All Forum Posts by: Eric Fernwood

Hello @Tim Alhanati,

Renting to a relative is not something to be taken lightly. Below are some considerations and recommendations.

• Only rent to a relative if that individual has consistently lived up to their commitments. If you have any doubts, I would not recommend renting to them.
• Sign a lease. It is important to have a comprehensive lease agreement, not the ones found in stationery stores. Below are a few of the items that should be in the lease.
  • What happens if the relative does not remain in the property for the full lease term?
  • What happens if the relative does not pay the rent on schedule?
  • How are repairs to be handled? Who pays for repairs?
  • What happens if they decide to move out?
  • Require that they have renter’s insurance.
  • No pets unless you agree in writing in advance
• Use a tenant screening service to obtain a profile for your sister.
• Collect a security deposit that is reasonable and customary in that location.
• Buy a profitable long-term rental property, not necessarily a property that your sister likes. Chances are, you will own the property much longer than your sister lives in it.

Hello @Meir Preis ,

[Good comments @Arn Cenedella]

There are cash flowing properties, but probably not at +7% interest rate with 25% down. In this post I will explain how we deliver cash flowing properties to our clients.

Our investor services business is located in Las Vegas. Therefore, the examples and comments provided in this document are specific to Las Vegas. However, they are likely to be applicable in other locations as well.

Before I talk about specifics, I want to explain the importance of cash flow.

All return calculations predict is how a property is likely to perform under ideal conditions on day one. Return calculations tell you nothing about the future. Our clients plan to hold their properties for the rest of their lives and then pass them to their children. So, what happens the first month or year is not as important as the long term performance. When it comes to long term performance, everything depends on rents keeping pace with inflation. If rents do not keep pace with inflation, your time off the daily worker treadmill will be limited.

For example, suppose every week you buy the same basket of groceries and today’s cost is $100. If inflation is 5%, below is a table showing how much less groceries you can afford in the future.

In 10 years, $100 will only buy 63% of the goods that you could buy today for $100. in 15 years, 49%, etc. You will only have financial security if rents keep pace with inflation. You need an longer focs than just day one cash flow.

All the above said, how are we consistently delivering multiple properties each month to clients with positive cash flow?

The Right Property

High-performing properties that will cash flow (with reasonable down payments and interest rate buy-downs) are available, but they are difficult to find. In Las Vegas, less than 0.4% of all available properties are even worth considering. What makes it even more difficult is that good properties go under contract in about 2 days. This means that we must evaluate a large number of properties to find a very small set of potential investment properties and make an offer within one or two days after the property comes on the market.

The only way we can consistently get some properties under contract include:

• We use data mining software to quickly find 10 to 20 potential properties from the thousands available in just a few minutes.
• We have a team of people who evaluate each property. If any team member does not agree, the property is eliminated.

Using the above method, we are able to bid on the few good properties within 1 day of it coming on the market. This enables

Hello @Kris-Ann Lagumen,

Based on the provided information, I cannot make a recommendation. You will need background information on both potential tenants to make an informed decision. You can obtain such information by using one of the tenant profiling services. Additionally, contact the last two landlords for reference checks.

You mentioned that one potential tenant has a pet. We have strict guidelines regarding the breed and weight of dogs allowed. In Las Vegas, it is common for the security deposit to be increased by $300/pet, plus a $25 monthly fee per pet. We do not allow cats, as they may cause significant damage to the property. We also do not accept smokers, as the cost of removing smoke residue after move-out can be substantial.

The lowest cost option is to work with a property manager with a track record of selecting reliable tenants for the first year. If the tenant performed well, you can take over management starting the second year.

Note: There are very few property managers skilled in selecting reliable tenants, and in Las Vegas, I know of only two.

In the rest of this post, I will discuss how to attract reliable tenants. Note that the information I will provide may not be applicable to existing properties. Why? Because the tenant segment willing and able to rent a particular property is fixed, there is little you can do to change this.

Property and Tenant Segment Relationship

Each tenant segment has specific housing requirements, and will only rent a property that meets all of their requirements. Below is an example of a segment’s housing requirement:

• Rent range: $1,500/Mo. to $1,850/Mo.
• Type: Single-family
• Configuration: 3+ bedrooms, 2+ baths, 2+ car garage, 1,200 SF to 2,100 SF
• Location: North of the river and east of Line Rd.

