All Forum Posts by: Eric Fernwood

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.

Hello Thuy,

Thank you and @Andrew Romano for your kind remarks. When I began investing in real estate many years ago, I made numerous mistakes. However, I was fortunate enough to receive help from others, and now I aim to repay their kindness by assisting others on their own journeys.

Data science and the study of demographics formed the foundation of our investor services business. The software and processes we have today are the result of many years of mistakes. One of the most important lessons I learned from my mistakes is that correctly interpreting raw data for real-world applications is very difficult. The combination of incomplete and unnormalized data, unpredictable human behaviors, and the necessity to make assumptions based on insufficient information makes accurate predictions challenging. An example may help.

Suppose your job is to determine whether Country A or Country B is the more desirable place to live for the citizens of the two countries. Assume every type of data you could want is available for both countries. The problem is that you will have to make assumptions about the data concerning what is desirable to the people of countries A and B. The odds of getting this right with only data are low. However, there is another way.

Suppose you stationed observers on the border between the two countries and they keep count for an extended period of time which way people were moving. If significantly more people moved from country A to Country B, you know that in the eyes of the people of these countries, Country B is more desirable. This is the advantage of observations over raw data.

Another example. When I moved to Las Vegas in 2005 to start an investor services business, I wanted to find a tenant segment with a high concentration of reliable tenants. These tenants stay many years, pay rent on schedule, and take care of the property. Despite spending over a month analyzing data, I couldn't draw any useful conclusions and eventually gave up on this approach.

I downloaded approximately 10 years of MLS rental data and analyzed historical tenant behaviors. I discovered several subdivisions where the average tenant stay was longer than five years and ran correlations between them.

From the rental rates of these properties, I estimated the tenants' income range. I then used this range to determine the types of jobs they held. I found that those at the lower end of the income range largely relied on tourism-related employment, so I raised the lower threshold. I also noticed a decrease in tenant tenure for properties with rent at the upper end of the income range, so I lowered the upper threshold. This research enabled me to identify the tenant segment we have been targeting for 15+ years with great success.

Thuy, based on my experience, I recommend focusing on observations and indicators as opposed to raw data. Raw data, although abundant, is challenging to use for drawing reliable conclusions.

I wish you success,

…Eric

Hello Tammy,

The old adage applies, “Live where you like but invest where you can make money.” Just because you would like to retire in the Chattanooga area, does not mean that Chattanooga is where you should invest today. Chattanooga may not have the characteristics necessary for financial freedom.

Financial freedom is more than replacing your current income; it requires maintaining your current lifestyle for life. To attain lifelong financial freedom, you need a passive income that meets two requirements:

• Rents must outpace inflation: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to pace with the cost of living, your financial independence will be short-lived.
• Persistent: Your rental income must last a long time, ensuring that you do not outlive your income.

The conditions necessary for rent to outpace inflation and last a long time:

• Cities with metro populations of over one million are usually less dependent on a single market sector or major employer compared to those with smaller populations. This leads to greater economic stability. Wikipedia
• Significant and sustained population growth. Wikipedia
• Low crime rate - Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.
• Low risk of a natural disaster - Homeowners insurance rates are a good indicator of the potential for a natural disaster to occur. The higher the rate, the higher the probability of a natural disaster. Never invest in cities with high-cost homeowners insurance. Insurance - ValuePenguin
• Low operating costs - The two most significant operating costs are typically property taxes and insurance.
  • Property tax rates: State Property Tax Rates - Rocket Mortgage
  • Insurance rates: Insurance - ValuePenguin
• No rent control of any kind: Google search
• Pro-business legislative environment: Google search

So, if Chattanooga does not meet these goals, I recommend investing in a city that does. And, as you approach retirement, you may consider using a 1031 exchange to purchase a rental property in Chattanooga. Later on, you can convert it into a residence.

One other criterion I would have for an investment location is an experienced local investment team. The problem is that everything you learn from podcasts, books, seminars, and websites is general knowledge. But you will buy a specific property, in a specific location, subject to local rules and regulations. The only source for the local knowledge you need is an investment team. If you are unable to find a competent local team, look in another city.

Working with an investment team usually does not cost more. For instance, we have delivered over 480 properties and charged our clients a fee on only four or five of them, and only in exceptional circumstances. In all other cases, the fees were paid by the listing agent of the seller, not by our client. Also, by working with an investment team, you also receive real-world investment training at no cost to you.

