All Forum Posts by: Eric Fernwood

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.

Hello @Benjamin Sulka,

Just because you can buy a property below market does not necessarily make it a good investment property. Here is the problem.

You buy a rental property to have a reliable rental income. However, the only way to have a reliable income is if a reliable tenant continuously occupies your property. 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. And, over the years that you will own the property, you will need multiple reliable tenants.

To maximize the odds of always having a reliable tenant, buy a property that attracts a tenant demographic with a high concentration of reliable tenants.

You can identify a tenant segment with a high concentration of reliable tenants through property manager interviews. If you or anyone would like sample interview questions, let me know.

Once you identify your target segment, determine what and where they rent today. You can create a property profile based on where and what they rent today. A property profile contains at least four elements:

• 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?

Let the target tenant segment you want to occupy your rental property make all the property decisions. For example, the map below shows where most of our client's properties are located.

I did not select the property type, rent range, configuration, or location. I determined where the segment we targeted was willing and able to rent; the tenant segment effectively made all decisions.

This is how a retail store chooses a location. A retail store identifies its target customer demographic and chooses a location based on where that demographic lives. They then stock the store with what that demographic is willing and able to buy. Companies that do not listen to their demographic lose a lot of money.

If you feel pressed to consider the lake house, I would ask multiple property managers questions like the following:

• Would you buy this property for use as a rental?
• What is the average length of time tenants would stay in this property?
• How long will it take to rent this property?
• What changes are necessary to maximize income while minimizing renovation costs?
• What is a reasonable rental rate for the property?
• Do you have experience managing this type of property?
• Will you be able to rent the property throughout the year, or will it be more seasonal?

After you ask the same questions of multiple property managers, you will have a good idea of the rent, time to rent, and length of tenant stay. Now is the time to use a spreadsheet to determine if the property makes financial sense.

Benjamin, I hope this helps. 

...Eric

Hello @Jennifer Cramer,

You need to look at the city level, not the state level. Which city is best depends on your investment goal, which I will assume to be lifelong 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 Causes Rents to Increase?

In real estate, prices are determined by the imbalance between the number of buyers vs. sellers. When there are more buyers than sellers, prices rise until the number of buyers and sellers is balanced. On the other hand, when there are more sellers, prices decline until the number of buyers and sellers is balanced.

Rental rates follow prices. When home prices are high, fewer people can afford to buy, so they are forced to rent. This increases the demand for rental properties, resulting in higher rents. When prices are low, more people can afford to buy, which decreases the number of renters, leading to a decrease in rent.

What causes rents to increase? When there are more buyers than sellers. Increasing population increases the demand for housing, which causes rising prices and rents. If the population growth rate is significant and sustained, rent increases will outpace inflation. So, we have the first city criteria.

✅ Significant and sustained population growth. See this page on Wikipedia for population growth data.

Income Persistence

Income persistence depends on your tenants remaining employed at similar wages for as long as you live. However, all private sector jobs are short-lived. The average lifespan of a company is about 10 years. Even S&P 500 companies only have an average lifespan of about 18 years. Every job your tenants have will vanish in the foreseeable future. So, whether your income persists is dependent on replacement jobs. What conditions are necessary to attract new companies to relocate to a city?

✅ Economic stability. This requires a metro population >1M. Smaller cities tend to be dependent on a single company or market sector. Wikipedia 

✅ Low operating costs: The three most apparent costs for investors are income taxes, property taxes, and insurance. Here are the sources for comparison: Tax Foundation, Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage 

✅ Low crime rate: Companies depend on attracting talented workers. Talented workers will not move to a high-crime city. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities. 

✅ Low risk of a natural disaster: When a natural disaster hits a city, it destroys jobs, businesses, and homes. This forces people to move to a different city to find work and start over. So, even if your property is rebuilt, there might not be anyone to rent it. Meanwhile, you still have to pay your mortgage, taxes, insurance, and maintenance costs. To avoid this, choose a location with low-cost homeowners' insurance, which indicates a lower risk of natural disasters. Insurance - ValuePenguin 

✅ Pro-business environment: Google search

Elimination, Not Selection

We now have a well-defined set of criteria that a city must meet to make financial freedom possible. The next question is how to use these criteria. Fortunately, there is an easy method based on elimination, not selection.

