All Forum Posts by: Eric Fernwood

Hello @Robert Willard,

There are good deals in Las Vegas, but they are not easy to find. Based on our research, on average, only about 0.4% of all available properties are even worth considering. The days of driving around and stumbling upon a good investment property are no longer viable. The only reason we can consistently find good properties is through our use of data science.

Our method is to focus on net income ( rent - all expenses including vacancy costs, maintenance, etc.) and income dependability and not low price. Low priced properties are more likely to have higher vacancy and maintenance costs, largely due to the tenant segment the property attracts.

The only way to have a dependable passive income is if a dependable tenant continuously occupies the property. A dependable tenant is someone who:

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

Dependable tenants are the exception, not the norm.

The process we follow is straightforward. First, select a tenant pool segment with a high concentration of tenants that meet the above requirements. You can find this segment through property manager interviews. If you want sample interview questions, let me know.

Once you identify a tenant segment you want to target, determine what and where they rent today. You need to determine at least five segment characteristics.

• Location - Locations where significant percentages of the target segment live today.
• Property type - What type of properties are they renting today? Condo, high rise, multi-family, single family?
• Rent range - What the segment is willing and able to pay. Usually, this is about 30% of their gross monthly household income.
• Configuration - Two bedrooms, three-car garage, large back yard, single-story, two stories?
• Wants - Physical features the segment values. For example, granite kitchen counters, bars on the first-floor window, or a three-car garage.

After determining the above, you can provide the profile to any realtor, who can then find conforming properties. This narrows the search to a manageable number of properties, instead of looking at hundreds or thousands. However, in addition to matching your target segment’s housing requirements, the property must also meet additional requirements. See the image below.

Since you'll likely hold this property for the rest of your life, it’s important to remember that all return calculations are only a snapshot in time. Return calculations only predict how a property is likely to perform, under ideal conditions, on day one. Return calculations tell you nothing about day two onward. So, you need to be aware of the initial return but your main focus needs to be on long term performance.

In summary, select a tenant segment with a high concentration of dependable tenants. Then, determine what and where they rent today, and purchase similar properties. So far, we have delivered over 470 investment properties using the same methodology. And, our results have been excellent: average annual appreciation of 15+%; average annual rent growth of 8+%; during the 2008 financial crash, our clients had zero decrease in rent and zero vacancies; our average tenant stay is over 5 years, and out of a tenant population of over 1,200, we’ve had total 6 evictions in the last 15+ years.

Contact me if you have questions, or if you would like a copy of our free investor's roadmap guide.

Hello Denarius,

How are you finding it difficult to invest in Las Vegas? Are you having problems finding good properties, or what is the specific problem? Please provide more information.

Finding good investment opportunities is difficult. We are an investor services company and have delivered over 470 properties. However, without the data mining software we developed, I could not identify good properties. And, once you identify a potential property, you need detailed information (rent, time to rent, renovation items and cost, etc.). None of this information can be found on an MLS data sheet, or on Zillow, Redfin, etc. In addition to property identification and validation, you also require a range of services. You need a team that can provide inspection, renovation, and management services. Residential realtors can only provide data sheets and access to the properties you select, but little more.

If you want more information on finding and working with an investment team, DM me or post your questions.

Hello Tiyu,

The location is the most critical investment decision, not the property. There are more considerations than just property taxes and insurance costs. 

Below are the location criteria I followed, along with the necessary resources. The overall process is to eliminate locations that are unlikely to provide long-term dependable passive income. The cities that remain after eliminating unlikely locations are worth further investigation.