If you would like info on what to look for in an investment realtor or a PM, DM me.

…Eric

Hello @Anthony Freeman,

We have completed over eighty 1031 exchanges to date, and our largest number of replacement properties in one exchange was five. It was a bit of a scramble, but it worked. In this post, I will discuss some potential pitfalls that can result in you losing your tax deferment.

Before I continue…

The exchange process is illustrated below:

The 45-Day Identification Period

The 45-day replacement property identification period starts when the relinquished property closes. Identifying the replacement properties is the first potential pitfall.

Although you are only required to identify replacement properties during the 45-day window, you may lose your tax deferment if you are unable to or choose not to close on them. This could occur if you are outbid or if a serious issue is identified during the due diligence process, making it not worthwhile to complete the purchase.

Our Process

Our goal is to put replacement properties under contract immediately after all contingencies are complete on the relinquished property. We then aim to close on the replacement properties as soon as possible after the relinquished property closes. Typically, cash purchases close about two weeks after the relinquished property, while financed purchases close four weeks later. The steps are illustrated below.

By utilizing this method, if something does not pan out with one or more of the replacement properties, we still have ample time to locate, put under contract, and validate (due diligence) another property within the 45-day identification period.

Movement of Funds

A regular question I receive is if a 1031 exchange agent is required. The simple answer is yes. If the funds touch your accounts, you lose your tax deferment.

Below is an illustration of the flow of funds during a 1031 exchange. The funds must move from the closing escrow agent to the 1031 exchange agent. When you close on the replacement property, the funds go from the 1031 exchange agent to the escrow company handling the closing. The funds must never be in your hands, or the 1031 exchange may be void.

Other Potential Pitfalls

• You are not allowed to use the proceeds from the relinquished property to pay for renovations. Some of our clients have opted to pay capital gains tax on a portion of the proceeds and use that money for the renovation.
• Not all purchase contracts include the 1031 exchange language. Make sure to have your listing agent obtain the correct language from your exchange agent for your state. The agent should include it in the agent-to-agent remarks, specifying that the 1031 text must be included in offers. If this does not happen, you can counteroffer specifying the required 1031 language.
• To fully defer the capital gains tax, you must reinvest all the proceeds from the sale into the replacement property. Any cash or other non-like-kind property received during the exchange will be subject to capital gains tax.
• To accurately determine the cost of the replacement property for tax purposes, it is important not to make any assumptions. Instead, obtain the required replacement cost from a 1031 exchange agent. We once had a client who assumed that their replacement property had to cost $300,000 or more, only to discover through the exchange agent that they actually had to spend over $500,000. There is no room for error in this process, so it is crucial to work closely with an exchange agent. If anyone would like a referral to a good 1031 exchange agent, DM me. We can provide you with the contact information for three exchange agents who are known for being easy to work with and highly knowledgeable.
• If there is an existing mortgage debt on the relinquished property, it's important to consider how it will be handled during the exchange. Any reduction in debt or cash received may be treated as taxable boot, resulting in potential tax liabilities. Do not assume, ask your 1031 exchange agent.
• Qualified Use Requirement - Both the relinquished and replacement properties must meet the requirement of being held for investment or used in a trade or business. Personal residences or properties primarily held for personal use do not qualify for a 1031 exchange.
• State Tax Considerations - While 1031 exchange tax deferments are allowed under federal tax law, not all states conform to these rules. It's crucial to understand the state-specific regulations regarding like-kind exchanges, as some states may not recognize or fully conform to the federal provisions. Consult with a tax professional familiar with your state's laws.
• The Biden Administration's proposed FY 2024 budget includes the creation of “capped deferral” for 1031 exchanges. In this proposed change to 1031 exchange laws, taxpayers in FY2024 would only be able to defer capital gains up to an aggregated amount of $500,000 for each taxpayer ($1 million for joint filers). Source. If you are considering a 1031 Exchange, 2023 may be the last year to do it.

Hope this helps,

…Eric

Hello @Travis Horstman,

What you should do depends on future rent and price growth in the city where your homes are located.