The process is illustrated below. Start with all cities that match one of the criteria. For example, cities with a metro population >1M. Next, apply each additional criterion to the cities remaining on the list, removing cities that don't meet all criteria.

I recommend applying the elimination criteria in the following order.

✅ Cities with a metro population >1M: Wikipedia

✅ Significant and sustained population growth: Wikipedia

✅ Low crime rate: Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.

✅ Low risk of a natural disaster: Insurance - ValuePenguin

✅ Low operating costs: Tax Foundation, Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage

✅ Pro-business environment: Google search

Investment Team

Why is it essential to work with a local investment team? 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.

[Let me know if you or anyone else would like to see a process for locating and qualifying a local investment team.]

Jennifer, I hope this helps. Reach out if I can help, or you can check out my weekly blog at ericfernwood.substack.com for more investing insights, methodology, and processes.

...Eric

Hello @Josh Haney,

Buying through a turnkey does not reduce the time or effort required for due diligence. Turnkey is simply an alternative to direct purchase.

The first step is to define your goal. For many, the goal is achieving financial freedom. However, financial freedom goes beyond simply replacing your current income; it entails maintaining your current lifestyle indefinitely. To have lifelong financial freedom, you need a passive income that meets two requirements:

• Rent growth must outpace inflation: If rents in the city where you invest do not outpace inflation, no matter how many properties you own, the erosion of buying power due to inflation will soon be forced to get a job to supplement your decreasing rental income.
• Persistent: Your rental income must last a long time, ensuring you do not outlive your income.

Location Selection

Below are the requirements a city must meet for financial freedom.

✅ Significant and sustained population growth. Prices and rents only rise rapidly if there is sustained and significant population growth. Never buy in a location with declining or static population growth.

✅ Economic stability. This requires a metro population >1M. Smaller cities tend to be dependent on a single company or market sector.

People are drawn to cities for job opportunities; existing businesses must grow and new ones must move in, creating more employment. What are the characteristics that make a city attractive to businesses?

✅ Low operating costs

✅ Low crime rate

✅ Low risk of a natural disaster

✅ Pro-business environment

✅ No rent control of any kind. Rent control is a strong indicator of an intrusive government

If anyone wants the information sources for each of the above, DM me.

Tenant Segment Selection

The only way to have a reliable income is if a reliable tenant continuously occupies your property. A reliable tenant stays for many years, always pays the rent on schedule, and takes care of the property. Reliable tenants are the exception, not the norm. And, over the years you will hold the property, you will need multiple reliable tenants.

The best way to consistently have a reliable tenant is to buy a property that attracts a tenant segment with a high concentration of reliable people. You can identify this segment through property manager interviews. If anyone would like sample interview questions, DM me.

Once you identify a target segment, determine what and where they are renting today. Based on this, you can create what I call a property profile. A property profile has at least four elements:

• Location - The locations where a significant percentage of the target segment is 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?

Once you have a property profile, you know exactly what to purchase to attract your target tenant segment. If you buy a property that does not match all elements of the segment’s property profile, you will exclude this segment from renting your property, which will likely result in shorter tenant stays, lower profits, or worse.

You are now at the point where you need to decide how you want to purchase the property.

How to Determine the Best Purchase Method for You

Based on your due diligence, you know where and what to buy to achieve financial freedom. Now the question is, which option is better for you: turnkey or direct purchase?

The diagram below illustrates the basic process for selecting between turkey or direct purchase.