1. Metro Population >1M - There are thousands of locations to consider; too many to evaluate. So, start with metro areas with a population >1M. Small towns may rely too much on a single business or market segment. Wikipedia - https://en.wikipedia.org/wiki/...
2. Both state and metro populations are increasing - Do not consider investing if the state or metro populations are static or decreasing. Wikipedia - https://en.wikipedia.org/wiki/...
3. Low crime - Cities with high crime levels and long-term profitability are incompatible. People and businesses avoid areas with high crime. The result is a lack of job opportunities and investment. Never invest in any city on Neighborhood Scouts' list of the 100 most dangerous US cities. https://www.neighborhoodscout....
4. Low operating costs - High operating costs can turn what appears to be a profitable property into a money pit. The two most apparent overhead costs are property taxes and insurance. Look for stats with low taxes and insurance. Insurance - ValuePenguin https://www.valuepenguin.com/a..., Metro Property Taxes - LendingTree https://www.lendingtree.com/ho...
5. Limited urban sprawl - Many cities in the US, including Phoenix, Memphis, and Indianapolis, have large open areas surrounding them, enabling unlimited expansion through urban sprawl. This leads to a slow or stagnant increase in property prices and rents in established areas as people move further out and rent or buy newer homes.
6. Natural disaster risk - Natural disasters such as tornadoes, hurricanes, and earthquakes destroy communities. While insurance might rebuild your property, the bigger issue is the loss of jobs, local businesses, and essential amenities. Until the community is rebuilt, you will have an empty property, but mortgage payments, taxes, insurance, and other expenses will continue, with no income to offset these costs. The cost of homeowners insurance is the best indicator of the likelihood of a natural disaster in an area. Insurance - ValuePenguin https://www.valuepenguin.com/a...
7. Metro rent and price growth rate - To have the additional dollars you need to pay for inflated prices, rents must rise faster than inflation. Therefore, a critical location selection metric is that rents and prices are rising faster than inflation. If historical rental data is unavailable, you can use the rate of appreciation in the area as a proxy, as rents tend to follow prices. However, COVID-19 distorted markets, so only consider data from 2013 to 2020. Zillow research data https://www.zillow.com/researc...
8. Landlord/tenant rules and regulations - Some locations have laws that limit how much you can raise rents, making it nearly impossible to keep pace with inflation. Similar regulations can also make it difficult to choose reliable tenants and evict non-performing ones. Don't invest in places with these restrictions. To find out if a place has these laws, talk to local property managers.

The metro areas that remain are the ones to investigate further. 

If you follow the above process, your odds of selecting a location that will get you off and keep you off the corporate treadmill are very high.

Hello Ben,

I do not understand your methodology. Please explain.

The only places I hear of that generate significant cash flow (at 6% interest rates) are declining markets where prices are low. I define a declining market as any location where rents are not rising fast enough to offset inflation. In such locations, your buying power is declining over time. Dollars do not matter; buying power is what you live on.

Below is an example. Suppose you have a property where the cash flow is $600/Mo, rent growth is 2% annually and inflation is 6%. Below is a table showing the effective buying power over a ten year period.

As you can see, over 10 years you lost 34% of your buying power. Your options will be to reduce your spending by 34% or get back on the daily worker treadmill.

Another consideration is that return calculations only predict how a property is likely to perform on day one, under ideal conditions. Return calculations tell you nothing about day two onward. Only considering the initial cash flow does not give you a complete picture.

Hello @Steve Bebek,

My 2¢.

Markets change, so I recommend only considering properties that would make good long-term rentals, as well as good mid-term rentals (MTRs) and short-term rentals (STRs). That way, if the market for MTRs or STRs changes, you have a backup option.

Short-term rentals seem to have ongoing issues in many locations. Especially when you include HOAs. Additionally, STRs provide less reliable income because they depend on people taking vacations. And, if the economy declines, fewer people take vacations. But everybody has to have a place to live, all the time (demand for long-term rentals.)

We just did a study on Las Vegas MTRs. They appear to be very attractive and they do not run afoul of most of the HOAs in Las Vegas. Most HOAs have a 30-day minimum lease period. I assume Glendale and Surprise are similar. If you want a copy of the Las Vegas MTR study, DM me.

When I was living in NYC and decided to create an investor services business, Phoenix was high on my list of possible locations to set up business. However, two things made me decide on Las Vegas. The first was operating costs. Below is a table comparing state averages.

If I compare a $400,000 property generating $2,000/Mo cash flow (ignoring all other costs like debt service), it works out as follows.

So, for a property in Arizona to generate the same cash flow as one in Nevada, it must generate $1,280 more cash flow to compensate for the higher operating costs.