Every property has specific characteristics, such as the one listed below:

• Rent: $1,700/Mo.
• Type: Single-family
• Configuration: 3 bedrooms, 2 baths, 2 car garage, 1,500 SF
• Location: North of the river and east of Line Rd.

The characteristics of this property match the housing requirements of the example segment.

Note: If you buy a property that does not meet ALL of a segment's housing requirements, you are intentionally excluding this segment from renting your property.

Choose the Segment First

A rental property is only as good as the tenant who occupies it. For a reliable passive income stream, the property must be continuously occupied by a reliable tenant. A reliable tenant is someone who stays for many years, takes care of the property, and always pays the rent on schedule.

Reliable tenants are the exception, not the norm. Also, you will probably hold this property for the rest of your life so you will need multiple reliable tenants over the years.

The only way I know to constantly have a reliable tenant is to purchase a property that attracts a tenant segment with a high concentration of reliable tenants. And, work with a property manager skilled at selecting reliable tenants.

How do you identify a segment with a high concentration of reliable tenants? Property manager interviews.

Once you identify a tenant segment you want to occupy your property, determine what and where they rent today. Then, buy similar properties.

Using this approach has many advantages:

• Works in any location.
• Focuses on your financial goals.
• Maximizes your rental income by ensuring that your property is likely to always be occupied by a reliable tenant.
• Removes opinions and bias from property selection.

Hello @Daniel Lang,

Considering all the locations in the US is impractical due to their sheer number. However, there is a simple process based on elimination. Start with an initial list of cities, and then apply elimination filters. Each filter eliminates cities with fatal flaws for a long-term passive income stream that keeps pace with inflation and that you will not outlive. By the end of the process, you will have a small set of candidate cities for further investigation.

Begin by selecting cities with a metropolitan area population of greater than 1 million. Small towns may rely too heavily on a single business or market segment. Here is the source: Wikipedia

Below are additional elimination filters. If a city fails one filter, eliminate it from further consideration.

• Both state and metro populations are increasing. Do not buy anywhere if the state or metro populations are static or decreasing. Wikipedia
• Low crime - High crime and long-term appreciation and rent growth are mutually exclusive. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.
• Low operating cost - High operating costs can turn what appears to be a profitable property into a money pit. The three most apparent costs are income taxes, property taxes, and insurance. Insurance - ValuePenguin, Metro Property Taxes - LendingTree, State Property Tax Rates - Rocket Mortgage
• Low disaster risk - Natural disasters, such as tornadoes, can destroy entire communities, including jobs, shopping, and housing. If a tenant loses their home, they will immediately move to a new location with jobs and a place to live, instead of waiting one year or more for the property to be rebuilt. Even if your insurance covers the cost of rebuilding, it may be difficult to find new tenants because people have already moved away. Communities hit by natural disasters may take years or never fully recover. Meanwhile, your expenses, such as mortgage, taxes, insurance, and maintenance, will continue. To avoid this, choose a location with low-cost homeowners' insurance, which indicates a lower risk of natural disasters. Insurance - ValuePenguin
• Rent control - Some states and metro areas have implemented various kinds of rent control. Rent control may prevent you from increasing the rent fast enough to keep pace with inflation. It may limit your property manager's ability to select the best tenant. It may make evictions of non-performing tenants difficult or impossible. Never invest in any location with rent control. Google search the city concerning rent control.
• Inflation compensating - Every time you go to the store, the same basket of goods costs more and more dollars. In order to have the additional dollars needed to pay inflated prices, rents must rise faster than inflation. Therefore, a critical location selection metric is that rents and prices are rising faster than inflation. Rents tend to lag behind prices, so you can use the appreciation rate if you do not have historical rental data. Zillow Research

At this point, you will have a small number of potential cities for further consideration.

Hope this helps.

Hello @Dalton Thornsberry,

Instead of pre-determining the type of property to buy, I recommend focusing on your financial goals. Let's assume that your goal is to have a reliable passive income. A reliable passive income must meet the following requirements:

• Inflation compensating: Rental income keeps pace with inflation, compensating for rising prices.
• Persistent income: Your income will last, ensuring you and your spouse won't outlive the income.

The above is dependent on the investment city.

In order to have a reliable income, your property must be continuously occupied by what I call a "reliable tenant." A reliable tenant stays many years, always pays the rent on schedule, and takes care of the property. You will hold the property for many years you you will need multiple reliable tenants over the years.

