All Forum Posts by: Eric Fernwood

Hello Casey,

We’ve provided investor services in Las Vegas for the last 15+ years. We've delivered over 480 investment properties with over 90% repeat business rates. So, we have the experience you're looking for.

You asked multiple questions, and I divided them into the following sections.

• Should I get a pre-approval first?
• How to consistently acquire dependable passive income properties?
• What about LLCs?

Should I Get a Pre-Approval First?

Yes. You need to know how much you can afford while still keeping a pad for unexpected events in your life. Also, there is more than just the down payment. Below is information specific to Las Vegas.

• Down payment - The majority of our clients put down 25%. This provides the best combination of down payment and interest rates.
• Closing costs - For financed purchases in Las Vegas, typical closing costs are 1.5-2% of the purchase price. Closing costs are lower in Las Vegas because Nevada is a title state. Only 19 states are title states; the others are warranty deed states, and closing costs will be higher.
• Renovation cost - The typical renovation cost for properties we target ranges between $10,000 and $20,000. However, I recently spoke with a California property manager and discovered that their typical renovation cost is between $100,000 and $150,000.

Below is the estimated cost to close for a $400,000 property:

• Down payment: 25% x $400,000 = $100,000.
• Closing costs: 2% x $400,000 = $8,000.
• Renovation and carrying costs: $15,000.

Total cash necessary to acquire the property and bring it to market: $100,000 + $8,000 + $15,000 = $123,000.00

How to Consistently Acquire Winning Properties

There is no magic or secrets, and gurus are not required. Consistently buying dependable passive income properties is a straightforward process. At each decision point, there are clear metrics, so you know you are making the right decision. Below is an image showing the process.

Successful investing is like peeling an onion. You start with the location.

Location

When making an investment decision, the location is more important than the property itself. Choose a location based on factors including:

• Rents increased faster than inflation.
• State and city populations increasing.
• Metro population > 1M.
• Low crime.
• Low operating costs.

Tenant Segment

After selecting a location, choose a tenant segment with a high concentration of reliable tenants (by interviewing multiple local property managers). A reliable tenant is someone who stays for many years, pays rent on time, and takes good care of the property. However, good tenants are the exception rather than the norm.

Property Selection

You identified a segment with good tenants and want them to rent your property. The only way to do this is to buy properties similar to what they are currently renting and in the same location(s). If you buy a different type of property or in a different location, you will be excluding the segment you want.

By following the approach outlined above, you can consistently acquire dependable passive income properties through a step-by-step process that involves little subjectivity. As long as you adhere to the process, the likelihood of success is high. 

I wrote a guide on the process. If you would like a free copy, DM me.

LLCs

One purpose of holding properties within a Limited Liability Company (LLC) is to limit the liability of the property owner or investor. By forming an LLC, the property owner creates a separate legal entity that can own property and conduct business in its own name. If a property owner holds properties in their own name and the property is subject to a lawsuit, the property owner may be personally liable for any damages or losses.

Our clients follow a two-step process.

1. Buy the financed property in your own name. While it may be possible to obtain financing for the LLC to buy the property directly, it is likely to be much more expensive.
2. After closing escrow, transfer the deed into the LLC.

Considerations

• I have never heard of a lender that allows you to transfer the deed into an LLC or a trust. However, I have also never heard of a lender calling the note due because of a property transfer. As long as you continue making payments, I don't believe they will care.

• Transfer tax - some states, such as Nevada, charge a property transfer tax if the ownership is changed. However, there are scenarios where the transfer tax can be exempted.

• An LLC only provides protection if you treat it like a business. If you were to mingle funds in your personal checking account, someone might be able to break apart the LLC in court. To avoid this, set up a separate bank account for LLC and don't use it as your personal checking account.

• Whether an LLC is necessary depends on the litigation environment where the property is located and what assets you need to protect. Another option is an umbrella policy. For example, suppose your landlord insurance covers you up to $1 million in liability. Then, you could have an umbrella policy that covers you from $1 million-$2 million. While this approach does not offer the same level of protection an LLC would, it covers all of your assets.

• One method for reducing risk is to include your property manager as an additional insured on your landlord policy. This way, you ensure they remain on your side if someone decides to sue you.

• The best way to avoid litigation is to reduce the odds of it occurring. Below are some examples.

