low.
• Does NOT have an internal repair department. More on this later.

There are several more requirements, but these will give you a start on yours.

Once you have a list of requirements, it is time to find candidate property managers.

Finding Candidates

Search Engines

If you Google something like "Las Vegas Nevada property management companies," you may get too many hits to be practical. Also, ranking high on Google is more of a popularity/marketing contest than any measure of quality of service.

Yelp Reviews

Yelp and similar websites do not include reviews from individuals who benefit from a business's success, such as restaurant owners.

For property managers, other property owners are the clients, not tenants. However, only tenant reviews are typically included. A positive review from a tenant can be a negative review to the property owner.

Some examples.

• "The property manager agreed to replace all the faucets with better-looking ones at no charge!" - Including labor, faucets are about $150 each.
• "They let us stay an extra two weeks at no charge." - Our average rent is $2,200/Mo. Two weeks is $1,100.
• "They gave us back our entire security deposit despite our dog's damage to the rug.” Failing to deduct carpet damage from the security deposit takes money out of the owner’s pocket.

A negative tenant review can be a positive owner review:

• "I lost my job, and I asked the property manager for a couple of free months to find another job. They said no! XXX is a terrible property management company." The property manager did their job by protecting the owner from months of no income.

Always read property manager reviews through the eyes of the owner, not the tenant.

Networking

Reach out to people in your location on sites like Biggerpockets.com and others. 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 due diligence.

Narrowing the Candidate List

Visit each candidate's website. If a website says they specialize in commercial properties and you want to buy residential, cross them off your list. Spending a few minutes on each website before the interviews will save you time.

Interview Questions

Select the best 5 or 10 property managers for an initial phone screen. Prepare 5 to 7 questions. I use one sheet of paper for each interview to take notes. After the interviews, I compared their responses. This helps me identify who knew what they were doing and who was guessing.

First Interview

Consider the chemistry between you and the property manager and their answers to your questions.

Below is a list of possible questions. Many more questions are listed in the guide.

• 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 an internal maintenance department?
• Do you have a staff? How many are full-time?
• What are your fees?

Remove all property managers who did not perform well.

Second Interview

Select 5 to 7 additional questions that build on the initial questions. Again, record all answers for later comparison. Some important questions for this interview include:

• What is the average length of time your tenants stay in a property?
• What is your typical time-to-rent?
• How do you keep owners informed? (monthly statements, website, etc.)

A complete list of interview questions is in the full guide.

Based on this meeting, narrow the list to one or two property managers.

Third Interview

Hold the third meeting via Zoom. Use your previous meetings to guide your questions. Focus on any remaining important issues.

After this meeting, you should have a good property manager.

Additional Considerations

• Choosing the cheapest property manager may cost you more in the long run. A single tenant who doesn't pay rent or causes other problems can be more expensive than the slightly higher cost of a more experienced manager. Focus on the value you get, not just the lowest price.
• Never work with a property manager with an in-house repair staff. They often earn more from repairs than rent collection. Your unplanned maintenance costs shouldn't be another person's primary source of profit. The property managers we work with use services from independent providers for maintenance.
• Do not expect investment advice from a property manager. I've worked with many property managers, and none knew how to analyze a property. The best source of such analysis is an investment realtor (NOT an "investor friendly" realtor).

Summary

Your financial success hinges on your property manager's skills.

Hello @Nick Rivers,

Whether you should keep the property is more complex than the current cash flow. Below are some considerations.

Income Reliability

You stated that you had problematic tenants. This is usually the result of managing your own property. Some people think that the only task a property manager does is to collect the rent, and they do not want to pay for that service.

However, a good property manager's most valuable contribution is selecting reliable tenants. A reliable tenant stays many years, always pays the rent on schedule, and cares for the property. Reliable tenants are the exception, not the norm.

I've worked with many property managers during the 15+ years we've operated our investor services business in Las Vegas. I only know of two property managers with this skill.

I suggest hiring a skilled property manager if you retain the property.

Let me know if you (or anyone) would like to know how to select a good property manager.

To Sell or to Hold

The goal of real estate investing 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
• Persistent: You will not outlive the income.
• Reliable: 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 you invest in. Income reliability depends on the tenant(s).