How do you have the highest probability of always having a reliable tenant? There are two key success factors:

• A property manager who is skilled at selecting reliable tenants. I know many property managers in Las Vegas, but only two of them are skilled in selecting reliable tenants.
• Selecting a tenant segment with a high concentration of reliable tenants. This is what I did when I set up our investor services business in 2005.

How do you identify a tenant segment with a high concentration of reliable tenants? Multiple property manager interviews. Once you identify this segment, determine what and where they rent today. Then buy similar properties.

Summarizing

I see investing as a three-step process.

1. Choose a location where rents keep up with inflation. Maintaining long-term financial independence is only possible if rents keep pace with inflation.
2. After selecting a location, interview property managers to identify a tenant segment with a high concentration of reliable tenants.
3. Buy what your selected segment is willing and able to rent.

We’ve delivered close to 500 investment properties and I did not decide on any of the properties :

• Where to buy
• What to buy
• The property type
• The property configuration
• The renovation components

Everything was defined by the tenant segment we want to occupy our properties.

If you make decisions based on your financial goal and not other people’s opinions, you should do well.

DM me if you have questions.

Hello  @Allan Tualla,

Rather than focusing on property type, I recommend prioritizing your financial objective, which I assume is achieving financial independence. To become and remain financially independent, it's essential that your property is always occupied by what I refer to as a reliable tenant. Such a tenant will stay for many years, always pay rent on schedule, and take good care of the property. However, reliable tenants are the exception, not the norm, and since you're planning to hold the property for many years, you will need to have multiple reliable tenants over the holding period.

The only way I know to maximize your odds of always having a reliable tenant is:

• Select a tenant segment with a high concentration of reliable tenants.
• Work with a property that is skilled at selecting reliable tenants. This is a rare skill. I only know of two property managers in Las Vegas who have this skill.

To find a segment with a high concentration of reliable tenants, start by interviewing multiple property managers. Once you identify a segment that will provide the reliable income you need, determine what and where they currently rent. Then, buy similar properties.

I did not create this process; this is simply how the commercial world operates. When a business wants to select a location, they do not base the decision on someone's opinion and hope that things will work out. Instead, they first identify their target demographic and choose a location that best matches it. Selecting the location or property type first is unlikely to yield the best results.

To target a specific tenant segment, you need to choose the appropriate property in the right location.

How Tenants Select a Place to Live

When someone is searching for a rental property, they typically begin by browsing one of the many real estate websites. They then proceed to eliminate unsuitable options, usually in the following order:

• Rent Range - If the person can afford $1,800 per month, they will eliminate properties with an asking rent that exceeds this amount.
• Property type - If a person has a wife and two children, they are unlikely to consider one-bedroom properties.
• Configuration
• Location

Even if there are hundreds of available properties, after applying the above housing requirement filters, only a few properties will remain. Below is an example of a segment’s housing requirements.

• Rent range: $1,600/Mo. to $1,800/Mo.
• Property Type: Single-Family
• Location: Northwest, within 5 to 10 miles of the central business district.
• Configuration: Three bedrooms, two car garage, one story or two stories, built after 1990, with a lot size between 4000 ft.² and 8000 ft.²

It's unlikely for people to rent properties that do not meet all of their housing requirements. You can leverage this fact to choose properties that appeal to a specific tenant segment.

Each property has specific characteristics. The characteristics of an example property are below.

• Rent: $1,750/Mo.
• Property Type: Single-Family
• Location: Southeast, 12 miles from the central business district.
• Configuration: Three bedrooms, two car garage, one story, built 2000, with a lot size of 5000 ft.²

This property aligns with the housing requirements of the tenant pool segment that I previously mentioned, so most applicants will come from that segment. However, if a property does not meet all the requirements of a certain tenant segment, that segment will be excluded from your potential tenant pool.

Does buying a property to attract a specific tenant segment work? We have successfully delivered over 480 investment properties targeting a single-tenant segment in Las Vegas. Our results have been excellent due to the tenant segment we target and the property manager we work with.

Alan, be cautious of general advice. Real estate is a local market, so you should make investment decisions based on the specific area where you want to invest, and not based on other locations.