  • In Las Vegas, the landlord is not required to install a carbon monoxide detector. When we do renovations, we take them out. The concern is that if the tenant does something stupid and someone is harmed by carbon monoxide, they will sue you. By taking out the carbon monoxide detector and requiring in the lease that they install and maintain one, you avoid this potential risk.
  • We remove alarm and monitoring systems. I can imagine a situation where a tenant is robbed, and they blame you because the alarm system failed to work.
  • You need to be aware of the exterior as well. Century plants look like giant artichokes with spikes on the ends of their leaves. We remove such plants if they are within 3 feet of a walkway. I can see a situation where a child runs into the plant and is injured.

  Casey, I hope the above helped.

Hello @Jamie Stone,

Turnkey is simply a purchasing method and does not reduce the time or effort required to select a location, tenant segment, or conforming property characteristics. Below is the recommended process. Note that due to length considerations, I could not include many details. If you have any questions or want more information, reach out.

Due Diligence

Location

When making an investment decision, the location is more important than the property itself. Choose a location based on factors including:

• Rents increased faster than inflation.
• State and city populations increasing.
• Metro population > 1M.
• Low crime.
• Low operating costs.

Tenant Segment

After selecting a location, choose a tenant segment with a high concentration of reliable tenants. A reliable tenant is someone who stays for many years, pays rent on time, and takes good care of the property. However, good tenants are the exception rather than the norm.

Property selection

You identified a segment with good tenants and want them to rent your property. The only way to do this is to buy properties similar to what they are currently renting and in the same location(s). If you buy a different type of property or in a different location, you will be excluding the segment you want.

Purchase Method

Once you have determined where and what you want to buy, you can now decide on the best way to purchase conforming properties, turnkey or direct. See the image below.

Considerations

Lower Return

In general, turnkey properties are almost always more expensive than direct purchases. Turnkey providers have high overhead and significant costs, as well as marketing expenses, and they must make a profit. All these costs are in addition to the normal acquisition cost you would pay if you bought the property directly. The diagram below illustrates the cost difference between a direct purchase and a turnkey purchase.

As shown above, a turnkey property costs more to purchase but generates the same rent as a directly purchased property. If you increase the acquisition cost while the income remains the same, the return on investment will be lower.

Independent Inspection Report

Some turnkey providers do not allow independent inspections. While turnkey properties often have cosmetic improvements such as new paint, carpet, and appliances, they don’t always address plumbing, HVAC, roofing, and other system defects. Without an inspection report from an independent licensed property inspector, you will not know about any foundation issues, roof damage, mold, water damage, code violations, and other expenses that can turn what appears to be a sound investment into a financial nightmare.

Property Management

One benefit of turnkey properties is that they come with a tenant, and the turnkey property manager handles property management.

In preparing this article, I looked at reviews of several turnkey property managers. One had several hundred one-star ratings. In one contract I read, it was required to use their property manager, even if they performed poorly, resulting in short tenant stays and other issues. This leaves you with no choice.

Since they don't have to worry about being replaced with another property manager, there's little incentive for them to find good tenants. They collect a fee every time they re-rent the property, which creates a conflict of interest.

I was reading a turnkey real estate company's website where they boasted about having an in-house repair staff. Property managers often make more money from repairs than they do from collecting rent. I don't want my expenses to be the property manager's main source of profit, as this creates a conflict of interest.

Contract Commitments

I read a turnkey contract with what I thought were unreasonable terms. For example, if you decide to sell the property, you can only do so through the turnkey company, which specifies a rate well above what you could get by selling it through another realtor.

Direct Purchase Issues

The direct purchase method has its own issues. For example, in my experience, less than 1% of all realtors have the ability to select or analyze properties. Before I started my business in Las Vegas 15 years ago, I purchased several properties through residential realtors. However, they could only provide MLS data sheets, which are of zero value to an investor. When you buy a property, you need a variety of services and resources to bring it to market, which are only available from a local investment team. If you can't find a good local investment team, it will be more challenging to make a direct purchase.

