All Forum Posts by: Eric Fernwood

Hello @Alis B. 

Before I answer your question (as best I can), know that I believe you should only buy properties that generate a sustained positive cash flow and are located in an area likely to appreciate over time. Meeting these two goals (sustained positive cash flow and appreciation potential) is not easy. Let me explain:

Sustained positive cash flow

Sustained positive cash flow means that rent consistently exceeds the total recurring costs. What criteria must the property and the area meet in order to achieve sustained positive cash:

• A good tenant. I define a good tenant as one who: pays all of the rent on schedule, takes care of the property, does not cause problems with neighbors, does not engage in illegal activities on the property, and stays for multiple years.

• Low maintenance cost. This is a combination of the climate, condition of the property, and the quality of the property manager. 

• Stable or growing job market - Rental property profitability is dependent on a stable job market. You want a job market that is growing and not dependent on industries like manufacturing. Also, it is better to have a lot of smaller employers than a few large employers.

• Property price vs. rent. There are areas where it is virtually impossible to rent a property at a profit due to the cost of the properties vs. the rent.

• Landlord friendly laws and taxes. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict a tenant. Also, state, local and property taxes are very important. It is very difficult to have a profitable property in a high tax area.

• A property that will rent quickly at a price which will exceed recurring costs thus generating a profit.

• There are other considerations as well but I think I covered some of the more important ones.

Potential Appreciation

• Low crime. High crime and appreciation do not go together.

• Sustained population growth of people who can and will rent your type of property.

• A stable area in which people desire to live and have good schools.

• Overall state population growth.

If you limit your search to any single geographical area you are unlikely to find such properties. Focus on your goals and not geography. I am a Realtor in Las Vegas, and my business is almost exclusively remote investors; at this time I have zero local investor clients. People invest here because some properties here meet their profitability and appreciation goals. However, Las Vegas is not the only place where you can meet the profitability and appreciation objective and I will now tell you the process I would use to find others.

The process

Note that the following is more of an outline rather than a description so please ask if you want more information on any point.

• Start by understanding the overall population movement trends. See population changes by state here. In general, I think the population is moving towards the southwestern states. This should narrow your search to only a few states.

• Each state has a limited number of viable cities since you need cities that are sufficiently large so that there is a stable (and growing) population. I am guessing a population over 1 million people would be a good start. This should get you to 5 to 10 cities.

• A rental property is no more valuable than the jobs around it so you need to look at job stability in each of the cities. Googling each city and the local chamber of commerce web site is usually a good source. This should eliminate one or two more cities.

• For each of the remaining cities check the taxes/landlord/eviction/rental/rent control laws. For example, in Las Vegas a typical eviction takes less than 30 days and costs less than $500.

• Seminars and blog answers (like the one I am writing) are general in nature and may not apply to a specific local because each local is unique when it comes to investing. The best source of such local information is a mid sized property manager. They will have enough properties under management to know the market but small enough to be interested in a new client (you). You will learn more about local investing by talking to 3 or 4 property managers than you will get from seminars and books. You are essentially looking for the intersection of four factors:

1. Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.

2. Type: Condo, high rise, single family, duplex, single story, two story, etc.

3. Configuration: Two bedroom, three car garage, mud room, etc.

4. Rent Range: If the majority of the population to which you want to rent are willing to pay $1,000/Mo to $1,300/Mo. you should be looking at properties that can profitably rent in the same rent range.

• Once you have a property profile (that matches the above factors) you can use Zillow or any other source to determine the typical price these properties recently sold for. Once you know the typical price and the typical rent you can use a tool I created to determine if you can make money in that market. Break-Even Calculator. Using this tool and data from Zillow, I looked at properties in three cities: Austin, TX; Cupertino, CA and Las Vegas, NV. If the Break-Even Price is lower than the Actual Sold Price it is unlikely that properties in that city will generate a positive cash flow. As you will see in the table below the prices of properties in Cupertino (and possible Austin) are too high relative to the rent to generate a positive cash flow. You should be able to generate similar data for all the cities you are considering in an evening. (Note: the following are "typical" prices. You can usually do better than typical once you are actually looking at properties.)

• Next, I would select one realtor and one property manager from each finalist city and go. There is no substitute for personally meeting the people who will be the core of your investment team. Note: tell both the Realtor and the property managers up front that you are in the investigation phase and are not “buying” anything on this trip. If any are “too busy” to spend time with you, then you know to eliminate them from further consideration.

• At this point I believe you will likely have enough information to make an informed decision on where and what to buy.

Alis, I hope the above helps. Feel free to contact me if you have questions.

You asked a question covering a lot of territory. I broke your question into the following items and will address each one as best as I can.

