All Forum Posts by: Eric Fernwood

Quote from @Eric Fernwood:

Hello @Amir Rahmani,

I would compare all three cities based on the following criteria.

• Operating costs - Every dollar lost to operating costs is a dollar less for you to live on.
• Population growth - Never invest in a location where the population of the state or city is static or declining.
• Urban sprawl - Urban sprawl creates a situation where the growth of rent and property prices of existing properties is limited by the constant construction of new properties.

Comparing these three criteria will provide a reasonable comparison of the three cities for long-term real estate investment.

Operating Costs

Operating costs are a direct impact on profitability. Choose a location with low operating costs to minimize overhead expenses and maximize profits. The three most apparent costs are income taxes, property taxes, and insurance. Below is a comparison of state averages.

Note: In Arizona, I believe that there is no income tax if you own three or fewer rental properties. However, I included income tax in the comparison because the tax is minimal.

Sources:

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

To put this in perspective, below are the estimated annual operating costs for a $400,000 property in all three states.

Conclusion: If you purchase in Texas, you will incur far more overhead and have a lower return than if you purchase in Arizona or Nevada.

Population Growth

Population growth tells you a lot about a location. If a significant number of people are moving into the location, everything is going reasonably well. If the population growth is static or negative, there are serious problems in a location should be avoided. How are these three cities performing? Below is the population change between 2020 and 2022.

• Phoenix: +2.26%
• Dallas: −0.37%
• Las Vegas: +2.24%

Conclusion: The fact that Dallas is losing population would be a major concern for me. Prices and rents are driven by supply and demand, and where the population is falling, so is demand. Dallas does not seem like a good long-term investment location.

Urban sprawl

Urban sprawl is the unrestricted expansion of a city. Where there is unrestricted room for expansion, prices, and rents of existing homes rise slowly. If rents do not keep pace with inflation, your buying power will continue to increase and sooner or later you will be back on the daily with your treadmill. Below are links to time-lapse aerial views of the three cities

• Phoenix - Unlimited room for expansion so rents of existing properties will rise slowly.
• Dallas - Unlimited room for expansion so rents of existing properties will rise slowly.
• Las Vegas - Limited room for expansion. Las Vegas is a small island of private property in an ocean of federal land. Rents and prices of existing properties will rapidly due to limited supply.

Conclusion: Based on the potential for urban sprawl, I believe that rent and price growth for existing properties will not keep pace with inflation in Dallas and Phoenix. However, due to the shortage of land and rising population in Las Vegas, rents should keep pace with inflation.

Amir, I hope this is a good start for you.

 Reposting this time with images. :)

Hello @Amir Rahmani,

I would compare all three cities based on the following criteria.

• Operating costs - Every dollar lost to operating costs is a dollar less for you to live on.
• Population growth - Never invest in a location where the population of the state or city is static or declining.
• Urban sprawl - Urban sprawl creates a situation where the growth of rent and property prices of existing properties is limited by the constant construction of new properties.

Comparing these three criteria will provide a reasonable comparison of the three cities for long-term real estate investment.

Operating Costs

Operating costs are a direct impact on profitability. Choose a location with low operating costs to minimize overhead expenses and maximize profits. The three most apparent costs are income taxes, property taxes, and insurance. Below is a comparison of state averages.

Note: In Arizona, I believe that there is no income tax if you own three or fewer rental properties. However, I included income tax in the comparison because the tax is minimal.

Sources:

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

To put this in perspective, below are the estimated annual operating costs for a $400,000 property in all three states.

Conclusion: If you purchase in Texas, you will incur far more overhead and have a lower return than if you purchase in Arizona or Nevada.

Population Growth

Population growth tells you a lot about a location. If a significant number of people are moving into the location, everything is going reasonably well. If the population growth is static or negative, there are serious problems in a location should be avoided. How are these three cities performing? Below is the population change between 2020 and 2022.

• Phoenix: +2.26%
• Dallas: −0.37%
• Las Vegas: +2.24%

Conclusion: The fact that Dallas is losing population would be a major concern for me. Prices and rents are driven by supply and demand, and where the population is falling, so is demand. Dallas does not seem like a good long-term investment location.