In Summary

Before buying from a turnkey:

• Conduct your own due diligence to determine which properties match your target tenant pool. If the turnkey service does not offer conforming properties, find a reliable local investment team.
• If the turnkey provider does not allow you to hire an independent inspector to evaluate the property, look for another purchase source.
• The turnkey provider must provide a list of all repairs made so that you know what repair costs to expect based on the inspection report. Cosmetic repairs are inexpensive, but repairing systems can be costly. For example, premium granite can be installed in a typical kitchen for less than $3000, whereas replacing the sewer line from the house to the street can cost anywhere between $5000 and $10,000. If the roof has deteriorated, replacing a composition roof can easily cost $10,000.
• Rental comps - just because there is a tenant in the property paying a specific amount does not necessarily mean that is the market rent for the property. I have investigated several multifamily properties where the agent claimed the tenants were paying $X, but when I interviewed them, I discovered they were actually paying significantly less.
• Determine the vacancy rate and the time it took similar properties to rent. That will give you an idea of how long your property will be vacant between tenants.
• Determine the market value of the property based on recent comparable sales. This will give you an idea of how much you are paying for the convenience of buying a turnkey property.
• You should be able to work with the property manager of your choice. If you are required to use only the turnkey property manager, it would be a major red flag for me.
• The turnkey provider must provide the results of any code inspections. Code violations can be a ticking time bomb that will explode down the road.
• They must provide all disclosures from the prior owner of the property.
• Obtain a written statement from the turnkey property manager with specifics on the time and cost to evict a non-paying tenant.

Buying a turnkey property is simply a purchase method. It does not save you any time on due diligence, and turnkey properties are typically more expensive than a direct purchase, which can lower your returns.

Hello Noah,

Broad statements make good soundbites, but they are rarely applicable to specific markets. Furthermore, they do not apply to all segments within a single market. For instance, the demographic that buys million-dollar houses differs from the demographic that buys $400,000 homes. It is possible for prices to decrease in the million-dollar home market segment while increasing in the $400,000 market segment.

We've targeted a single narrow tenant segment in Las Vegas for the last 15+ years. Below are statistics for properties that conform to this tenant segment.

Sales - Median $/SF by Month

Prices have stabilized and started rising again.

Sales - List to Contract Days by Month

Days on market have been dropping rapidly since January, indicating increasing demand.

Sales - Availability by Month

The number of homes on the market has declined rapidly since December, indicating decreasing supply.

Sales - Months of Supply

There is only 1 month of supply, indicating a strong seller’s market.

Based on the statistics, demand is increasing and supply is decreasing. Prices are starting to rise and will continue to rise for the next few months.

A frequent question I receive is, “Why is Las Vegas performing so well when so many cities are not?”

Supply & Demand

Unlike the stock market, which is largely driven by emotions in the short term, real estate prices are based on supply and demand. Las Vegas is unique in that its housing stock is almost fixed while demand continues to increase. This almost guarantees that prices and rents will rise in the future.

The Supply Is Almost Fixed

Las Vegas is a small island of private property surrounded by a vast expanse of federal land. There is very little undeveloped privately owned land available in Las Vegas, and what is available is quite expensive. As a result, new homes in the areas we target start at $550,000, while properties that match our target tenant pool segment are priced between $320,000 and $475,000. Therefore, even if more new homes are built, it will not increase the housing stock for the market that we are targeting.

Demand

Increasing population drives the demand for housing. The population of Las Vegas grows by an average of 2-3% each year. What is attracting people to Las Vegas? Jobs. In a study I conducted in January, there were between 26,000 and 31,000 open jobs in Las Vegas. These open jobs will attract more people to Las Vegas, thereby increasing the demand for housing.

Currently, there are between $16 billion and $26 billion worth of new projects under construction, depending on which study you read. As these large-scale projects come online, they will create thousands of additional jobs.

Hello @Nick Tarantino,

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

There is a straightforward process for successful investing, similar to peeling an onion. See the image below.

Location

The first and most important decision to make when investing is choosing the right location, not the property itself. (For more details on this process, please post your questions or reach out to me directly.) There are several criteria that a location must meet, and below are three of them:

• Rent growth must keep pace with inflation. Every time you go to the store, it requires more and more dollars to buy the same basket of goods. Unless rents keep pace with inflation, you will not have the additional dollars you need, and your only option will be to continually decrease your standard of living.
• Metro population greater than 1 million. Small cities tend to be too dependent on one industry or one major employer. Your financial future is tied to this location, so it's important to choose one that will be stable over the long run.
• Increasing state and city population. If the population of either the state or the city is static or declining, demand for housing will not increase. Unless demand increases, prices and rents will not increase.