1. Should you manage your own properties?
2. How can you determine a good place to invest in real estate?
3. How can you make the best use of the funds you have?

Question #1: Managing your own properties
Managing your own properties is based on the assumption that you can save money or that there is some advantage. Most new investors believe that the only value of a property manager is to collect the rent. I wish it was that simple. When I first started, I managed my own properties. What a mistake! Each month I had to knock on the tenant’s doors since I did not receive the rent in the mail by the 1st. And, even though their cars were in the driveway and I could hear the TV, no one would answer. After losing a few months rent this way (I owned 8 properties at the time) I placed them in the hands of a bad property manager (I was no better at selecting property managers at that time than I was at screening tenants). She did collect the rent but then never deposited it into my account! Finally, I got the properties into the hands of a good property manager. To make a long story short, 4 of the 8 tenants had to be evicted and good tenants installed. My “management” time went from “most weekends and frequent evenings” to about 30 minutes a month. In total, I believe my attempting to save the 10% property manager fee cost me close to $10,000. Today I am a Realtor in Las Vegas and almost all of my clients are out of state/country investors. I have clients with enough properties that I could easily make a business managing them. Am I considering managing the properties? No. In order to be successful at managing properties you need a lot of property manager experience and hundreds of properties to justify the staff, software and processes. Just don’t do it. (if you would like to see what value a good property manager can provide, see this blog article). Finding a good property manager is not always easy. I have a set of property manager interview questions which I have developed over a number of years. If you would like a copy, send me an email.

I hope by this point you have decided not to manage your own properties. If this is true, the next issue is do you need to live in the same city? Based on my clients, I am convinced the answer is no. So, my advice is to choose a city for investment and choose a place to live. I do recommend that all things being equal, buy properties in a city I would enjoy visiting. When my clients come to Las Vegas to “inspect” their properties, a portion of the entire trip is a tax deductible business expense.

Question #2: Where and what to buy?

There is no easy answer to this question but below is the process I would use. Note that fully answering your question would fill a book so understand that the following is only an overview.

• I would start by understanding overall population movement trends. See population changes by state here. In general, I think the population is moving towards the southwestern states. This should narrow your search to only a few states.
• Each state as a limited number of viable cities since you need only look at cities that are sufficiently large so that there is a stable (and growing) population. I am guessing a population over 1 million people would be a good start. This should get you to 5 to 10 cities.
• A rental property is no more valuable than the jobs around it so you need to look at job stability in each of the cities. Googling each city and the local chamber of commerce web site is usually a good source. This should eliminate one or two more cities.
• For each of the remaining cities check the landlord/eviction/rental laws. For example, in Las Vegas a typical eviction takes less than 30 days and costs less than $500. I have heard from more than one of my clients that evictions in California (and some other states) can take up to a year if the tenant actively resists and cost thousands. (No investor initially worries about evictions, until it happens to you.) The best source for this kind of information would be talking to a few property managers in each city you are considering. I would choose mid sized property managers. They will have enough properties under management to know the market but small enough to be very interested in a new client (you).
• Property managers deal with the issues that concern you every day. They know what rents and what doesn’t. Pose the same questions to multiple property managers and you will quickly learn the real situation. Also ask about their fees and services. The basic issues I would investigate include:
• What type, configuration, location and rent range do they recommend? Remember that the property manager only makes money if there is a tenant paying the rent so they have the same goal as you do.
• Ask about the eviction process (time and cost), tenant rights laws, rent control and any other issues that will impact your profitability.
• Who are the major employers for these tenants?
• The last question should always be, “What have I not asked you about that I should know?” Over the years I have been amazed at the responses I have received to this question.
• Once you know the type, configuration, location and rent range of recommended properties, your next step is to determine whether you can afford to buy such a property and whether a typical property generates a positive cash flow. For example, if a typical rental property costs $400,000 and your budget is $150,000, don’t waste your time. Next, spent some time on one of the popular real estate sites and obtain information about possible rental properties in the remaining. What you are looking for are properties that were recently sold and the rental rate for similar properties. I selected three cities to use as an example: Austin, TX; Cupertino, CA and Las Vegas, NV. Then, using a tool I developed (Break-Even Calculator - see here for more information) I created the following table. The Break-Even Calculator enables you to determine the purchase price where the recurring costs equals the income.

