All Forum Posts by: Eric Fernwood

Hello @Benjamin A Ersing,

There are databases that will enable you to select locations, but for individual property selection I have found none. Whether such databases exist for location selection in foreign countries, I do not know.

We probably have a different approach to selecting properties than most. We are engineers and use data-mining software we developed for selecting the few good properties from the thousands available. The data we use for property selection is hyper-local information and varies by tenant pool. Some examples.

I had a potential client from a north central state (Wisconsin?) who stated that unless a property has a mudroom (an entrance on the side of the house to a room that has a tile floor where you take off your muddy boots), you could not rent it. In Las Vegas, which is in the Mojave Desert (the hottest and driest desert in the US), mud rooms do not exist. The mudroom is an example of a location specific factor.

Even in a single location, some factors are tenant pool specific. For example, security bars and granite counters. For one tenant pool, security bars on first-floor windows are critical, but granite counters are irrelevant. For another tenant pool, bars on windows would likely scare away prospective tenants and granite counters are a requirement.

I’ve looked for but never found databases that provides hyper-local information. As we’ve developed our data-mining software, we discovered many tenant pool specific factors. For example, for our target tenant pool if any dimension of the master bedroom is less than 12’, the time to rent significantly increases. So, a property with a 11.5’x18’ master bedroom will take far longer to rent than a property with a 12’x14’ master bedroom. I do not know why, but it is true. We have accumulated approximately 40 such factors. Such hyper-local factors are part of the criteria we use for selecting good investment candidates.

However, even if you have the hyper-local data, it cannot be blindly followed. For example, if there is a constantly barking dog next door, no matter how good the numbers are, the property will have a hard time renting . The lesson is to validate everything.

How did we build our hyper-local data? We started (about 12 years ago) by talking to many local property managers. They can tell you what are popular (low time to rent) properties and communities. From there, you could search for common elements. Also, look at what does not rent well and determine why that is the case. This is what we did to build the rules for our data-mining software.

Sorry that I did not have the answer you were seeking.

Hello @A Mills,

Thanks for the kind words. People were very kind to me when I started. My way of repaying their kindness is to help others.

Here is our 2020 Las Vegas Investor Outlook.

Hello @Account Closed,

As others have stated, the Las Vegas market is very strong. Here is how I see Las Vegas from an investors point of view:

• No state income taxes.
• Pro business government actively seeking growth and diversification business opportunities.
• Average property tax: 0.55%
• Time/cost to evict: <30 days and $500
• Economic activity: Currently, $24B under construction (and more announced), which will create thousands of new well paying jobs and bring more people to Las Vegas. Remember that this is a town of 2M population so $24B investment has a tremendous impact.
• Google is building a $600M data center. Facebook moved their servers to Las Vegas as have other providers.
• Commercial energy cost: California: $0.​19/KwH, Nevada: $0.08/KwH. Also, Las Vegas is one of the few cities in the US with dual sources of power, critical for servers and electricity dependent industries like data centers and Internet switching.
• The fiber optic bundle connecting Southern California to the East Coast runs under Las Vegas Boulevard, which is why Switch Company, one of the largest data centers in the world is located in Las Vegas.
• 87.5% of Clark County is federally owned. Today, the amount of vacant buildable land is <28,000 acres, much of which is not viable for residential development. Consumption rate is about 5,000 acres/year. See the GIF below​. The areas in brown are federal land. The time-lapse only goes through 2018 and there was a large amount of development in 2019 so even less land is available now. I believe that the shortage of land and increasing population almost guarantees prices and rents will rise.
• Many people moving from California to Las Vegas. Currently >30% of properties sold in Las Vegas are to California addresses.
• Affordable. The best price range for single family investment properties is between $250,000 and $350,000.
• Return with 25% down is usually between 3% to 5% after all expenses including management, insurance and debt service.​ Add about 2% for a cash purchase.​
• Average appreciation over the last 9 years: 11%. This year is likely to be above 6%
• Rents increasing rapidly. 4.5% last year, and we expect it to be higher this year due to the inventory shortage.
• Landlord insurance on a $300,000 property is about $450/Yr.

In summary, Las Vegas is a good market for investors today and should remain so for the foreseeable future. If you would like more details on our view of the market, please see our 2020 Annual Investor Outlook under our BP Member Blog.

Hello Omer,

You are right to focus on selecting the right location. As long as you buy property in a good location, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases. If you buy in a bad location, you are doomed from the start. So, what are the characteristics of a good location?