Investment Team

Everything you learn from podcasts, books, seminars, and websites is general information. You will buy a specific property in a specific location in a specific condition subject to specific local regulations. The only source for the hyper-local information you need is a good local investment team.

An investment team has probably delivered hundreds of investment properties. They already have all the skills, contacts, processes, and services you need to be successful. No matter how hard you try, you cannot duplicate the years of experience of a team of experts. Plus, working with an investment team costs no more than working with any other realtor.

If you cannot find a good investment team, look for another location.

Tenant Segment

The property is no better than the tenant who occupies it. If your goal is to get off the treadmill and stay off, you need a reliable income stream. The only way to achieve this is by having a “good” tenant continuously occupying your property. I define a good tenant as someone who stays for many years, pays rent on schedule, and takes care of the property.

However, good tenants are the exception, not the norm. To increase your chances of finding a reliable tenant, you need to find a tenant segment with a high concentration of good tenants. You can do this by interviewing multiple local property managers.

Property Selection

You have identified a tenant segment that has a high concentration of good tenants. If you want this segment to occupy your property, find out what and where they currently rent (again by interviewing multiple property managers) and then purchase similar properties. By allowing your target tenant segment to make all decisions about the property, your chances of success are high.

Summary

To keep this post brief, I will stop here. It is important to understand that consistently acquiring dependable passive income properties does not require luck, the opinions of others, or guesswork. It is a straightforward process with metrics at each decision point, so you can be confident that you are making the right decisions.

If anyone would like more details or have questions, DM me for a free guide that I wrote up to explain my investment methodologies and processes.

Hello @Anna M. Xiques,

You are on the right track. You need a local investment team.

Everything you learn from books, seminars, podcasts, and websites is general information. You will not buy a general property in a general location. You will buy a specific property in a specific location, subject to specific local regulations. The only source for the hyperlocal information you need is local experts. The problem is how to find the experts you need. The place to start is finding an investment realtor.

Residential or "Investor Friendly" Realtors

Residential realtors enable people to buy or sell homes. The home-buying process is simple. Home buyers select properties, and the residential realtor provides access. Once a property is selected, the residential realtor processes the offer and the closing process. Some residential realtors occasionally sell real estate that will become rental properties. However, residential realtors provide very 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 you, as an investor, need to make informed decisions.

Investment Realtor

Where residential realtors sell homes, investment realtors sell income streams. Investment realtors provide the information you need to evaluate an investment property.

Investment realtors are always part of a team. Only a team of experts can provide the end-to-end processes, skills, and knowledge necessary to bring a property to market. See below for a diagram of the process we follow.

While the above diagram depicts our process, any investment team will have a similar process. So, if you find an investment realtor, you have a full team.

How to Find an Investment Realtor

There are usually thousands of residential realtors in a metro area, but only one or two investment realtors. How do you find one?

Compile a List of Candidates

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

After obtaining a pool of candidates, evaluate each of them using the following interview questions. The purpose of the interview questions is to determine the individual's ability to lead a team in finding, validating, inspecting, renovating, and managing a property.

Interview Questions

Before you begin interviewing candidates, prepare a list of 10 or fewer questions. You won't have time for more. Ask each candidate the same questions and take note of their responses. Below are sample questions, along with answers. It's unlikely that any candidate will have the "perfect" answer to every question, but they should provide reasonable responses.

• 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 properties per year. Even if all were investment properties, it's not enough repetition to have the needed processes, experience, and resources. I believe a minimum of 12 investment properties per year is necessary to be proficient.
• Did you or your client select the properties? This is an important question. Residential and investment-friendly realtors do not pick properties. They send MLS data sheets for the properties the client identifies. The client evaluates the properties and selects one or more to make an offer. The realtor adds almost no value if you do all the work. Reject the candidate if the client selected the property.
• What were your primary selection criteria? - It could be 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. No real estate sites that I’ve seen provide usable estimates on rent or time to rent. Monthly rent is the critical information you need to evaluate a property.
• 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.”

If the candidate answers all questions satisfactorily, you are reasonably assured they know what they are doing, and the team they work with will provide the skills, experience, and processes you need.