The critical component for financial freedom is rent outpacing inflation. So, are rents outpacing inflation in your city?

If rents do not outpace inflation, no matter how many properties you own, you cannot achieve financial freedom. An example will prove this.

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 is the rent's present 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 the rents in your city aren't outpacing inflation, consider using a 1031 exchange to a location where rents are outpacing inflation.

Income Persistence

You never want to be in a position where you've outlived your income. The only way for your income to persist is if your tenants remain employed at similar jobs. The problem is that non-government jobs do not last. The average lifespan of a company is about 10 years. An S&P 500 company has an average lifespan of 18 years. So, every non-government job your tenants have will vanish in the foreseeable future. Unless new companies move into the city and create replacement jobs, all that will remain are lower-paying service sector jobs. If your tenants have reduced pay, your rent will stagnate or fall.

What characteristics attract companies to set up new operations in a city?

✅ Low operating costs

✅ Low crime rate

✅ Low risk of a natural disaster

✅ Pro-business regulatory environment

✅ A sufficient population for economic stability. This usually requires a population >1M.

If your city does not meet the above, 1031 should be considered.

Properties and Tenants

Each tenant segment has specific housing requirements and is unlikely to rent a property if it doesn't meet them. The converse is also true. The characteristics of a property determine which tenant segment it attracts.

Are there enough reliable tenants in the segment your property attracts so that a skilled property manager can consistently choose a tenant who will stay many years? Some segments stay longer than others on average.

In 2005, when I selected Las Vegas to set up my business, I did extensive tenant segment research. I discovered that there are three major segments, which I named Transient, Permanent, and Transitional. Below is the average length of stay for each segment.

• Transient: <1 year
• Permanent: >5 years
• Transitional: < 2 years

We target properties in the $320,000 to $475,000 range to attract the Permanent segment. Above about $500,000, properties attract the Transitional segment. Properties that attract Transitional tenants are often unprofitable due to short tenant stays and a longer time to rent. Below about $280,000, you get into a tenant segment that stays, on average, one year or less. Vacancy costs make properties targeting this segment a non-go.

Talk to several property managers. Ask each one about the typical duration a tenant might stay in your property. Also, ask about the time it takes to find a tenant.

I would consider a 1031 exchange if the answers are unfavorable.

Buy Now Or Later

I continue to hear people lament that interest rates are no longer around 3%. They aren't and won't be in the foreseeable future, so we have to deal with the rates as they are.

Prices are rising. Since the beginning of this year, the prices of properties in our target segment increased by 9%.

What will happen if you wait until rates fall? An example will show the problem.

Suppose property prices rise by 8%/Yr, and it takes 5 years before rates fall to 5%. What is the cost of waiting?

I will assume a $400,000 property to have numbers to work with. The table below displays the rising market value from appreciation and the accumulated equity. By waiting, you lose a lot of equity growth, which can not be recovered.

There is another problem with waiting. In five years, prices will be higher, so buying the same property will cost you more. See the table below.

So, waiting 5 years costs you:

• Lost equity: $187,731
• Increased down payment due to appreciation: $56,319
• Higher debt service due to higher prices: $251/Mo

What would happen if you purchased today and refinanced in 5 years?

Also, purchasing today does not necessarily mean negative cash flow. We are still finding properties with first-year ROI between 0% and 1% by putting 30-35% down and or buying down rates. Buying today gets you on the rent and appreciation escalator.

So, I see no advantage to waiting.

Summary

Nick, consider the property's long-term outlook, the type of tenants it attracts, its rent growth rate, etc. Then, decide whether the property can support the goal of financial freedom you desire or if it's time to take action.

Hello @Tanuj Yadav,

There is always the dialogue concerning whether investing locally or remotely is the better option. I believe the answer is not based on rhetoric, it is based on your goals.

If your only goal is to own an investment property, then invest locally. If your goal is financial freedom, then there are stringent requirements for where you invest. For the rest of this post, I will assume your goal is financial freedom.

There are two location requirements for financial freedom.

• Rents outpace inflation.
• The rent continues for the rest of your life.

Here is the problem with investing where rents do not outpace inflation.