ROI - Too often new investors only consider ROI. ROI is only a snapshot in time; a prediction of how the property will perform day one of a long time hold. You will own the property for a long time so consider the location's trajectory. Fortunately, locations change slowly and, once headed in a direction, are likely to continue in the same direction. Start by comparing what the area was like 20 or 30 years ago to today. In the past, were there a lot of high-paying jobs and today mostly service sector jobs remain? If that is the case, I think you can see the trend that will continue into the future. Buying in a declining market is a path to a future serious financial situation.

Metro size - I would only consider metro areas with a population of at least 1 million. You want a stable economic environment and small towns may depend on a single company or commodity.

Population - Increasing population is a critical factor for two reasons. First, if the population is declining, demand will decrease and property prices and rents will fall. If the population is increasing, demand will probably increase, and prices and rents will rise. Second, one of the primary motivators for people to move is jobs. So, if people are moving to a location, it is likely that there is an increasing number of jobs. Below is a (2018) map showing net domestic migration by state. I would not invest in a state that is losing population.

Jobs - Rental properties are no better than the surrounding jobs. The location must have increasing job quantity and quality because if it is not increasing, then it is probably falling. You are buying a property you may hold a lifetime which totally depends on jobs. However, jobs do not last. What would you guess is the average life span of an S&P 500 company? Would you believe less than 18 years? How long do you expect a typical business survives? About 10 years. Most of the current employers in any location will be gone in 10 to 20 years, from the day they started. As the current employers die out, your tenant pool’s jobs will vanish and so will their ability to pay the current rent. Unless companies are moving into the area creating new jobs that replace the vanishing ones, your investment will drop in value and rents will follow.

Safety/Crime - People and businesses will not move to cities perceived as unsafe. A good list of places to avoid is NeighborhoodScouts Most Dangerous Cities 2020.

Appreciation - Inflation is constantly eating away buying power. Unless rents are rising at or above the rate of inflation, your rent is declining in current dollars. The best way to spot such trends is to look at $/SF for housing prices over the last 10 or 20 years, adjusted for inflation. Rents follow housing prices so what you see happening with housing prices today is what will happen in the future to rental rates.

Investor Friendly - There are many factors that can make a location investor friendly or unfriendly. Below are a few:

• Property taxes - It is hard to make a profit on a property with high property taxes. For example, we own a home in Austin and one in Las Vegas. The property tax in Las Vegas is about 0.55% and in Austin it is about 2.5%. Such taxes are a direct hit to the bottom line.
• Insurance cost - High insurance costs not only increase expenses, they indicate a location where climatic or other factors are more likely to cause significant losses.
• Landlord/tenant legislation - Only invest in landlord friendly states. Rent control or long and costly evictions are a clear indicator you should look somewhere else. For example, in some parts of the US it is difficult or impossible to evict anyone over the age of 65, during winter months, or it may just take a long time. Remember that your monthly expenses remain the same, whether there is a paying tenant in the property or not. Could you afford to pay the mortgage and other expenses for many months plus legal fees? If not, talk to local property managers about the time and cost to evict.

Operating Costs - This is a catchall for all the expenses that will drag down your cash flow. Some are relatively fixed, like debt services, taxes, insurance, and management. The wildcards are vacancy and maintenance cost. Vacancy cost is property specific but you can get a good understanding of a location by looking at time to rent. If median time to rent is in days, you are likely OK. If time to rent is in months, you will have a serious problem. Maintenance costs are property specific as well but there are some generalizations that might help.

• Older properties require more maintenance than newer properties.
• Composition roofs require more maintenance than tile or metal roofs.
• Properties in climates with hard freezes require more maintenance than properties in milder climates.
• Properties in locations with a lot of moisture require more maintenance than properties in dryer climates.
• Wood siding requires more maintenance than aluminum, vinyl or stucco siding.
• Properties with lush vegetation require more maintenance than properties with little or no vegetation.

Investment Team - Lastly, do not forget about an investment team. You are totally dependent on having the right team of people working for you in order to succeed in investing. Unless you can put together a strong team in the location you are considering, look somewhere else. Contact me if you would like details on assembling a team.

Omer, I wish you success.

Hello @Jack B.,

Interesting take on the Las Vegas market. @Bill B., excellent comments. You pointed out that combining apples with donuts do not produce meaningful (or valid) numbers.

Let's start with the declining sales statement. Declining sales is usually due to one of two situations. One, there is inventory available but people are not buying. This is a drop in demand and not a good indicator. The second is a decline in available inventory. This is what is occurring in Las Vegas. Below is the single family inventory for Las Vegas. As you can see, inventory started falling off a cliff starting in September 2019. It is now at 2.2 months of supply. That is a very tight supply.