Urban sprawl

Urban sprawl is the unrestricted expansion of a city. Where there is unrestricted room for expansion, prices, and rents of existing homes rise slowly. If rents do not keep pace with inflation, your buying power will continue to increase and sooner or later you will be back on the daily with your treadmill. Below are links to time-lapse aerial views of the three cities

• Phoenix - Unlimited room for expansion so rents of existing properties will rise slowly.
• Dallas - Unlimited room for expansion so rents of existing properties will rise slowly.
• Las Vegas - Limited room for expansion. Las Vegas is a small island of private property in an ocean of federal land. Rents and prices of existing properties will rapidly due to limited supply.

Conclusion: Based on the potential for urban sprawl, I believe that rent and price growth for existing properties will not keep pace with inflation in Dallas and Phoenix. However, due to the shortage of land and rising population in Las Vegas, rents should keep pace with inflation.

Amir, I hope this is a good start for you.

Quote from @Alex Yee:

Quote from @Eric Fernwood:

Hello @David Hanson,

The goal of real estate investing is to achieve financial independence. To do so, you need a reliable passive income. A reliable passive income requires meeting the following three requirements:

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

The process of acquiring reliable passive income properties is a process. Much like peeling and onion, as illustrated below.

Location

Location is the most important investment decision you will make because it determines all long-term income characteristics including:

• Whether rents will keep pace with inflation
• How long your income stream will last
• How reliable your income stream will be
• How much of your rental income is lost to overhead
• Whether you or the government control your property

Tenant Segment

The only way to have a reliable rental income is if your property is continuously occupied by a reliable tenant. A reliable tenant is someone who stays for many years, pays the rent on schedule, and takes care of the property. And, since you will hold the property for many years, you will need multiple reliable tenants over the years. However, reliable tenants are the exception, not the norm. The best way to always have a reliable tenant is to buy properties that attract people from a tenant segment with a high concentration of reliable tenants.

You can select a tenant segment with a high concentration of reliable tenants through property manager interviews.

Once you select a segment, the next step is to determine where and what they are renting today. Based on this, you can create a list of the segment’s housing requirements. Below is an example of what a segment housing requirements might look like.

• 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.

If you choose a property that does not match all of the segment's housing requirements, you are purposely excluding that segment from renting your property.

Property

You identified the tenant segment you want to occupy your property and you know their housing requirements. To attract people from this segment, buy similar properties.

Important: Each property's characteristics only match a single segment's housing requirements. So, find a segment with the right characteristics, and then buy properties that match their housing requirements.

However, there are addition criteria the property must meet:

• Short time to rent
• Reasonable renovation cost and risk
• Acceptable initial ROI and cash flow
• Reasonable purchase price
• Low maintenance cost
• Acceptable area rental restrictions
• Located in a thriving area with potential for future growth.

Summary

Consistently acquiring reliable passive income properties is the result of a process, not luck or the opinions of others. To acquire such properties, start with the location and then peel the onion one step at a time.

 Eric, thank you for this! I haven't seen many people propose the strategy of targeting specific tenant segments but it makes a lot of sense. You mention that you can get the information about Tenant segments through talking to property managers- is that the strategy you're recommending? 

Also, many people mention Cash Flow but it's increasingly difficult to find properties that cash flow since the interest rates are so high. In using the BP calculator, it seems a lot of properties may make positive cash flow by Year 5 or between years 5-10. 

To evaluate deals, I've been looking at:

- the CoC ROI % (looking for something just below 0%, -1-3%)
- 5-year annualized return (looking for at least 10%)
- Cash flow by year (how many years will it take to be cash flow positive- looking for anything below 5 years)

Then I look at:
- reducing the purchase price I'll offer
- increasing the down payment
- slightly lower interest rates (~1% to maybe account for re-fis?)
- and lastly, how high I could charge for rent

Curious to hear others' thoughts. Am I approaching this correctly? 
For context, I am a new investor looking into the Las Vegas area, already pre-approved, but now very confused on how to strategically evaluate deals. 

Thanks in advance!