Anna, I hope this helps.

Hello @Abi Horton,

I moved to Las Vegas from New York City. I understand why you hate it there. I did too.

Assuming you have the freedom to choose any location, below is what I would do.

Location

The first and most important decision to make is to choose a location. The location determines all long-term income characteristics. I would start with Wikipedia's list of metro areas with a population greater than 1 million and apply each of the following elimination filters. Once you have eliminated all locations that do not conform to all the following criteria, you will have a short list of locations to evaluate. The elimination criteria are as follows.

• Metro area population size greater than 1M. Small towns may rely too much on a single business or market segment. Wikipedia
• Inflation compensation - The location determines whether rents will increase fast enough to offset inflation. Therefore, a critical location selection metric is that rents and prices are rising faster than inflation. Rents lag prices, so you can use the appreciation rate if you do not have historical rental data. Zillow Research
• 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 are income taxes, property taxes, and insurance. Insurance - ValuePenguin, Metro Property Taxes - LendingTree
• 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 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.

Once you've narrowed the list of locations, the next criteria is the presence of a good local investment team.

Everything you learn from seminars, podcasts, books, and websites is general in nature. You won't be buying a general property in a general location. Instead, you will be purchasing a specific property in a specific location that is subject to specific local rental regulations. The only source of such information is an experienced local investment team that has years of experience. You cannot duplicate what took a team of people years to learn. Plus, working with an experienced investment team costs no more than working with any other realtor.

If I did not find a good local investment team in a location, I would look for another location.

Target Tenant Segment

A rental property is no better than the tenant who occupies it. You want your property continuously occupied by what I call a “good” tenant. A good tenant is someone who stays for many years, takes care of the property, and pays all the rent on schedule.

You can find a tenant segment with a high concentration of good tenants by interviewing multiple local property managers. Once you identify a target segment, determine what and where they are renting today.

Property Selection

If your plan is to house hack, it's always wise to have a backup option. In this case, the backup option would be using the property as a long-term rental. Therefore, buy properties similar to what your target segment is currently renting. This way, if you ever decide to change it to a long-term rental, you'll have applicants from your target tenant segment.

When we work with clients who wish to house hack, we usually select properties with four bedrooms and three baths, and a three-car garage. We have standard renovation items, but when we are doing properties that will be used for house hacking, it does change some items. For example, we usually put commercial-grade nylon carpets in bedrooms. For a house hack, I would install LVP to lower turn costs. House hacking requires other small changes to our standard renovation, but not that many.

Summary

Making money in real estate is a straightforward process. It starts with selecting the right location because the location determines all long-term income characteristics. Next, select a tenant segment with a high concentration of good tenants. Lastly, select a property similar to what your target tenant segment is renting today. You will want a property that is also suitable for house hacking. For example, a four bedroom, three bath, three car garage property.

Abi, I hope this helped.

Hello @Kelly Elterman,

You posed a great question but not one with a simple answer. In this post I will address several aspects concerning the current situation and anticipated future changes. The topics include:

• The goal of real estate investing
• The current market situation.
• Return calculation limitations
• The foreseeable future

The Goal of Real Estate Investing

The goal of real estate investing is to achieve financial independence so you no longer depend upon a 9-to-5 job. There are two parts to financial independence. The first is having sufficient cash flow today that will replace your current income. The second is that rents increase fast enough so that they offset the effects of inflation. Unless both of these conditions are met, you will not have the financial freedom you want.

Inflation is where future appreciation and rent growth come into play. Unless you invest in a location where rents keep pace with inflation, you will not be able to afford the inflated prices. So, you will not achieve your goal of financial freedom. Remember that metro averages are not what matters. What matters is how the specific area performed over the last few years.

The Current Market Situation

What is killing returns at this time is primarily high-interest rates. It is difficult to find properties that cash flow with only 25% down. We are finding a few in Las Vegas, but that is primarily due to the data mining software we developed. If we did not have the data mining software, I don't think we would find them either.

High debt service, driven by high interest rates, is not the only cost that is bringing down returns. Property taxes and insurance costs also reduce profitability. I recently wrote an article comparing property tax and insurance costs in Texas, Florida, and Nevada. Below are the state averages. (These are state averages, individual cities may impose additional taxes.)

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

To maximize profitability, consider a location with lower operating costs.