Here is the chart showing the pending sales.

Note the sharp increase in pending sales in Jan 2020. This means that next month's closed sales will be significantly higher.

For the segment we target, correctly priced properties only stay on the market 1 to 5 days. We are facing fierce competition. We wrote offers 10k above comps that still was not accepted. We wrote offers 2 or 3 days after a properties goes on market and were told the seller already accepted an offer. Due to the increased demand, we expect the prices to increase in Q1. Over priced and properties in poor condition are still sitting on the market for a long time though. While sound bites from the press are interesting, they are usually misleading. For example, you could have a significant increase in sales in homes priced $250,000 to $300,000 and at the same time homes priced over $1M falling off a cliff. If the reporter based their "sound bite" on total dollars sold, they might factually state that the dollar volume is decreasing. However, the statement means almost nothing. The demographic buying $250,000 homes is not the same as that is buying +$1M homes. I see this sort of error all the time in the news. This is why we generate our own statistics. You must combine apples with apples, not apples with donuts.

On "prices are falling.", I do not keep track of $1M+ homes, low end condos, sales in Pahrump, Mesquite or Boulder City, so you could be correct on these segments, which are totally different demographic than Las Vegas. On the property profile we target, prices rose 3% last year. The 3% growth shows that the investment market is not overheated. Below is what happened in 2019 to our target property profile:

The following graph shows the current median $/SF comparing to the peak ($171/SF) in 2006 for properties conforming to our target profile. The blue line is the non-inflation adjusted $/SF. The red line is the peak $171/SF price adjusted for inflation. The green line is just the peak price $171/SF with no consideration of inflation. If you ignore inflation, the current median $/SF (blue line vs. green line) is approximately 90% of the 2006 peak price. If you consider inflation, the current $/SF is about 40% below the peak price. Whether you compare current $/SF to non-inflation adjusted or to inflation adjusted peak $/SF, Las Vegas still has a long way to reach 2006 peak prices.

On how long properties stay on the market, again you cannot lump all price ranges and property types together. Below is the median list to contract days for the property profile we target. List to contract removes the purchase method bias. For example, if you have a high percentage of cash buyers, list to close will appear artificially short. If you have mostly financed purchases, list to close will appear artificially long.

You mentioned that your data was for a specific area. To what area are you referring to?

We just released our annual Las Vegas investor outlook. If you would like to see what happened in 2019 and what we expect to happen in 2020, send me an email.

Hello @Marty True,

I agree with you that unless you can cash flow, do not buy the property. Further, I believe that every good investment location/property must meet three criteria:

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
• Currently and likely to continue appreciating for the foreseeable future at or above the rate of inflation.
• In a location where you can make money and you control your property as opposed to the government dictating what you can do.

The right properties in Las Vegas meet the above criteria very well. However, like in any location, good investment properties are hard to find. Currently, only 1 in about 800 to 1000 properties available on any given day passes all our filters including ROI. With 25% down, 30 year fixed, 4.5% rate, expect a 3% to 5% return, after all expenses. With a cash purchase, add about 2%. They are certainly not abundant but we do find them regularly and close several each month.

Hello Dan,

Thanks for the clarification. In my opinion, the value a client brings to the table is their business. Whether they are flipping or investing, they are buyers.

As to why would we not purchase all the good properties for ourselves? A couple of reasons. First, we do not compete with our clients. We only buy properties that no active client is interested in. Second, we can not afford to buy a lot of properties.

On flippers, we generally do not work with flippers at this time. Flippers were a significant part of our business in 2010 through about 2013. We developed software to find below market priced homes and we could resurrect it if needed.

Another factor with flippers is that we have a fundamental policy: "No one gets hurt on our watch." Most of the people who contact us about flipping do not have the resources or experience to successfully flip, they are extremely likely to lose money. Our clients do not lose money, we do not put them in danger. If an experienced flipper came to us who had the resources, we would likely resurrect the software and see what is possible.

I am impressed that you can find good investment properties. Good investment properties are not easy to find manually. We can only do it using our data mining software. With 25% down you can expect 3% to 5% after all expenses, including management and debt service. With a cash purchase, add about 2%.