Hello @Tom Hall,

I disagree with the notion that the best place to start investing in real estate is where you live. The ultimate goal of real estate investing is to achieve sustained financial freedom, which requires a passive income that meets three key requirements:

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

All three requirements depend on the location. The odds of anyone already living in a location that meets all the requirements are low. And, if you make a purchase in a location that does not meet all the passive income requirements, your time spent being financially independent will be short-lived. Why? Inflation.

Suppose every time you go to the grocery store, you buy the same groceries. Today, these groceries cost $100. Additionally, I will assume that you plan to hold the property for the remainder of your life, which is at least 30 years. Suppose rents in the location only rise 2% per year and inflation is 5%. What happens to your ability to buy these same groceries over 30 years? I created the following table to demonstrate the decrease in the amount of groceries you can purchase in 5-year intervals.

As you can see, each year you have to reduce your grocery purchases by 3% (5% inflation - 2% increase in rent). In just 10 years, $100 will only be worth 74% of what it can buy today. This is why I said that if you do not invest in a city where rents keep pace with inflation, your financial independence will only last as long as you can continually reduce your standard of living.

Another consideration is knowing what, where, and how to buy a property. Everything you learn in seminars, books, podcasts, or websites is general knowledge. Valuable, but nothing is applicable to any specific location. You need hyperlocal knowledge, years of experience, and access to the right resources. The only source for this is an experienced local investment team. Working with an experienced investment team is not only free in most cases, but also saves you time, money, and risk. Plus, you will learn from experts how to invest in real estate the right way for the specific location.

Does remote investing work? We’ve delivered over 480 reliable passive income properties to over 180 clients, worldwide. I believe only 8 clients were local. All the rest lived in other states or countries. And, we know remote investing works because we have >90% repeat business rates.

In summary, live where you like but invest where you can make money.

“Live where you like but invest where you can make money.”

Hello @Wale Lawal,

I recommend selecting an investment location based on your financial goals, rather than on others’ opinions. To achieve financial freedom, you need a passive income that meets three requirements.

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

All three requirements depend on the location.

What are some of the characteristics of a location that will meet the above requirements?

• A metro area population greater than 1M**.** Small towns may rely too much on a single business or market segment.
• Both state and metro populations are increasing.
• Low crime - High crime and long-term appreciation and rent growth are mutually exclusive.
• Rent control - Never invest in a location with rent control or similar anti-landlord regulations.
• Low operating cost - Investors often overlook operating costs when selecting an investment location, so below is an example to illustrate the difference in location costs.
• Rents keep pace with inflation. Unless rents keep pace with inflation, your financial independence will be short-lived

Below is a comparison of operating costs for Texas, Ohio, Kansas, and Nevada.

Sources:

• State average insurance cost
• State average property taxes
• State income taxes

To put the overhead costs into perspective, here is a comparison of the estimated annual operating costs for a $400,000 property. I did not include state income taxes in this example.

What does this mean to you as an investor? To have the same net cash flow in Texas as a property in Nevada, the Texas property must generate a $6,192 higher cash flow ($9,736 - $3,544) than a similar property in Nevada.

I hope this helps,

…Eric

Hello @Tom Hall,

You will not buy in a state. You buy in a specific city. So you want to select the city.

Fortunately, there is a straightforward process for selecting a city that generates reliable passive income. But what exactly is a reliable passive income? A reliable passive income meets three requirements:

• Inflation compensating: Rental income increases faster than inflation, compensating for rising prices. If your rental income does not keep pace with inflation, your financial freedom will be short-lived.
• Persistent income: Your income will last, you and your spouse won't outlive it.
• Reliable income: Your income continues even in difficult economic times.

There are too many cities to evaluate so I recommend a different approach. Start with an initial set of candidate cities and then eliminate ones that fail any of the additional requirements.

• Start with metros with a population greater than 1M**.** Small towns may rely too much on a single business or market segment. Wikipedia

• Both state and metro populations are increasing. Do not buy anywhere if the state or metro populations are static or decreasing. Wikipedia

• Low crime - High crime and long-term appreciation and rent growth are mutually exclusive. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.