Hello @Alex Yee,

You're right, finding first-year cash-flowing properties is difficult. The only way we can find cash-flowing properties is through our data mining software. This morning, there are only 22 properties in metro Las Vegas that are even worth considering. The days of cruising websites and selecting cash-flowing properties ended at around 5% interest rate.

Financing

The diagram below illustrates the typical process: you obtain pre-approval, then close with the lender.

Below illustrates the process we follow today.

As soon as we have a property under contract, we contact multiple lenders and get numbers for interest-rate buydowns, DHCR loans, etc. We then work with our client to select the best financing option.

On Return Calculations

Another consideration is that return calculations only predict how a property is likely to perform under ideal conditions on day one. You will hold the property for many years, so is important to have a longer view. Below is an example of the type of mistake you can make if you only consider the initial return.

Property A had a lower initial return, but rents kept pace with inflation. Property B started with a higher initial return, but rents did not keep pace with inflation, so the time off the treadmill is short-lived.

Rents

You do not control the rent. The market controls the rent.

Zillow, Rent-o-meter, and others calculate the average price per square foot of recent rentals for a given area and then multiply that by the square footage of the subject property. This fails almost 100% of the time.

Every property is unique and must be evaluated based on factors such as location, condition, configuration, and lot size. Online programs cannot take these variables into account. Additionally, what a similar property may have rented for in the recent past is not always a good prediction for what your property is likely to rent for today.

Property managers evaluate rental properties by comparing them to current listings in the area. By assessing the competition in relation to your property, they determine a suitable rental price. This is why we include a property manager as part of our property validation process.

On Achieving Cash Flow

The time to achieve positive cash flow is totally dependent upon the city. In some cities, where there is little demand for housing, prices are low and rents rise slowly or not at all. In such markets, it may take a long while to achieve a positive cash flow. In high-appreciation markets, one year is realistic.

Currently, we are still achieving positive cash flow in the first year. However, this requires finding the right property and the right financing.

Our Target Tenant Segment

Fifteen years ago, when I started our investor services business in Las Vegas, I interviewed many property managers to gain insight into the various tenant segments. Once I had their input, I spent approximately three months studying tenant pool demographics. I selected a narrow tenant pool segment and have been targeting them for the past 15 years.

I've also collected behavioral data on our tenant segment over the years and this is part of the input to our data mining software. We have about 10 years of data down to the street level in many areas of Las Vegas.

How Long Will High Rates Last?

“Predicting anything beyond yesterday is guessing.” …Eric

I've asked that question of many of our clients. Generally, the guess is between two and three years. I do not believe that interest rates will go back to 2% or 3% in the foreseeable future. I do believe that we will see 4% and 5% interest rates in the next two or three years.

Hello @Andrew Potievsky,

When comparing locations, I always consider operating costs and other factors that can affect my ability to make a profit. I will begin by examining operating costs.

Operating Costs

Below is a comparison of income taxes, insurance, and property taxes for Ohio and Florida, along with Nevada as a reference point.

Sources:

• State average insurance cost
• State average property tax
• State Income Tax

To put this in perspective, below is the annual overhead cost for a $400,000 property.

To achieve the same net cash flow, a property in Columbus would have to generate almost $5,000 ($8447 - $3544) more in annual rent than one in Las Vegas due to higher operating costs.

Rent Control

Rent control can prevent you from increasing your rent to keep pace with inflation, limit your ability to select the best tenant, or remove a non-performing tenant cost-effectively and expeditiously. Below is a list of rent control.

• Columbus - Yes
• Orlando - Yes/[No](https://www.doorloop.com/laws/florida-rent-control-laws#:~:text=No%2C there are no Florida,doing so unless absolutely necessary.) - I found a statement saying that Orlando does have rent control and another one that the state does not permit it. So, I included both links
• Jacksonville - No
• Las Vegas - No

The above is a good start for comparing locations.

Selecting a Good Investment Location

On selecting an investment location - I recommend against following anyone's opinion on where to invest. Instead, do your own research. The process for selecting a positive cash flow city is straightforward.