For most people, the goal of real estate investing 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 a passive income that meets two requirements:

• Rents must keep pace with inflation: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to pace with the cost of living, your financial independence will be short-lived.
• Persistent: Your rental income must last a long time, ensuring that you do not outlive your income.

What are the requirements that a city must meet in order to likely achieve financial freedom?

• A metro population >1M. Smaller cities tend to be dependent on a single company or market sector.
• Significant and sustained population growth causes increasing demand for housing. When there are significantly more buyers than sellers, rents and prices tend to rise, enabling them to outpace inflation.
• Low crime rate - Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.
• Low risk of a natural disaster - Disasters like tornadoes can completely decimate communities. Those affected will relocate to a place where they can live and work today. Once settled, there is no incentive to return to the rebuilt community. This means that even if your insurance company rebuilds your property, there may not be anyone available to rent it. However, you will still be responsible for paying your mortgage, taxes, insurance, and utilities. A good way to gauge the risk of natural disasters in a particular community is by considering the cost of homeowners insurance. It is advisable to avoid purchasing property in cities with high insurance rates. Insurance - ValuePenguin
• No rent control of any kind: Google search
• Pro-business legislative environment: Google search

What if your city does not meet these criteria? In this case, you may have a unique option available. If you have owned and used your home as your primary residence for at least two out of the past five years, you may qualify to exclude up to $250,000 of the gain from your income, or up to $500,000 if filing a joint return with your spouse. This presents a special opportunity to use the net proceeds to purchase a property in a city that meets the requirements for financial freedom.

So, it comes down to the following:

• If your city meets the requirements for financial freedom, converting the properties to rentals is an excellent idea.
• If your city does not meet the requirements for financial freedom, you may have the option to sell your properties without having to pay capital gains tax. With the proceeds from the sale, you can purchase a rental property in a city that meets the requirements for financial freedom.

Travis, I hope this helps,

…Eric

Hello @Luis Fontenoy,

You did not state the purpose for the data so I will assume you are looking for a good investment city. So we are on the same page, my definition of a good investment city is one where:

• Rents outpace inflation
• Persistent income - You will not outlive the rental income

Before I proceed, Some background information about me. I am an engineer working for an investor services company in Las Vegas. My role involves data science, property analysis, and software development. I developed software tools and processes that enable us to identify and evaluate properties based on individual client's specific needs and goals. To date, we have delivered over 480 properties to more than 180 clients worldwide, with a repeat business rate exceeding 90%. I believe my experience makes me qualified to offer opinions on the use of analytics.

Raw Data

You asked about city-level data sources. What data you find will likely vary in terms of quality, consistency, and completeness. Even if you find high-quality data, interpreting the data is always a challenge. There is a better way than using raw data, and that is using indicators. An example will illustrate the point.

Suppose you are tasked with determining which country, Country A or Country B, is more desirable for people from both countries to live in.

• Data-based approach - Assuming you have all the data you need, you can analyze it to determine which country is more desirable. However, your conclusion is unlikely to be correct because you must make assumptions about what matters to the citizens of both countries. Such information is not likely to be found in raw data.
• Indicator-based approach - What if you sat on the border and observed how many people moved between Country A and B? If by headcount, you determine significantly more people move from Country B to A, you can assume that, to the citizens of the two countries, Country A is the more favorable. This approach used the indicator, the actual movement of people, instead of raw data.

The use of indicators provides highly accurate results. This is how our data mining software works; it evaluates properties based on historical tenant behaviors.

Indicators for a Good Investment City

Repeating my earlier opinion of what is a good investment city:

• Rents outpace inflation
• Income persistence - You will not outlive the rental income

What is driving these two criteria?

Rents Outpace Inflation

In real estate, prices and rents 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 balanced. On the other hand, when there are more sellers, prices drop until the balance is restored. Rental rates follow prices. When prices are high, demand for rental properties increases and rents rise; when prices are low, demand for rental properties decreases and rents fall.

What causes the imbalance between buyers and sellers? Population change. And, if the population increases fast enough, rents will rise faster than inflation. So, we have the first city selection indicator.

✅ Significant and sustained population growth. Use Wikipedia

Income Persistence

Income persistence depends on your tenants remaining employed at similar wages for a long time. 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. So, whether your income persists is not only about the present jobs, it is also about future replacement jobs.