• Inflation compensating - Every time you go to the store, the same basket of goods costs more and more dollars. In order to have the additional dollars needed to pay inflated prices, rents must rise faster than inflation. Therefore, a critical location selection metric is that rents and prices are rising faster than inflation. Rents tend to lag behind prices, so you can use the appreciation rate if you do not have historical rental data. Zillow Research

• Low disaster risk - Natural disasters, such as tornadoes, can destroy entire communities, including jobs, shopping, and housing. If a tenant loses their home, they will immediately move to a new location with jobs and a place to live, instead of waiting one year or more for the property to be rebuilt. Even if your insurance covers the cost of rebuilding, it may be difficult to find new tenants because people have already moved away. Communities hit by natural disasters may take years or never fully recover. Meanwhile, your expenses, such as mortgage, taxes, insurance, and maintenance, will continue. To avoid this, choose a location with low-cost homeowners' insurance, which indicates a lower risk of natural disasters. Insurance - ValuePenguin

• Rent control - Some states and metro areas have implemented various kinds of rent control. Rent control may prevent you from increasing the rent fast enough to keep pace with inflation. It may limit your property manager's ability to select the best tenant. It may make evictions of non-performing tenants difficult or impossible. Never invest in any location with rent control.

• Low operating cost - It’s not how much you gross, it's how much you net. You must consider all major recurring costs when selecting an investment location. As an example, below is a comparison of operating costs in Florida, Texas, and Nevada. (Remember that these are state averages, and individual cities may impose additional taxes.)

  

Information sources:

• Insurance cost
• State Property Tax Rate

To show the impact of taxes and insurance I compared overhead costs on a $400,000 property in the three states.

What does this mean to you as an investor? A property with lower cash flow in a city with lower overhead costs may generate a higher net cash flow than a property with higher cash flow in a city with higher overhead costs.

Tom, this is your financial future. Do your own due diligence based on facts; do not bet your future on someone else's opinion.

It’s July and time for another Las Vegas update. Before I continue, note that the charts only include properties that match the following profile, unless otherwise noted.

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

What we are seeing:

Overall inventory is falling in Las Vegas. The chart below is from the MLS and includes all property types and price ranges.

The Charts

The charts below are only for the property profile we target.

Rentals - Median $/SF by Month

June rents were unchanged from May. YoY is flat.

Rentals - Availability by Month

The number of homes for rent continued to drop rapidly, indicating a decreasing supply.

Rentals - Median Time to Rent

The median time to rent is 20 days, unchanged from May. This is a very reasonable time to rent.

Rentals - Months of Supply

Only about 0.7 months of supply for our target rental property profile. Demand is greater than supply. This will push up the rent.

We saw a similar tight supply in sales as well. Now only about 0.6 months of supply. This will push up the prices.

Sales - Months of Supply

Sales - Median $/SF by Month

Despite increasing interest rates, $/SF is climbing month after month in 2023. June $/SqFt is 7% higher than January.

What is driving long-term demand for rental properties in Las Vegas?

Las Vegas Fundamentals

Unlike financial markets (which are largely driven by emotions), real estate prices and rents are driven by supply and demand. What is the supply and demand situation in Las Vegas?

Supply

Las Vegas is unique in that it is a tiny island of privately owned land in an ocean of federal land. See the 2020 aerial view below.

There is very little undeveloped private land remaining, and any available land in desirable areas costs more than $1 million per acre. Due to the high cost of land, new homes in our targeted locations start at $550,000. The homes that appeal to our target tenant segment are priced between $320,000 and $475,000. Therefore, no matter how many new homes are built, the housing stock we target remains almost constant. This is different from metropolitan areas with unlimited expansion potential, where the construction of new homes limits the growth of rent and home prices of existing properties.

Demand

The driver for housing demand is population growth. The average Las Vegas annual population growth is between 2% and 3%. What attracts most people to Las Vegas (and other metros) is jobs.

In a study I did in January, I looked at two major job sites (Monster and Glass Door) for the number of open jobs in Las Vegas. According to these sites, there are between 26,000 and 31,000 open jobs in Las Vegas.

The number of available jobs will increase in the future. Depending on which study you read, there is between $18B and $26B of new construction under development. As these come online, they will create even more jobs attracting more people to Las Vegas.

Of the people who will move to Las Vegas, a significant portion matches the tenant segment we've targeted since 2005. So, the demand for conforming properties priced between $320,000 and $475,000 will increase over time.

Summary

Due to the unique combination of a fixed supply and increasing demand, I believe Las Vegas fundamentals will continue to drive up prices and rents for the foreseeable future.

Let me know if you want more sales or rental data, and I will post additional charts.