Start with cities with a population over 1 million (Wikipedia) and then illuminate properties that fail any of the following additional criteria

• 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 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
• Low disaster risk - When a tornado or other natural disaster strikes a city, it doesn't just obliterate individual properties. The entire community, including jobs, shopping, and retail, is destroyed. Your tenants won't wait for your property to be rebuilt in a year or two; they'll move immediately to a location where they can work and live today. Even if your insurance company rebuilds your property, there may be no one to rent it. Everyone in the community will have resettled in other locations, and there's no reason for employers, retail establishments, or people to move back. Locations hit by natural disasters may take many years or never recover. However, your mortgage, taxes, insurance, maintenance, and other expenses will continue without interruption. 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 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.

At this point, you will have a small number of potential cities. The next step is to find a local investment team. Why is working with a local investment team critical?

Everything you learn from seminars, podcasts, books, and websites is general information. You will purchase a specific property in a specific location that is subject to specific local rental regulations. The only source of the hyperlocal information you need is a local investment team that has years of experience working with investors. Also, working with a local investment team costs no more than working with any other realtor so there is no disadvantage and every advantage to working with a local investment team.

Andrew, I hope this helps. If you have other questions, please DM me or post here and I will respond.

It’s June and time for another Las Vegas update. For a more in-depth view of the Las Vegas investment market, DM me for our 2023 Las Vegas Investor Outlook.

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+ 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

May rents were unchanged from April. YoY is flat.

Rentals - Availability by Month

The number of homes for rent continued to drop rapidly.

Rentals - Median Time to Rent

Median time to rent continued to drop, indicating increasing demand.

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 less than one month of supply. This will push up the prices.

Sales - Months of Supply

Sales - Median $/SF by Month

Despite increasing interest rates, $/SF is climbing up.

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.

Hello @Amir Rahmani,

I would compare all three cities based on the following criteria.

• Operating costs - Every dollar lost to operating costs is a dollar less for you to live on.
• Population growth - Never invest in a location where the population of the state or city is static or declining.
• Urban sprawl - Urban sprawl creates a situation where the growth of rent and property prices of existing properties is limited by the constant construction of new properties.

Comparing these three criteria will provide a reasonable comparison of the three cities for long-term real estate investment.

Operating Costs

Operating costs are a direct impact on profitability. Choose a location with low operating costs to minimize overhead expenses and maximize profits. The three most apparent costs are income taxes, property taxes, and insurance. Below is a comparison of state averages.

Note: In Arizona, I believe that there is no income tax if you own three or fewer rental properties. However, I included income tax in the comparison because the tax is minimal.

Sources:

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

To put this in perspective, below are the estimated annual operating costs for a $400,000 property in all three states.

Conclusion: If you purchase in Texas, you will incur far more overhead and have a lower return than if you purchase in Arizona or Nevada.

Population Growth

Population growth tells you a lot about a location. If a significant number of people are moving into the location, everything is going reasonably well. If the population growth is static or negative, there are serious problems in a location should be avoided. How are these three cities performing? Below is the population change between 2020 and 2022.

• Phoenix: +2.26%
• Dallas: −0.37%
• Las Vegas: +2.24%

Conclusion: The fact that Dallas is losing population would be a major concern for me. Prices and rents are driven by supply and demand, and where the population is falling, so is demand. Dallas does not seem like a good long-term investment location.

Urban sprawl

Urban sprawl is the unrestricted expansion of a city. Where there is unrestricted room for expansion, prices, and rents of existing homes rise slowly. If rents do not keep pace with inflation, your buying power will continue to increase and sooner or later you will be back on the daily with your treadmill. Below are links to time-lapse aerial views of the three cities

• Phoenix - Unlimited room for expansion so rents of existing properties will rise slowly.
• Dallas - Unlimited room for expansion so rents of existing properties will rise slowly.
• Las Vegas - Limited room for expansion. Las Vegas is a small island of private property in an ocean of federal land. Rents and prices of existing properties will rapidly due to limited supply.

Conclusion: Based on the potential for urban sprawl, I believe that rent and price growth for existing properties will not keep pace with inflation in Dallas and Phoenix. However, due to the shortage of land and rising population in Las Vegas, rents should keep pace with inflation.