What conditions are necessary for existing companies to invest in expansions, and for new companies to relocate to a city? In my opinion:

✅ 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. 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

✅ Pro-business environment

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

There is data for each of these indicators, which I will show shortly. For now, the question is how to use these indicators.

Do Not Select, Eliminate

Start with the easiest criteria and then eliminate cities based on additional criteria, as illustrated below.

The criteria and sources:

• Cities with a metro population greater than 1M. Wikipedia
• Significant and sustained population growth. Wikipedia
• Low crime rate. Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.
• Low risk of a natural disaster - Homeowners insurance rates are a good indicator of the potential for a natural disaster to occur. The higher the rate, the higher the probability of a natural disaster. Insurance - ValuePenguin
• Low operating costs - The three most apparent costs for investors are income taxes, property taxes, and insurance. Tax Foundation, Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage
• Pro-business environment - Google search
• No rent control of any kind - Google search

You Need an Investment Team

One additional criterion I recommend is an experienced local investment team. Podcasts, books, seminars, and websites only provide general information. You will buy a specific property, in a specific city, subject to specific local conditions. The only source for the skills, processes, and experience needed to identify, validate, renovate, and manage properties is a local investment team. By working with a team, you also gain real-world investment training.

Also, working with an investment team usually does not cost more. For instance, we have delivered over 480 properties and only charged our clients a fee on only four or five of them, and these were exceptional circumstances. In all other cases, our fees were paid by the listing agent of the seller, not by our client.

Hello @Josh Scroggins,

Working with an experienced investment team is critical. Everything that you learn from podcasts, books, seminars, and websites is general knowledge. However, you will buy a specific property, in a specific location, subject to local rules and regulations. The only source for the local knowledge you need is a local investment team.

There is only one crucial team member: an investment realtor. An investment realtor is always part of a team because only a team of experts can provide the necessary end-to-end processes, skills, and knowledge to identify, validate, inspect, renovate, and manage a property. Therefore, when you find an investment realtor, you have a complete investment team.

Residential Realtor vs. Investment Realtor

There are usually thousands of residential (or “investor friendly”) realtors in a metro area, but probably only one or at most two investment realtors. What is the difference?

Residential realtors - Residential realtors enable people to buy or sell homes. The process is simple. Homebuyers select properties, and the residential realtor provides access. Once a property is selected, the residential realtor facilitates the offer and closing process. Although some residential realtors occasionally sell real estate that will become rental properties, they provide limited value beyond MLS data sheets. To an investor, MLS data sheets are worthless. Below is a table comparing what an MLS data sheet contains and what an investment team provides.

Below is a diagram of the process we follow and who is responsible for each step. All investment teams will follow a similar process.

How Do You Find an Investment Realtor?

Start by compiling a list of candidates. Get names from

• Real estate investing websites (such as Biggerpockets.com)
• Property managers
• Local investors
• Talk to real estate brokers
• Google searches
• Local meetups

Once you have a list of candidates, evaluate each using the following interview questions. The purpose of the interview questions is to determine the individual's experience, character, and resources.

Interview Questions

Will you find a candidate with the “right” answer to every question? Probably not, but they must provide reasonable answers. If they can’t, move to the next candidate.

• Tell me about your investment team. - You're looking for a response like, “I've worked with X property manager for years. We've completed X properties. "I work with several renovation companies..."
• Do you or have you owned investment properties? - If they have not personally owned investment properties, I would reject the candidate.
• How many investment properties did you close in the last 12 months? - Some realtors only sell two or three investment properties per year, which is insufficient for developing the necessary processes, experience, and resources. In my opinion, a minimum of 12 investment properties sold per year is required to achieve proficiency.
• Did you or your client select the properties? This is an important question. Residential and "investment-friendly" realtors do not select investment properties. They send MLS data sheets for the properties that the client selected. The client is then responsible for evaluating the property. The realtor adds almost no value if you do all the work. Reject the candidate if the client selected the property(s).
• What were your primary selection criteria? - It could be the initial return, appreciation, tenant pool, or something else. You're looking for a plausible answer based on analytics, not opinion or “feelings.”
• Tell me about the tenant pool you target. - Understanding the existence of tenant pools and their characteristics is not common knowledge. It requires a person with a lot of investment experience. If they do not have a plausible answer or do not understand the question, go to the next candidate.
• What is the average tenant's stay? - If the realtor is working with investors, they know how long the tenants of a specific tenant pool segment typically stay in the property. If the realtor has no good answer, move on to the next candidate.
• How did you estimate rent and time to rent? - They should be able to describe a process like, "I look at recently rented comparable rentals…" Another good answer is that they work with a property manager who supplies this information. If they answer Zillow, Redfin, Rentometer, etc., they do not know how to evaluate investment properties. Next candidate.
• Tell me about your renovation process. - You are looking for an answer similar to, “I work with the property manager to determine a list of renovation items. Next, I work with XXX company to get a quote. Once escrow closes, the renovation company does the work, and the property manager does final acceptance.”