I was evaluating a location and determined the average rent growth rate was about 2%. If I assume that the (actual) inflation rate is 5% and the initial rent is $1,000/Mo, what is the inflation-adjusted adjusted rent (or buying power) in 5, 7, and 10 years?

Here is the formula for calculating the future value of the rent.

Inflation-adjusted rent at:

• 5 years: $1,000 x (1 + 2%)^5 / (1 + 5%)^5 ≈ $865
• 7 years: $1,000 x (1 + 2%)^7 / (1 + 5%)^7 ≈ $816
• 10 years: $1,000 x (1 + 2%)^10 / (1 + 5%)^10 ≈ $748

Because inflation is outpacing the rent, every year your buying power declines. In this example, in 7 years, $1,149 ($1,000 increased at 2%/Yr) will only buy as much as $816 will today.

The ugly truth is that no matter how many properties you own in a location where rents do not outpace inflation, you will sooner or later be looking for 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

There are more criteria. If you are interested, let me know and I will post them.

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 490+ 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.

Tanuj, 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 @Nick Virovec,

In my opinion, none of the online sites (Rentometer, Zillow, Redfin, etc.) are accurate enough for evaluating specific properties. In this post, I will explain why and how to obtain the required accuracy.

How Online Sites Estimate Rent

Online sites calculate the average rent per square foot for an area. When you enter the address of a property, the site estimates the rent by multiplying the average area $/SF by the subject property's square footage. For example, if the average $/SF for 3-bedroom homes in an area is $1.10/SF, and the subject property has an area of 1,500 SF, then the estimated rent would be:

• 1,500 SF x $1.10/SF = $1,650/Mo

The problem is these sites do not consider a property's specifics.

Property Specific Examples

Proximity to nuisances - Property A, located next to Interstate 15, will have a lower rental price than Property B, even if the physical attributes of the properties are the same. This is because of the noise generated by I15.

Property condition - Would you expect this property to rent for the same amount as a similar property in good condition?

Age - These two properties have similar sizes and the same number of beds and baths. Would you expect them to have the same rent?

I could continue, but I believe you see some problems with online sites for estimating rent.

Rentometer vs. Actual

I decided to use Rentometer for the following comparisons. Any online site could be used, and the results would be about the same.

I looked up four recently rented properties on the MLS and compared the median Rentometer prediction to the actual rent. As you can see below, the information provided by Rentometer is nowhere near the actual rent.

Next, I used Rentometer to estimate the rent for another property. Rentometer provided a rent range of $1,852 to $2,258, a range of $406.

I then compared the return for this property based on the low, median, and high Rentometer projections. See below.

So, depending on which Rentometer rent estimate you choose, you will either lose $94/Mo or make $312/Mo. Would you be willing to purchase a property with this quality of information? I would not.

What is the best source of property-specific rental rates? Property managers.

How Property Managers Estimate Rent

Property managers largely base rent estimates on current competition. For example, suppose recently rented similar properties went for $2,300/Mo. But, when your property goes on the market, similar properties are available for $1,950/Mo to $2,000/Mo. It's likely your property will rent for around $2,000/Mo, not $2,300/Mo. Rental history is not that relevant when it comes to actual rental rates. Online tools only use past rental data for making rental estimates.

Important considerations:

• The current competition is what determines the monthly rent, not prior rentals.
• Your competition is not necessarily the property down the street. It could also be a property across town, as illustrated below. Prospective tenants who work in the "main job area" consider all properties in acceptable areas with similar commute times.

• Property specifics matter. For example, what if you paint the interior dark green, which is unacceptable to the tenant segment normally attracted to your property? You could only rent it if you decreased it well below market.

Summary

No online site I have seen provides property-specific rental rates accurate enough for making investment decisions. The most dependable source for accurate rent information is an experienced property manager.

We have delivered 490+ properties and never selected one without first obtaining the rent estimate from a reliable property manager.

Nick, 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 @Julius Clark,

I completely agree with you. Too many people want to “go it alone.” Why? I have no idea.

People think they know how to invest because they read many books, attended seminars, and listened to podcasts. The problem is that 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.

Besides, 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.

Your investment is as good as your team.