Amir, I hope this is a good start for you.

Hello @Todd Knudson,

Out of the 180+ clients we've worked with, only about 10 were local. The rest lived in other states or countries.

When it comes to successful remote investing, two requirements are crucial:

• Choosing a location where rent has kept pace with inflation and is likely to continue doing so.
• Having an experienced local investment team.

Location Selection

The selection process is based on metrics that a location must meet. Below are a few of the criteria.

• Metro area population greater than 1M. Smaller cities may be too dependent on a single employer or market segment, which can lead to instability over the long run.
• Both state and metro populations are increasing. Never invest in a city if either the state or city populations are static or declining. Your financial future is linked to the financial future of the area. If the economy and quality of life are good, the state and city populations will be increasing.
• Low crime - A rental property is no better than the jobs around it. And, non-government jobs have limited life spans. The average lifespan of a company is ten years. An S&P 500 company has an average life span of 18 years. Every job your tenants have today will vanish in the foreseeable future. Unless new companies move into the city and create replacement jobs, the only available jobs will be low-paying service sector jobs. Companies are unlikely to select a high-crime location to set up new operations. If area income declines, the city has no choice but to reduce services. As services decline, crime increases, causing more people to move away. This is a financial death spiral from which few cities have recovered. Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.
• Low operating cost - Every dollar lost to operating costs is a dollar you don't have to live on. The three most obvious operating costs are state income tax, property taxes, and insurance. Choose a location with low operating costs if you want to maximize your net income.
• 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.

For more details, DM me for my free guide on selecting a dependable passive income location.

Investment Team

The key success factor for successful remote investing is an experienced local investment team. The critical team member is the investment realtor. Investment realtors are not “investor-friendly” realtors.

Residential (or "investor-friendly") realtors enable people to buy or sell homes. The process is simple. Homebuyers select properties, and the residential realtor provides access. Once selected, the residential realtor facilitates the offer and the closing process. Some residential realtors occasionally sell real estate that will become rental properties. However, residential realtors provide limited value beyond supplying MLS data sheets. MLS data sheets are worthless to investors.

While there may be thousands of residential realtors in a metropolitan area, there are usually only one or two investment realtors. Investment realtors work with a team to provide a broad range of services, including property selection, evaluation, renovation, and management. There is no way you can learn from podcasts, seminars, or books the skills and experience that a team of people has learned over the years and hundreds of transactions in that location free

For a guide on how to select an investment realtor, DM me for my free guide.

Summary

Remote investing is straightforward if you choose a good location and have an experienced investment team.

Hello @David Hanson,

The goal of real estate investing is to achieve financial independence. To do so, you need a reliable passive income. A reliable passive income requires meeting the following three requirements:

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

The process of acquiring reliable passive income properties is a process. Much like peeling and onion, as illustrated below.

Location

Location is the most important investment decision you will make because it determines all long-term income characteristics including:

• Whether rents will keep pace with inflation
• How long your income stream will last
• How reliable your income stream will be
• How much of your rental income is lost to overhead
• Whether you or the government control your property

Tenant Segment

The only way to have a reliable rental income is if your property is continuously occupied by a reliable tenant. A reliable tenant is someone who stays for many years, pays the rent on schedule, and takes care of the property. And, since you will hold the property for many years, you will need multiple reliable tenants over the years. However, reliable tenants are the exception, not the norm. The best way to always have a reliable tenant is to buy properties that attract people from a tenant segment with a high concentration of reliable tenants.

You can select a tenant segment with a high concentration of reliable tenants through property manager interviews.

Once you select a segment, the next step is to determine where and what they are renting today. Based on this, you can create a list of the segment’s housing requirements. Below is an example of what a segment housing requirements might look like.

• 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.

If you choose a property that does not match all of the segment's housing requirements, you are purposely excluding that segment from renting your property.

Property

You identified the tenant segment you want to occupy your property and you know their housing requirements. To attract people from this segment, buy similar properties.

Important: Each property's characteristics only match a single segment's housing requirements. So, find a segment with the right characteristics, and then buy properties that match their housing requirements.