Turnkey Due Diligence Questions

The following are considerations/questions to ask the turnkey provider:

• “Can I have an independent inspector evaluate the property?” - Only rely on evaluations provided by an independent licensed property inspector; disregard opinions or statements by the turnkey.
• Do not be fooled by good looks. Turnkeys focus on cosmetic improvements, as these make a property more attractive to buyers. However, cosmetic improvements are typically much less expensive than repairs or replacements for systems such as plumbing, electrical, sewer, or foundation.
• Read the purchase contract. Only what is in the written contract matters; nothing the salespeople say matters.
• The turnkey must provide all disclosures from the prior owner of the property. If they are unwilling to do this, they could be hiding serious (expensive) problems.
• The turnkey must provide the results of any code inspections. Are there any code violations?
• Buying through a turnkey always costs more than a direct purchase. I call this additional cost a convenience fee. See the diagram below. Is the convenience of buying turnkey worth the additional cost?

Turnkeys generate significant ongoing income through property management fees. A property manager is not just a "rent collector"; they are the difference between profit and loss. One turnkey property management group I was researching had over 1,000 reviews and a combined score of just over 1 star. A poor property manager will result in move vacancies, higher maintenance costs, and shorter tenant stays. Below are the questions you should ask.

• “What are your property management fees? Are there any additional fees?”
• “Can I choose the property manager I want, or must I use yours?” If you are required to use their property manager, I would not purchase through them.
• “What is your tenant selection process? “Selecting a reliable tenant is the most important job of a property manager. They should have a clear process and criteria for selecting tenants.
• “What is the cost to find and place a new tenant?” It could be $500, or it could be 1 month’s rent. Whatever it is you need to know.
• “What is the average length of stay for similar properties?” Frequently, the average length of tenant stay is just one year. A follow-up question is, “What is the typical time to rent?” If the average stay is one year and the time to get a paying tenant into the property is 3 months, you lose 20% (3/15) of your annual rent to vacancy. So, if the property rents for $800/Mo, and the vacancy rate is 20%, you are only receiving $640/Mo.
• “Is there a tenant already in the property?” Get a copy of the actual lease and read it.
• “Do you have an in-house repair department?” In many cases, property managers make more money from maintenance than from management fees. This is an inherent conflict of interest. I would not work with anyone who has a vested interest in raising my maintenance costs.

If the turnkey does not provide/allow for all of the above, either find a different turnkey or make a direct purchase.

Direct Purchase

If you decide that a turnkey purchase is not the best option for you, find an experienced local investment team.  An experienced local investment team can provide you with all the in-depth local information and resources you need. If you or anyone would like to know how to select an investment team, DM me.

How much time will it require if you work with an experienced investment team? It depends on the team. I have asked many of our 180+ clients about the total time they spent, from the first Zoom meeting through receiving their first rent. The reported times range between 8 and 12 hours, which includes 3 hours of training. So, if you work through an experienced investment team, your time investment is minimal.

Josh, I hope this helps. DM or post your questions.

Hello @Suneet Dewan,

To keep this post at a (somewhat) reasonable length, I will be brief on each topic. Post if you or anyone has questions.

Location Selection

The most important investment decision you will make is the location. The location determines all the long-term income characteristics, which is critical because financial freedom is a long-term proposition.

Financial freedom goes beyond merely replacing your current income; it entails maintaining your current lifestyle for life. To achieve lifelong financial freedom, you need a passive income that fulfills two requirements:

• Rents must keep pace with or exceed inflation: Inflation consistently erodes the purchasing power of a fixed amount of money.
• Persistent: Your rental income must last a long time, ensuring that you do not outlive your income.

What are the consequences of buying in a city where rental rates do not outpace inflation? An example will illustrate the consequence.

Suppose you purchase a property with an initial cash flow of $1,000 per month. The rent growth rate is 2%, and the inflation rate is 5%. In five and ten years, what will be the buying power adjusted for inflation? I will use the following formula to calculate the future rent at 5 and 10 years.

Calculating:

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

So, in five years, $1,000 will be worth the same as $865 today. In ten years, it will be worth the same as $748 today.

The takeaway is that no matter how many properties you own in a city where rents do not outpace inflation, sooner or later you will be forced to get a job to supplement your declining rental income buying power.

How do you select the city?