The main factor that led me to choose Las Vegas over Phoenix was the issue of urban sprawl. Here is a link to a time-lapse of Phoenix. As you can see, there is no limit to expansion. This kind of urban sprawl limits rent and price growth in existing areas (for rentals). Also, people with sufficient income tend to move to newer areas on the outskirts. Those who remain have lower incomes, which also minimizes rent and price growth.

Below is an aerial view of Las Vegas taken in 2020. The brown areas on the map indicate federal land surrounding the small island of privately-owned land that is Las Vegas. As you can see, there is almost no undeveloped land left. Soon, redevelopment will be the only option. In fact, it is already happening in some areas.

Between the two, Las Vegas will perform better in the long run due to limited or no urban sprawl and lower operating costs.

Steve, I hope this helped. If I can help, DM me.

Hello @Eric Gorostiza,

The process we followed is illustrated below. So far we've delivered over 470 well-performing investment properties using this process.

The process is straightforward. And, at every decision point there are clear metrics so you know you are making the right decision.

Starting with the location, each step in the process is built upon the previous step. The first selection (the most critical one) is based on the goal of getting off and staying off the corporate treadmill. The easy part is getting off. Any properties, in any location, that collectively generate enough income today will work. The hard part is staying off.

To stay off the treadmill, you need dependable passive income. A dependable passive income has 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 will last; you and your spouse won't outlive it.

All three characteristics are primarily dependent upon the location. Below are some of the location selection criteria. If you would like background on each criteria, let me know.

• Metro population >1M
• Both the state and metro populations are increasing
• Low crime
• Low operating costs (taxes, insurance)
• Limited urban sprawl
• Metro rent and price growth rate > inflation
• Landlord/tenant rules and regulations

Once you select a location, work with local property managers to identify a tenant pool segment with a high concentration of dependable tenants. A dependable tenant is someone who

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

Once you select a tenant pool segment, find out where and what they rent today. Then buy similar properties. If you buy similar properties, most of the people attracted will be from the selected tenant pool. If you buy anything else, you exclude this segment with the right characteristics. The target tenant segment drives all property characteristics.

Renovation - Renovation is not about making the house appealing to you. Your tastes do not enter into it. Renovation is the process of transforming a property to be more attractive to your tenant segment, thereby increasing the rent, decreasing time to rent, and reducing maintenance costs.

Eric, this is a straightforward method for consistently selecting properties that will provide the dependable passive income you want. No guessing, no opinion, no luck required.

Let me know if you have any questions.

Hello @Ainsley Logan,

Unfortunately, your situation is not unusual. We have a client who purchased three investment properties from us, and all of them performed very well. He read on multiple websites that multi-family is the right solution. He wanted to invest in multi-family properties. However, most of the multi-family properties in Las Vegas are C-class, located in high-crime areas, and attract a tenant pool consisting of low-wage hourly workers.

We refused to sell him the properties because we knew they would not perform well. However, he contacted another realtor, who, based on what our client told us, said that these properties were cash cows. The client believed the realtor and ended up purchasing four 4-plexes.

A year later, he has four paying tenants out of 16 units. Some units are occupied by squatters, and the rest are vacant. Additionally, there has been significant property damage. He came back to us to dispose of all the multifamily properties, not because he dislikes multifamily properties, but because he is losing a significant amount of money on these properties. And, neither he nor I believe the situation can be turned around in the foreseeable future.

Is investing in multi-family properties a bad idea? Absolutely not. The success of such an investment depends on the quality of the tenant pool the property attracts.

My first investment property was a C-class 4-plex in Houston. It attracted problematic tenants, resulting in skips, property damage, evictions, squatters, and other problems. To reduce losses, I had to maintain the property myself. It was a wonderful day when I sold that property.

A few years later, I purchased two 4-plexes in a suburb of Atlanta. These properties were A- or B+ properties and performed excellently, with almost zero issues. The difference was the tenant pool the properties attracted.

Based on the information provided, I am unable to make a recommendation. Assuming that you are working with a good property manager with significant experience managing properties similar to yours, they would be your best source of advice.

My questions to your PM would be: will your properties attract dependable tenants (see my definition for dependable tenants below)? Are the rents expected to grow at least on par with inflation (historical trends may help)? If the answers are yes, then keeping the property may make sense.