However, there are addition criteria the property must meet:

• Short time to rent
• Reasonable renovation cost and risk
• Acceptable initial ROI and cash flow
• Reasonable purchase price
• Low maintenance cost
• Acceptable area rental restrictions
• Located in a thriving area with potential for future growth.

Summary

Consistently acquiring reliable passive income properties is the result of a process, not luck or the opinions of others. To acquire such properties, start with the location and then peel the onion one step at a time.

Hello @Jordan Morris,

Remote investing is our standard business. Of the 180+ clients we’ve worked with, only about 10 were local. All the rest lived in other states or countries.

There are two requirements for successful remote investing:

• Choosing a location with rent that has kept pace with inflation and is likely to continue doing so.
• An experienced local investment team.

Location Selection

The selection process is based on a few simple metrics that a location must meet. Below are a few of the criteria.

• Metro area population greater than 1M.
• Both state and metro populations are increasing.
• Low crime - 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
• Rent control - Never invest in any location with rent control.

For more criteria and details, DM me for my free guide on selecting a dependable passive income location.

Investment Team

The critical factor for successful remote investing is a local investment team. The critical team member is the investment realtor. Investment realtors are not “investor-friendly” realtors.

Residential (or "investor-friendly") realtors enable people to buy or sell homes. The process is simple. Homebuyers select properties, and the residential realtor provides access. Once selected, the residential realtor facilitates the offer and the closing process. Some residential realtors occasionally sell real estate that will become rental properties. However, residential realtors provide limited value beyond supplying MLS data sheets. To an investor, MLS data sheets are worthless.

While there are usually thousands of Residential Realtors in a metro area, there are usually only one or two Investment Realtors. Investment Realtors must understand finance, market trends, ROI, tenant pools, and more. Investment Realtors provide a wide range of services, including property selection and evaluation. Plus, Investment Realtors are always part of a team. Only a team can provide all the skills and resources required for successful real estate investing.

For how to select an experienced investment realtor, DM me for my free guide.

Summary

Remote investing is straightforward if you choose a good location and have an experienced investment team. So far, we’ve delivered over 480 investment properties. Some of our clients live in other countries.

Hello @Mabel Lee

I recommend starting with your goal and working backward to determine what you need to purchase in order to achieve it. For this post, I will assume that your goal is a passive income that meets the following requirements.

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

Location Selection

The location is the most important investment decision you will make, not the property. The investment location determines all long-term income characteristics including:

• Whether rents will keep pace with inflation
• How long your income stream will last
• How reliable your income stream will be
• How much of your rental income is lost to overhead
• Whether you or the government control your property

The process of selecting a reliable passive income location is simple. Begin by selecting a reasonable set of potential cities and then eliminate those that do not meet specific additional requirements.

• Start with cities with a metro population >1M. Smaller cities maybe be dependant upon one market segment or a limited number of large employers and they are unlikely to do well in times of economic distress. (Wikipedia). Baltimore’s population is >2M.
• Both state and metro populations are increasing. Do not buy anywhere if the state or metro populations are static or decreasing. (Wikipedia)According to the Census Bureau, the population of Baltimore has declined by 6.3% between 2010 and 2020. This tells you people are leaving the area, so prices and rents will rise slowly due to limited demand. This will not meet the goal of inflation compensation which requires prices and rents to keep pace with inflation.
• 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. Baltimore is number 18 on the crime list. High crime has multiple impacts. One is that major employers will not choose locations with high crime levels. So, new jobs will not be created that pay similar wages and requires similar skills to where the tenant segment is working today. The result is declining incomes, which leads to an increase in crime, which leads to more people leaving the metro area. This is a financial death spiral from which few cities have recovered.

Other selection factors to consider. DM me for a free copy of my guide on selecting a dependable passive income location.

Property Selection

The purpose of owning a property is to attract reliable tenants. A reliable tenant is someone who stays for many years, always pays rent on time, and takes care of the property. However, reliable tenants are the exception rather than the norm. Since you plan to hold the property for many years, you would need a reliable tenant each time the property goes vacant. The best way to achieve this goal is to buy a property that attracts a tenant segment with a high concentration of reliable tenants.