An Elimination Process

You cannot evaluate every city in the US practically. So, I recommend using an elimination process. Start with cities with a sufficient population, and evaluate each city against additional criteria. If a city fails to meet any of the criteria, remove it from the list.

✅ Sufficient population: cities with a metro population greater than 1M. Small towns may rely too much on a single business or market segment. Wikipedia

✅ Significant and sustained population growth: Never invest in any location with a static or declining population. Wikipedia

✅ Low crime rate: Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.

✅ Low operating costs: Good indicators of a pro-business climate include:

• Property taxes: State Property Tax Rates - Rocket Mortgage.
• State average insurance cost: Insurance - ValuePenguin
• State income taxes: Tax Foundation

✅ Low risk of a natural disaster: The cost of homeowners insurance is the best indicator of the likelihood of a natural disaster in an area. Choose a location with low-cost homeowners insurance because they have the lowest risk of natural: Insurance - ValuePenguin

Reliable Income

The goal of real estate investing is a reliable income. This can only happen if the property is consistently occupied by a reliable tenant. A reliable tenant is someone who:

• Has stable employment in a market segment that is stable and likely to improve over time
• Pays all the rent on schedule
• Takes care of the property
• Does not cause problems with neighbors
• Does not engage in illegal activities while on the property
• Stays for many years

Over the years you will own the property, you will need multiple reliable tenants. To increase your chances of always having a reliable tenant, purchase a property that attracts a tenant segment with a high concentration of reliable tenants.

How do you find a tenant segment with a high concentration of reliable tenants? By interviewing multiple property managers. If anyone would like sample interview questions, DM me.

How to Attract a Specific Tenant Segment

All people who rent are not homogeneous. There are many segments and each segment has different behavioral characteristics and different housing requirements. People will only rent a property that meets all their housing requirements. Therefore, if you purchase a property that matches a specific segment's housing requirements, you can expect most applicants to come from that segment.

How do you determine the housing requirements of a segment?

When you identify a tenant segment with a high concentration of reliable tenants, you also learn what and where they are currently renting. Based on the properties they are currently renting, you can define the four components of a property profile.

• Location - The locations where significant percentages of the target segment are renting today.
• Property type - What type(s) 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?

Once you have a property profile, you can give it to any realtor, and they can find conforming properties. This process eliminates all the guesswork.

In summary, the process for finding properties that will provide a reliable income is as follows:

1. Identify a tenant segment with a high concentration of reliable tenants through property manager interviews
2. Create a property profile based on where and what the target segment is currently renting.
3. Provide the property profile to a realtor who will find conforming properties
4. Evaluate each property based on the additional considerations

Suneet, I hope this helps. Reach out if you have questions.

…Eric

Hello @Sabah Shah,

A little background: In 2004, I lived in NYC and decided to change professions and create a real estate investor services business based on data science and processes. I knew New Jersey and New York were not good investment locations due to high direct and indirect operating costs and other factors.

I started by reading all the popular investment books and found that they primarily contained opinions from self-proclaimed experts rather than processes. As an engineer, I put little value in opinions.

I turned to commercial real estate practices. In particular, I focused on how companies choose locations for their retail stores and repurposed these methods to fit my requirements. I also changed my overall approach. Evaluating every city and selecting the best would be difficult and time-consuming. Instead, I decided to use a process of elimination based on the criteria necessary to achieve financial freedom.

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 comes every month, even during bad economic times.

Rents outpacing inflation and income persistence depend on the city where you invest. Income dependability is determined by the tenants who occupy your property.

Rents Must Outpace Inflation

Prices and rents are driven by the imbalance between buyers and sellers. Prices go up if more people want to buy than sell. When there are more sellers than buyers, prices go down.

Rental rates follow prices. When prices are high, demand for rental properties increases because fewer people can afford to buy, so rents rise. When prices are low, more people can buy, so demand for rental properties decreases, and rents fall.