Return Calculation Limitations

Return calculations only predict how a property is likely to perform under ideal conditions on the first day. They do not provide any information about the future. Since you will likely hold a performing property for as long as you live, what happens after the first day is far more important.

The Foreseeable Future

Before I continue, know that predicting anything beyond yesterday is guessing. So take the following only as my opinion.

I believe the politicians will do what is necessary to bring interest rates down as well as inflation because it will hurt their chances of reelection if they don't. I believe that within two years, interest rates will be lower than they are today. I was talking to a client about the situation, and here is what he said. "Higher interest rates are reducing my cash flow by about $300 per month. I believe interest rates will be significantly lower in one or two years. Assuming two years, that means I will actually pay $3600 ($300 per month times 2 years) more for the property. On a $400,000 property, $3600 is not significant. What is significant is locking in the price and then refinancing when rates are lower in the future.”

Summary

In my opinion, the best approach to real estate investment today is to purchase high-quality properties in areas where rents have consistently increased faster than inflation. It's also important to buy in a location with low operating costs. When interest rates fall, refinance. Real estate is a long-term investment, so short-term fluctuations are less significant.

Hello @Murray Reginald,

To ensure a profitable property, do not select a property type simply based on others’ opinions. Instead, identify the characteristics of the people you want to occupy your property. This is important because a rental property is only as good as its tenant. If your tenants do not pay rent on time, cause damage, or stay for short periods of time, your property will not perform as well as you would like.

The ideal tenant is someone who stays for many years, pays all the rent on schedule, and takes care of the property. However, “good” tenants are the exception, not the norm.

To identify a tenant segment with a high concentration of good tenants, interview property managers. Once you have identified a segment, determine what and where they currently rent. If you purchase properties that are similar, the majority of your applicants will come from the desired segment. If you have questions or would like more detail about this methodology, DM me.

Selecting properties is a straightforward process if you let your target tenant segment define all the characteristics of the properties you purchase.

Hello @Kelly Cynamon,

Choosing an investment location should not be based on people's opinions. While everyone has an opinion, it may not be the best location for you. Many people choose a location based on low cost and initial return. However, neither is a good indicator of a location that will help you become financially independent.

Inflation and Financial Independence

Every time you go to the store, it costs more and more to purchase the same set of goods due to inflation. To counteract the effects of inflation, your rental income must keep pace with it. If rents fail to keep up with inflation, you won't have additional dollars to pay inflated prices, and you will eventually be forced to return to the daily grind of working for a living.

Local demand determines prices and rents. In areas with low demand, prices, and rents will not rise fast enough to offset inflation. Additionally, investing in low-cost, low-growth locations is actually the most expensive way to reach financial freedom. If you're curious why, feel free to ask.

Some indicators of locations where rents will not keep pace with inflation include:

• The population at the state or local level is not increasing. Without population growth, there will not be a demand for additional housing. So, either prices and rents will be static or rise very slowly.

• Urban sprawl - Most cities in the US, such as Phoenix, Memphis, and Indianapolis, have large open areas surrounding them that enable unlimited expansion through urban sprawl. This leads to a slow or stagnant increase in property prices and rents in established areas, as people prefer to rent or buy newer homes.

• Crime - The value of your rental property is directly linked to the availability of jobs in the surrounding area. Unfortunately, most companies have a limited lifespan, and over the next 10 to 20 years, the companies employing your tenants are likely to disappear. Cities with high crime rates are not attractive to new businesses, which means that replacement jobs may not be created. Consequently, most available jobs in the area will be low-paying service sector jobs.

  Cities rely on property and sales taxes to fund their budgets. When the area's income decreases, so does property and sales tax revenue. This forces cities to cut back on services, which, in turn, leads to an increase in crime. Higher-income residents then leave the area, perpetuating a cycle of declining city income, services, and increased crime. Few cities have ever recovered from this economic "death spiral." Never invest in any city on Neighborhood Scouts' list of the 100 most dangerous US cities.

• High operating costs - Every penny you lose to taxes and insurance decreases your rental income. Look for states with low taxes and insurance. Insurance - ValuePenguin, Metro Property Taxes - LendingTree

There are more location considerations, but the above is a good start.