If the answers are no, you have two options:

1. If you can sell them for substantially more than you paid for them, a 1031 exchange may make sense. We've closed over 70 1031 exchanges. If you would like a referral to the three most frequent exchange agents we work with, DM me.
2. If the properties will not sell for much more than you paid or for less, sell the properties and take your losses. No point throwing good money after bad.

Multi-family is not the right answer under all conditions. Real estate is local, and you need to work with an experienced team to know what makes sense to purchase in your location.

If you want to consistently make money in real estate investing, there are three steps.

1. Location - Select a location that will provide a dependable passive income. There are multiple requirements for such a location but the most important is that between 2013 through 2020 rents increased faster than inflation. I chose this time span because it does not include the effects of COVID. There are other criteria. If you are interested, let me know.

2. Tenant pool segment - The only way you can have a dependable income is if the properties are continuously occupied by what I call dependable tenants. A dependable tenant is someone who:

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

   There is a process for selecting a tenant pool segment with a high concentration of dependable tenants. Let me know if you would like to know how.

3. Property - You selected a tenant segment with a high concentration of dependable tenants. You target a specific segment by purchasing properties similar to what and where that segment rents today. If you buy any other type of property, you are purposely excluding the segment you selected. We've delivered over 470 properties, and all of the properties have performed well. We never chose the property type, configuration, location, or rental range. Everything was decided by the narrow tenant segment we selected over 15 years ago. Even in the 2008 crash, our clients had zero vacancies and zero increase in rent. Rental income reliability depends on selecting properties that attract the right tenant pool.

I wish I could offer you useful advice. If I can help, feel free to DM me.

Hello @Jarrid Weber,

I am frequently asked this question, but unfortunately, there is no simple answer. Many of our clients who did 1031 exchanges were from California, Seattle, and Portland. Some exchanged because they were losing money, while others did not see a significant future upside.

The most common concerns I hear from our California clients include:

• Rent control and future expected rental regulations - California is a tenant friendly state, which usurps the property owners ability to make money. Such regulations make it very difficult to remove non-performing tenants.
• High operating costs - California insurance, property tax, state income taxes are among the highest in the nation. Unless the property is generating significantly more cash flow than a property in a low operating cost state, you are not maximizing your investment dollar.
• Decreasing population - Many people are leaving California. The reasons vary, but the long-term result will be reduced demand for rental properties.
• Undesirable living conditions - We have several clients who do not wish to remain in California once they are financially secure or retire. What many clients do is purchase an investment property in Las Vegas today, rent it out for several years, and then move into that property in the future to reduce their tax burden and have a better quality of life.

Some additional considerations

• The cost of selling a property and buying a replacement is high. Before you do this, you need to evaluate the cost/benefit of replacing the property.
• You likely chose Moreno Valley because it is near to where you live. The old saying applies, "live where you like but invest where you can make money." We've delivered over 470 properties and 90% of our clients live in other states or countries. There is no actual advantage to living in close proximity to your rental property.

I'm sorry I could not offer you specific metrics. I hope what I wrote helped a little.

National and metro averages can be misleading because properties and the tenant segments they attract are not homogeneous. For example, many C-class multi-family properties in Las Vegas were boarded up during the 2008 crash, resulting in lots of foreclosures. However, our clients experienced no interruption or reduction in rental income because the tenant pool we target remained employed and continued paying rent. Despite property prices plunging 50% or more, it did not matter to our clients. They sought dependable passive income to get off the daily worker treadmill and pass on to their children; the current market value is not relevant.

Below are our clients' experiences during major turbulent events.

• 2008 crash - Zero decline in rent and zero vacancies.
• COVID - Almost no impact
• Eviction moratorium - Almost no impact
• Our average tenant stays over five years.
• We've had five evictions in the last 15 years, with a population of more than 1,000 tenants.
• Over 90% of our clients invested remotely.
• Average annual rent growth between 2013 and 2021 was >8%. In 2022, rents rose 4.5%.
• Average annual appreciation between 2013 and 2021 was >15%. In 2022, prices rose through mid-year and fell in the second half ending up close to where they started.

Real estate is hyperlocal and broad averages are not good indicators of specific segments.

The image showing the typical single-family home construction did not show up. So here it is.