The imbalance between buyers and sellers is caused by population change. Property prices will be low in cities with stagnant or declining populations. Low prices indicate limited demand over a prolonged period of time. Rents also follow this trend, so they will increase slowly. On the other hand, higher prices indicate a prolonged period of more buyers than sellers. If the population increases rapidly enough, prices and rents will outpace inflation. So, we have one of the city selection criteria.

✅ Significant and sustained population growth. Wikipedia

Income Persistence

Income persistence depends on your tenants remaining employed at similar wages for as long as you own the property. However, all non-government jobs are short-lived.

The average lifespan of a company is about 10 years. Even S&P 500 companies only have an average lifespan of about 18 years. Every non-government job your tenants have today will vanish in the foreseeable future. Income persistence is more about about future jobs than current jobs.

The only way for there to be future replacement jobs is if new companies are moving into the city and creating replacement jobs. What conditions are necessary to attract new companies? Based on my commercial real estate research:

✅ Economic stability. This requires a metro population >1M. Smaller cities tend to be dependent on a single company or market sector. Wikipedia

✅ Low operating costs: Property taxes and insurance are investors' most significant recurring costs. Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage. See the overhead comparison below.

✅ Low crime rate: Companies do not set up new locations in cities with high crime rates. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.

✅ Low risk of a natural disaster. The best indicator I found is the relative cost of homeowner's insurance. Where insurance costs are low, there is a reduced probability of a natural disaster. Do not invest in cities with high homeowner insurance rates. Insurance - ValuePenguin

✅ Pro-business environment. Google search.

✅ No rent control of any kind. Rent control is a strong indicator of an intrusive government. Google search.

I listed the criteria below in the order I would use them.

• Population >1M: Wikipedia
• Significant and sustained population growth. Wikipedia
• Low crime rate: Neighborhood Scouts list the 100 most dangerous US cities.
• Low risk of a natural disaster: Insurance - ValuePenguin
• Low operating costs: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.
• No rent control of any kind. Google search.
• Pro-business environment. Google search.

Overhead Costs

Overhead costs are available at the state level, which is a good first pass. Getting to the city/property level is more complex, and I will not cover that in this post. To demonstrate the process, I will compare the overhead costs of Texas, Florida, Arkansas, and Nevada. The sources for this information are Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

The main recurring costs for investors are insurance and property taxes. I won't include state income taxes in this comparison because they only apply to the rental income after expenses, which will be relatively small.

I will calculate the state's average annual overhead cost for a $400,000 investment property to put these overhead costs into perspective.

• Arkansas: $1,531 + $400,000 x 0.62% ≈ $4,011
• Texas: $2,536 + $400,000 x 1.80% ≈ $9,736
• Florida: $2,207 + $400,000 x 0.89% ≈ $5,767
• Nevada: $1,144 + $400,000 x 0.60% ≈ $3,544

Every dollar you lose to overhead is less for you to live on.

What Property Type?

The type that will bring you dependable income, good times or bad.

The only way to have a dependable income is if your property is continuously occupied by a dependable tenant. A dependable tenant stays many years, pays the rent on schedule, and cares for the property. Dependable tenants are the exception, not the norm. Also, you will need multiple dependable tenants over the years you will own the property.

The way to increase the odds of always having a dependable tenant is to buy properties that attract a tenant segment with a high concentration of dependable people. Once you identify this segment, determine what and where they rent today and buy similar properties. This method is similar to how a retail store chooses its location. I found my "customer," the segment with a high concentration of dependable tenants, and identified the segment's housing requirements and bought similar properties.

Each tenant segment has specific housing requirements and is unlikely to rent any property that does not match all their requirements. Based on what they currently rent, I created a property profile. Below are the basic components and descriptions of each.

• 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?

Once you have a property profile, you can give it to any realtor, and they can find conforming properties.

How to analyze a property is another topic that I can explain if anyone is interested.

Recapping

City selection: Choosing an investment city based on analytics is not practical. There are too many cities. A better approach is to define your financial goals and determine the criteria necessary to meet these goals. Start with a list of cities that match one of the criteria and eliminate cities that fail any additional criteria.