The limitation of return calculations

Return calculations only predict how a property is likely to perform under ideal conditions on the first day. They provide no insight into the future. However, most people want to keep their properties for the rest of their lives. So, what happens after the first day is much more important. Take a long-term view of the metro area's future economic health. Your financial independence is linked to the performance of the location over the long term.

Kelly, I hope the above information is helpful. If you or anyone else would like more details about my investment methodologies, which I used to deliver over 480 high-performance investment properties, please DM me for a free white paper.

Hello @Mario Fernandez,

The goal of real estate investing is to achieve financial independence, which enables you to break free from your daily job and take control of your life. To get off and stay off the daily worker treadmill, you need a dependable source of passive income. What is dependable passive income?

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

The odds of living in a location that meets all the requirements for a dependable passive income are low. That's why the saying "live where you live but invest where you can make money" applies to most people. Remote investing is the solution.

Fortunately, there is a straightforward process for buying dependable passive income properties, as illustrated below.

Successful real estate investing is like peeling an onion: it starts with selecting the right location.

Location

The location determines the long-term income performance of the property. Some of the key location metrics include:

• Whether rents consistently kept pace with inflation.
• The populations of both the state and city are increasing. Every person who moves to a city needs a place to live. Cities with rising populations have a higher appreciation and rent growth rates compared to cities with declining or stagnant populations.
• A metro population greater than 1 million. Smaller cities tend to be too dependent upon a single industry or employer segment.
• Low crime. Most companies have an average lifespan of 10 years. S&P 500 companies only have an average lifespan of 18 years. So, every job your tenants have today will vanish in the next 10 to 20 years. Unless new companies are moving into that location, creating replacement jobs that pay similar wages and require similar skills, all that will be left are low-paying service sector jobs. When companies look for a new location, they will not choose high-crime cities.
• Rent control. Some cities and states have various forms of rent control or limit your ability to select tenants. In these locations, you may not be able to increase the rent fast enough to keep pace with inflation, or you may end up with undesirable tenants. Do not invest in locations with anti-landlord regulations.
• Low operating costs are crucial for maximizing cash flow. Every dollar spent on taxes and insurance reduces your profits. Some states, such as Texas and Florida, have high property taxes and insurance costs. Before choosing a location, be aware of the amount of rental income you will lose to taxes and insurance.

Investment Team

Everything you learn from books, seminars, websites, and podcasts is general information. You will not be buying a general property in a general location. Instead, you will buy a specific property in a specific location, subject to specific local regulations. The only source for the hyper-local knowledge you need is an experienced investment team. These people already have all the skills, experience, resources, and processes you need to be successful. And working with a team costs no more than working with any other realtor. There is every advantage and no disadvantage to working with a good local investment team.

If you’d like more detail on how to vet potential team members, DM me.

Tenant Segment

An investment property is only as good as the tenant who occupies it. Each tenant segment has different behavioral characteristics. In Las Vegas, for example, there are three major tenant segments: one with an average stay of less than one year, another with an average stay of over five years, and a third with an average stay of less than two years.

How do you find a segment with a high concentration of people who stay many years? By interviewing multiple local property managers.

Property Selection

Every tenant segment has specific housing requirements. Housing requirements can be categorized as follows.

• Location
• Property type - Apartment, condo, multi-family, single-family, etc.
• Configuration - Three bedrooms, two-car garage, one-story, two-story, etc.
• Rent range - Approximately 30% of the medium gross monthly income for the segment.
• “Wants.” “Wants” are items that a tenant segment finds highly desirable. For example, for many C-class properties in Las Vegas, bars on the first-floor window are highly desirable. For the tenant segment we target, stainless steel kitchen appliances and granite countertops are highly desirable.

You previously identified a tenant segment with the right characteristics. If you want people from that segment to occupy your property, only buy properties that conform to their housing requirements. If you buy anything else, you exclude this segment from renting your property.

Summary

Due to length considerations, I will stop here. If you want more detail about the process, DM me for a (free) guide.

Using this process, I’ve delivered over 480 high-performing investment properties. I wrote this guide because when I first started investing in real estate, people were kind enough to explain how things worked. I repay their kindness by helping others on their journey to financial independence.

Successful real estate investing is a straightforward process. Gurus and luck do not play a role in successful investing. By following the process outlined above, you greatly increase your chances of consistently acquiring high-performing properties.