Cost of an Investment Team

Working with an investment team usually does not cost more. For instance, we have delivered over 480 properties and charged our clients a fee on only four or five of them, and only in exceptional circumstances. In all other cases, the fees were paid by the listing agent of the seller, not by our client.

Josh, I hope this helps.

Hello @Kale Johnson,

There are hundreds of locations outside California where you could invest. The important question is, “Where should you invest to achieve financial freedom? “

Financial Freedom

Financial freedom is more than just replacing your current income; it's about maintaining your current lifestyle for life. To have lifelong financial freedom, you need a passive income that meets 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.

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

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.

What causes prices and rents to rise or fall?

Supply and Demand

In real estate, prices and rents 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 balanced. On the other hand, when there are more sellers, prices drop until the balance is restored. Rental rates follow prices. When prices are high, demand for rental properties increases and rents rise; when prices are low, demand for rental properties decreases and rents fall.

What causes the imbalance between buyers and sellers?

Population change.

Population Change

If the population decreases, fewer buyers enter the market, resulting in lower prices. Conversely, if the population increases, more buyers enter the market, driving up prices. Thus, only in cities with significant and sustained population growth will prices rise faster than inflation. This is the first city selection requirement:

✅ Significant and sustained population growth.

Jobs

People move to cities for jobs. What are the requirements for a city to attract new employers?

✅ Low operating costs

✅ Low crime rate

✅ Low risk of a natural disaster

✅ Pro-business legislative environment

✅ Sufficient population to have economic stability, major highways, and a major airport. This usually requires a metro population >1M. Smaller cities tend to be dependent on a single company or market sector.

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

City Selection Process

There are too many cities in the US to evaluate practically. However, there is a better method. And that is an elimination process.

Start by selecting cities with a metro population of more than one million. Then, apply elimination criteria in order from the easiest to most time-consuming. This saves time and boosts efficiency.

1. Cities with metro populations of over one million are usually less dependent on a single market sector or major employer compared to those with smaller populations. This leads to greater economic stability. Use Wikipedia
2. Significant and sustained population growth. Wikipedia
3. Low crime rate - Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.
4. Low risk of a natural disaster - Homeowners insurance rates are a good indicator of the potential for a natural disaster to occur. The higher the rate, the higher the probability of a natural disaster. Never invest in cities with high-cost homeowners insurance. Insurance - ValuePenguin
5. Low operating costs - The two most significant operating costs are typically property taxes and insurance.
   • Property tax rates: State Property Tax Rates - Rocket Mortgage
   • Insurance rates: Insurance - ValuePenguin
6. No rent control of any kind: Google search
7. Pro-business legislative environment: Google search

The result will be a short list of potential candidate cities.

Investment Team

The presence of an experienced investment team is another factor to consider when selecting a city. Why? If you needed surgery, you wouldn't start medical school--you'd find a specialist. The same applies to real estate investing.

The problem is that everything you learn from podcasts, books, seminars, and websites is general knowledge. But you will buy a specific property, in a specific city, subject to local rules and regulations. The only source for the local knowledge you need is an investment team. And, you can't replicate the expertise, processes, years of experience, and connections that come with an experienced local investment team.

Working with an investment team typically does not cost more than working with any other realtor. For example, we have delivered over 480 properties and charged our clients a fee for only four or five of them, as these were exceptional circumstances. In all other cases, the commission paid to the buyer's agent by the listing agent covered our fees, not our clients.

Also, by working with an investment team, you get a master class on real estate investing at no cost to you.

Summary

By following the process outlined in this post, you will quickly be able to identify cities that are highly likely to offer rapid rent growth and long-term income, which are crucial for achieving financial independence.