Property selection: The goal is not to buy a specific type of property; the goal is financial freedom, which requires a dependable tenant. Find a tenant segment with a high concentration of dependable people and buy properties similar to what and where they rent today.

Hello Kiersten,

The goal of real estate investing is not to own a specific property type. The goal is to have a property that consistently generates a reliable income. This can only happen if the property is consistently occupied by a reliable tenant. A reliable tenant is someone who:

• Has stable employment in a market segment that is stable and likely to improve over time
• Pays all the rent on schedule
• Takes care of the property
• Does not cause problems with neighbors
• Does not engage in illegal activities while on the property
• Stays for many years

And, over the years you will own the property, you will need multiple reliable tenants. To increase your chances of always having a reliable tenant, purchase a property that attracts a tenant segment with a high concentration of reliable tenants.

How do you find a tenant segment with a high concentration of reliable tenants? By interviewing multiple property managers. If you or anyone would like sample interview questions, DM me.

Attracting a Specific Tenant Segment

All people who rent are not homogeneous. There are many segments and each segment has different behavioral characteristics and different housing requirements. People will only rent a property that meets all their housing requirements. Therefore, if you purchase a property that matches a specific segment's housing requirements, you can expect most applicants to come from that segment.

How do you determine the housing requirements of a segment?

When you identified a tenant segment with a high concentration of reliable tenants, you also learned what and where they are currently renting. You can then define the four components of a property profile.

• Location - The locations where significant percentages of the target segment are renting today.
• Property type - What are the type(s) 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?

Once you have a property profile, you can give it to any realtor and they can find conforming properties. However, there are additional considerations for any property under consideration:

• Time to rent
• Renovation Cost & Risk
• Initial ROI and cash flow
• Purchase Price
• Maintenance Cost
• Acceptable area rental restrictions

Summary

If you follow the process of:

1. Identify a tenant segment with a high concentration of reliable tenants through property manager interviews
2. Create a property profile based on where and what the target segment is currently renting.
3. Provide the property profile to a realtor who will find conforming properties
4. Evaluate each property based on the additional considerations

You eliminate all guessing and your odds of buying a performing property are high.

Kiersten, I hope this helps.

…Eric

It’s October 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, analytics, and investing in Las Vegas in particular.

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.
• 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.

Regarding the overall Las Vegas real estate market inventory:

The chart below, provided by the MLS, includes all property types and price ranges. As of today, the inventory is at 2.5 months. In Las Vegas, a balanced market is characterized by six months of inventory, where the number of sellers is roughly equal to the number of buyers. We are in a seller's market.

Rental Market Trends

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

Rentals - Median $/SF by Month

YoY is up 2.6%, though rents dropped slightly in September compared to August, conforming to pre-Covid seasonal trends.

Rentals - Availability by Month

The number of homes for rent continued the downward trend.

Rentals - Median Time to Rent

Median time to rent maintained at ~20 days, indicating steady demand.

Rentals - Months of Supply

Only about 1 month of supply for our target rental property profile. Demand is greater than supply.

We saw a similar tight supply in sales as well. Now only about 1 month of supply. This will continue to pressure up the prices.

Sales - Months of Supply

Sales - Median $/SF by Month

Despite increasing interest rates, $/SF is climbing up. YoY is now up 2%. Compared to January 2023, September prices are up 9.5%.

Why invest in Las Vegas?

In short, to achieve financial freedom. However, financial freedom is not simply replacing your current income; it requires maintaining your current lifestyle for life. To attain lifelong financial freedom, you need a city where rents and appreciation outpace inflation.

What causes rents (and prices) to increase?

Supply & Demand

Unlike financial markets, real estate prices and rents are driven by supply and demand. In this post, I will briefly discuss the unique supply and demand situation in Las Vegas.

Supply

Las Vegas is unique in that 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

The driver for housing demand is population growth.

The average Las Vegas annual population growth is between 2% and 3%. What is bringing people to Las Vegas are jobs. At the spring job fair, there were over 20,000 open positions. The annual average wage was $65,000, which is our target tenant segment.