You can identify a segment with a high concentration of reliable tenants through property manager interviews. If you want more information, DM me for my free guide on selecting the right tenant segment.

Once you select a segment with a high centration of reliable tenants, determine what and where they are renting today. All you need to do is buy similar properties. These properties will attract people for the segment you want.

If you follow the approach outlined above, of working backward from your financial goals, there are only a few decisions to make and no dependence on luck or opinions.

Another important factor for success is having an experienced local investment team. An experienced local investment team already has all the necessary team members, processes, contacts, experience, and services you need. Additionally, working with an investment team costs no more than working with any other realtor.

Mabel, I hope this helped.

Hello @Gilian Villatoro,

When evaluating a location, take into account both the initial return and the long-term economic performance. You can estimate the initial return by using standard cash flow and ROI formulas. However, such return calculations only predict how a property is likely to perform under ideal conditions on day one.

Financial freedom requires a passive income that meets the following requirements:

• Reliable - Your income continues even in difficult economic times.
• Inflation-Compensating - Rental income increases faster than inflation, which compensates for rising prices. If rental income does not keep pace with inflation, you will not have sufficient dollars to pay for inflated prices.
• Persistent - Your income lasts; you or your spouse won't outlive it.

There are clear metrics for evaluating the probable long term performance of a location including:

• Metro population greater than 1M. Small towns may rely too much on a single business or market segment. List of cities: 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 - Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.
• Low operating cost - The three most apparent are income taxes, property taxes, and insurance. Insurance - ValuePenguin, Metro Property Taxes - Rocket Mortgage
• Rent control - Never invest in any location with rent control.
• Rents (and prices) keep pace with inflation.

There are other considerations but these are a good start. How does Memphis compare to these criteria?

✅ Metro population greater than 1M - According to the Census Bureau, Memphis metropolitan area was 1,337,779 in 2022.

❌ Both state and metro populations are increasing - Memphis population declined by 1.7% between 2017 and 2022. The result of a declining population is lower purchase prices (due to limited housing demand) and limited increases in rent and prices in the future.

❌ Low crime - Memphis is #5 on Neighborhood Scout's 100 most dangerous cities. High crime rates have multiple negative impacts, including job loss. Non-government jobs have a limited lifespan. On average, corporations last for 10 years, while S&P 500 companies last on average 18 years. So, all the jobs your tenants have today will disappear over time. Unless new companies move into the location and create replacement jobs, the only jobs remaining will be lower paying service sector jobs. As area income falls, city revenues also decrease. This forces cities to cut back on services, leading to increased crime and more people leaving the city. This creates a financial death spiral that few cities have been able to recover.

Low operating cost -

• ❌ Annual average cost of property insurance for Tennessee: $2,088. Compared to Texas: $2,536, Florida: $2,207, and Nevada: $1,144.
• ✅ Annual average property taxes for Tennessee: 0.71%. Compared to Texas: 1.80%, Florida: 0.89%, and Nevada: 0.60%.

✅ Rent control - I found no rent control in Tennessee.

❌ Rents (and prices) keep pace with inflation. According to RentCafe, the average rent per square foot for single-family homes in Memphis, Tennessee increased by 18.3% between 2017 and 2022. The CPI (Consumer Price Index) change between 2017 and 2022 was 29.8%. So, the buying power of rents decreased by 11.5% percent (18.3% - 29.8%). Unless rents keep pace with inflation, rents are effectively declining.

Other Considerations

• Urban sprawl - Population increase and limited room for expansion are what drive up prices and rents. As far as I can tell, there is unlimited room for expansion, as you can see in this time lapse aerial view. Without a barrier to expansion, new home prices and rents limit price and rent growth for existing homes.

Summary

Due to Memphis’ high level of crime, declining population, and unlimited urban sprawl:

• Properties will be low priced due to limited demand for housing.
• Rents lag prices by 2 to 5 years so initial return will be better than average.
• Rents have not kept pace with inflation so sooner or later, you will be forced back onto the daily work treadmill. This is not a location for long-term financial freedom.
• Urban sprawl limited rent and price growth for existing homes.

Gilian, not the news you probably wanted to hear, but these are the facts.