Hello @Dan Mumm,

A very good writeup defining your relationships with clients, which helps manage expectations. However, I disagree with you that it is the investor's responsibility to find the deals. I believe that as an investment realtor, it is absolutely our role and responsibility to find and qualify good investment properties for our clients. It is the highest value that an investment realtor can bring to clients, in addition to managing closing processes and providing access to network of resources (handyman, plumber, property manager, etc.). I'm not sure about your clientele but a lot of our investors are busy and successful professionals such as doctors, CPAs, engineers, project managers, entrepreneurs, etc, they do not have the expertise or the time to look for and qualify investment properties themselves. A vast majority of our clients live out of state or out of the country. By finding and qualifying properties for them, as well as coordinating and overwatching rehab and property manager handover, we help them achieve their goals of owning real estate in their investment portfolio and be on their way to financial independence, something they may not otherwise be able to achieve.

I agree with you that good investment properties are very hard to find. For us, only about 1 in every 800 to 1000 properties available on the MLS on any given day will pass all of our filters including ROI. It would be impractical to search for them manually using traditional methods such as driving around, knocking on doors, real estate websites, mass mailers, etc. This is why we developed data mining software to aid us in finding good investment properties. We would not be able to provide this service to our clients without the data mining software we developed.

In summary, I strongly believe that finding and qualifying good investment properties is the biggest value that an investment realtor can provide to his/her clients.

According to data from ATTOM Data Solutions, Las Vegas home prices crossed the point in the last few years where it is more affordable to rent than to buy. This means that the demand for good rental properties will increase and rental rates will follow.

Their 2020 3-bedroom rental estimate is $1656, a $151 increase over 2019 or 10% increase, with a population increase of close to 77,000 or 3.78%. That is a large increase in demand and population, given the size of the market.

The population growth and diminishing developable land almost guarantees price and rental rates increases. And, do not look to new homes to offset the increasing demand for rental properties. Currently, the median cost of a new home is over $410,000.

Strong rental growth is one of the reasons why we believe Las Vegas is an excellent location to invest in at this time.

Hello,

IMHO, national data will do little good if you are looking for profitable investment properties. What you need is hyper-local data. Even general local data is of limited value because you will not be buying an "average" property in an "average" location. You will buy a specific property in a specific location that will target a specific tenant pool. (The property type, configuration, location and rent range defines the target tenant pool. Ask if you are interested in more details.)

The reason you need data for a specific tenant pool is that each tenant pool's needs/wants may be different. For example, it may be critical to one tenant pool that the property is within walking distance to public transit. For another tenant pool, easy freeway access may be critical. The point is that there are few generalizations other than that the property must be in a location that is perceived as safe, looks and smells clean and is priced correctly compared to what your target tenant pool perceives as your competition.

How I developed our software was neither easy or quick. My efforts started about 12 years ago when I decided to change professions and build a business selling investment real estate. My first decision was the location. I was living in the NYC area and quickly determined that this was not a place that would work well. After a lot of research, I chose Las Vegas. (If any one is interested as to why Las Vegas, let me know.)

Once I settled on the location I started researching the market. I quickly realized that the days of driving around looking at properties and cruising real estate sites was over. In Las Vegas, good properties typically remain on the market 3 to 5 days during peak times and with over 10,000 properties on the market at any given time, data mining was the only viable option.

In order to build the software I first had to have a clear understanding of the tenant pool I wanted to target. This required me to define what I considered to be a good tenant. I define a good tenant as 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

I next determined the tenant pool with the highest concentration of good tenants. With the tenant pool identified, I then developed a property profile (location, type, rent range and configuration) that my target tenant pool would be willing and able to rent. Over time we've developed a number of rules to efficiently filter out properties that are unlikely to be good rentals. For example, if the ratio of bathrooms to bedrooms does not conform to the following, we generally remove the property from consideration: Bedrooms <= Bathrooms + 1. In total, we have about 40 such filters.

Once we reduced the number of candidate properties using filters, we next evaluate properties based on more computationally expensive factors. For example, one of the key factors is subdivision median time to rent. Basically, if it takes a long time for properties to rent in a subdivision, you do not want a property within that subdivision. Properties that take a long time to rent in the good times will be very hard to rent in the bad times, when you are most likely to need the income. How well did our clients do during the 2008 crash? Zero change in rent and zero increase in time to rent. The market value of their properties crashed like every other property in Las Vegas but their income stream was unchanged.

While data mining is critical to get the number of candidate properties down to a manageable size , you still need to go on-site and manually evaluate the property. For example, if there is a constantly barking dog next door the property will not rent, no matter how good the numbers are.

In summary, there is no alternative to targeting a specific tenant pool and acquiring a deep understanding of that pool. Acquiring the information you need to build filters and processes will take time. Also, once you identify candidate properties, you must have a process in place to validate them, never blindly believe what the numbers say.

Feel free to ask questions and I will do my best to respond.