Las Vegas has $30 billion in new developments either under construction or planned. This will create thousands of additional jobs, bringing more people to the city and increasing housing demand.

In Conclusion

With a fixed supply of properties in the range of $320,000 to $475,000, a rapidly growing population, and a growing number of jobs, it is almost certain that rents and prices will increase in the foreseeable future.

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

Hello @Carly Peterman,

Flipping can be a great way to make or lose money. It all depends on selling the renovated property at the expected price, within the expected time frame, completing the renovation on time and on budget, and buying the property at the right price.

In this post, I will cover some considerations for profitable flipping and demonstrate how to calculate the maximum price you can pay.

Profit/Loss Considerations

I often come across posts about how profitable flipping can be. However, I personally see flipping success as being similar to gambling in Las Vegas. You rarely hear about someone losing everything in Las Vegas. Instead, you only hear about the people who made money. I believe the same principle applies to flipping. Individuals without experience are almost certain to lose money.

Some important considerations.

• Renovation cost: You want to spend the least amount of money necessary to bring the property to the condition of similar properties that recently sold. For example, if recent sales had vinyl flooring in the kitchen, that is what you should install. Installing tile may make the property sell faster, but it is unlikely to increase the sale price significantly. If similar properties have tile and you install vinyl, the property may take longer to sell and could sell for less than those with tile. Therefore, do your research and be aware of what is considered market-ready for the price range and location you are considering. The basic process for determining what to renovate is illustrated below.

• Realistic sale price: People often overestimate the value of their property. The value of a property is determined by what someone is willing to pay for it, which is based on the competition (or lack of it). Don't be overly optimistic; be realistic. An accurate sale price is critical.
• Getting work done: We've renovated more than 500 properties, and finding reliable tradespeople has been a struggle. Initially, we used licensed contractors, but they were expensive and the quality of work was often subpar. On top of that, they rarely adhered to the timeline agreed upon in the contract. Fortunately, we found a handyman of great integrity and helped him build his own handyman business. We still use licensed contractors when necessary, but the handyman's team does most of the renovation work for about a third of the cost, and with excellent quality.
• Project manager: We have a dedicated team member who manages all renovations. She visits sites every other day and records a progress video for the client. She has had years of training and verifies that the work is done correctly. Without an experienced manager, the project would cost more, take longer, and the quality would be lower.
• Time frames: Every day you keep the property costs money. You need to estimate how long each step of the process will take, including the time it takes to sell. Be realistic and expect some delays.
• Renovation risk: Renovation items such as foundation issues, mold, water damage, termites, etc., can make it difficult to determine the actual cost until you own the property and address the problem. It is important to be mindful of renovation risks.

Maximum You Can Pay

Below is the basic formula for determining the maximum price you can pay:

• Maximum Purchase Price < Sale Price - Closing Cost - Renovation Cost - Project Management Cost - Hold Period x Monthly Hold Cost - Cost to Sell - Profit - Pad

Below is an example showing how you would determine the maximum price you can pay for a property.

Cost/price components :

• Sales price and time: You’ve determined you can sell the property when it is in market-ready condition for $200,000. Also, it will take 3 months to go under contract and it will take one month to close. So, the hold period for selling the property is 4 months. I will assume that the cost of sales is 6%. So, 6% x $200,000 = $12,000.
• Renovation cost and time: You’ve done the necessary research and are confident that the renovation will cost less than $50,000 and will require less than 3 months.
• Project Management Cost: You found a person who will manage the renovation, schedule all work, go onsite every other day, and send progress videos for $5,000.
• Profit: Profit is also an expense. I will assume a profit goal of 10%. So, 10% x $200,000 = $20,000.
• Cost pad: There are always surprises, so you need to include a pad. The amount of the pad depends on the odds of significant additional costs. For example, if the renovation consists of well-defined costs like carpet, paint, appliances, and light fixtures, the pad can be small. If the renovation includes foundation issues, mold, water damage, etc., you need a larger pad. I will assume a $5,000 pad.
• Time pad: In the real world, little goes according to schedule. I will add a 1-month pad to cover unexpected delays.

Next, collect the costs and hold times.

If the probable sale price after renovation is $200,000 and the costs, not including carrying costs, are $94,000, I will assume that the maximum purchase price must be less than $100,000 for estimating carrying costs.

Carrying Cost

Many flip properties are not financeable so I will assume the property was purchased with cash so there is no monthly debt service. And, I will assume the closing costs on a cash purchase were $2,000.

We can now estimate the monthly hold cost:

• Taxes: $1,400/Yr or $117/Mo
• Insurance: $800/Yr or $67/Mo.
• Utilities: $200/Mo
• HOA: $25/Mo
• Total: $409/Mo.

I estimated 8 months total hold time so my carrying cost is 8 x $409 ≈ $3,272.

Updating the cost list:

Based on our assumptions, we now know the maximum price we can pay for the property: $200,000 - $97,272 = $102,728. If you pay any more, you are likely to lose money.

Summary

Take the time to thoroughly understand the property, the renovation required, and the resources you'll need before making an offer. Do not assume that bidding low guarantees profitability. Some properties may cost more to renovate than their post-renovation market value.

When evaluating potential investment properties, it is crucial to have an accurate estimate of the rent that the property is likely to generate. Rentometer and other online sites (Zillow, Redfin, etc.) are not accurate enough for evaluating specific properties. In this post, I will explain why and show you how to obtain the accuracy you require.

How Online Sites Estimate Rent

Online sites like Rentometer and Zillow calculate the average rent per square foot ($/SF) for a specific area based on the number of bedrooms. When you enter the address of a property and the number of bedrooms and baths, Rentometer calculates the rent by multiplying the average area $/SF by the square footage of the subject property.

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 that Rentometer, et. al., does not take into account the specifics of a property.

Property Specific Examples

Proximity to nuisances - Property A, which is located next to Interstate 15, will have a lower rental price compared to 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 they have the same rent?

I could continue but I believe you see some of the problems with a site like Rentometer for estimating rent.

Rentometer vs. Actual

As an example of the problem of Rentometer data, I looked up four recently rented properties on the MLS and compared the Rentometer prediction to the actual rental rate. As you can see below, the information provided by Rentometer is nowhere near the actual rent.

To show what a difference the broad range of Rentometer predictions has on return calculations, I used Rentometer to estimate the rent for another property. Rentometer provided a rent range of $1,852 to $2,258, which is a very wide range.

Below is the cash flow for this property based on the low, median, and high Rentometer rent projections.

Depending on the Rentometer rent estimate you choose, you will either incur a loss of $94 per month or make a profit of $312 per month. Would you be willing to purchase a property with this sort of information? I would not.

What is the most effective method to determine the rental rate for a property? Experienced property managers.

How Property Managers Estimate Rent

Property managers do not solely rely on recent similar rentals when estimating rent. Instead, they base rent estimates on the current competition. For example, if similar properties were leased for $2,300/Mo, but there are multiple comparable properties currently available for rent between $1,950/Mo and $2,000/Mo, then it is likely that the property will rent for around $2,000/Mo. Past data is not that relevant when it comes to rental rates. Tools like Rentometer only use past data for making rental estimates.

Important rent considerations:

• The current competition compared to the condition of your property 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 located 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 decided to paint the interior dark green, which is largely unacceptable to the tenant segment normally attracted to your property? You could probably only rent it if you decreased the rent sufficiently below market.

Rentometer, like all online sites, provides only an estimated rent for an "average" property. However, every property is unique, and the actual rent for a specific property depends on various subjective factors, which online rent estimate sites cannot consider.

Summary

Rentometer does not provide the level of rent accuracy required for making investment decisions. The most dependable source for accurate rent information is an experienced property manager. Despite having delivered over 480 investment properties, we always seek the opinion of a property manager for each property before considering it.