• If the Break-Even Price is lower than the Actual Sold Price it is unlikely that properties in that city will generate a positive cash flow. As you can see, from the above, the prices of properties in Cupertino (and probably Austin) are too high relative to the rent to generate a positive cash flow. You should be able to generate similar data for all the cities you are considering in an evening.
• At this point you are probably down to two or three cities. Now is the time to call back the property manager(s) you liked the best for each remaining city and ask them to recommend a Realtor. Have each of the Realtors send properties which match the profile (type, configuration, location and rent range) you learned from your property manager interviews. Once you have the properties I would re-validate profitability using the Break-Even Calculator.
• Next, I would select one realtor from each city and go visit. There is no substitute for personally meeting the people who will be the core of your investment team. Note: tell both the Realtor and the property managers up front that you are in the investigation phase and are not “buying” anything on this trip. If any are “too busy” to spend time with you, then you know to eliminate them from further consideration.
• At this point I believe you will likely have enough information to make an informed decision on where and what to buy.

Question #3: How to make the best use of the funds you have?

A difficult question to answer without more knowledge of your situation. However, if you can obtain cost effective financing for investment real estate that is the way to go. One of the big advantages of investment real estate is the ability to finance a property over 30 years. Most of my clients put 20% down and finance the balance over 30 years.

Aaron, I hope the above will provide some ideas for further investigation. If you have questions, feel free to ask.

Thanks for the positive feedback. 

Hello @Will Porter ,

Having an informational interview with (multiple) property managers is essential. What I would seeking to discover is not only the type, configuration, location and rent range, I would also be looking for a future investment team member. I will share my opinion on how to select a good property manager. However, before I continue, know that I am a Realtor in Las Vegas and my practice is almost exclusively remote investors. So, I am biased towards utilizing a property manager based on my working almost 7 days a week with investors and the large number of people who have come to me for help after having disasters attempting to manage their own properties. Also, know that I am not a property manager; I do not manage properties. But, I know a few (very few) good property managers and if I refer a client to them, the client gets a discount on the property manager fees due to the volume of properties I have placed with them. Also, I have nothing to gain from referring clients to a particular property manager; I do not accept a referral fee from the property manager because I want the property manager to know that the only way they get another client from me is to take exceptional care of all my clients. Since property managers are accustomed to paying referral fees to Realtors and I will not accept a fee, they are very aware that I will move my clients to someone else without any hesitation if all my clients are not well cared for.

Before I get into how I interview prospective property managers I want to explain what I expect from a property manager, which is illustrated in the chart below. Expectations drive interview questions. (Note that I will talk about the process not specific questions. I have a list of over 40 property manager interview questions and if you would like a copy, drop me an email.)

The Critical Characteristic

Integrity** is THE critical characteristic for all investment team members. The reason integrity is so important is that there is no way to write a management agreement which will ensure the property manager will do what is actually needed for you to be successful. Saying this another way, there is the "letter" of an agreement and there is the "spitit and intent" of an agreement. A person with integrity will consistently carry out the spirit and intent of the agreement. A person with out a deep sense of personal integrity can usually be relied upon to carry out the letter of the contract most of the time which simply is not enough. Never associate with or deal with anyone who is not a person of high integrity.

Process Questions

These are the questions designed to determine IF they have processes in place that will meet your needs and how well they work. For example, my current process is that if I find a qualified property I send the property manager a walk through video of the property. The property manager gets back to me within 48 hours with her opinons on the property, the location, and the probable rent and probable time to rent. When I was intervewing property managers several said that they do not get involved with the properties until they are ready to rent. This is totally unacceptable to me. 

Fees and Cost Management

Obviously the fee charged by the property manager is important. However, I am more concerned about the value they provide in exchange for the fee they charge. I moved my clients from a property manager who charged 7% to a property manager who charges my clients 8% (My clients get a discount off their normal 10% fee due to the number of properties I have placed with them.) I did this because while the previous property manager was good for several years, they started not doing the job I require. So, worry about the value you get in exchange for the fee, not just the total fee.

Cost management is another critical area. You need a property manager with the processes of handling tenant requests 24 hours a day, 7 days a week. Water heaters (etc.) do not start leaking on any pre-determined schedule. You also want to receive the original invoice from the contractor who did the work; with no markup. Too many property managers view maintenance as another profit opportunity.

You need a well defined approval process. For example the property manager I primarily work with will automatically handle any repair under $200. Over $200 they will contact me or my client for approval prior to authorizing the work.

One final consideration on cost management. There are a small percentage of tenants who are always calling in for repairs. These are usually minor but the costs add up. The property manager must have a process for detecting such complainers and dealing with them.

Area of Expertise
Some of the property managers I know have the majority of the properties they manage in a relatively small geographic area. If you place a property with them and it is not in this area, repairs and everything else will require a special effort by the property manager and their staff. You want to be in the middle of their business channel.

Risk Management
Tenant screening procedure, rent collection and preventative maintainence are parts of risk management. I will talk about tenant screening some other time so I will not mention it here. On rent collection, the property manager must have a process in palce for collecting the rent. This sounds fundamental but I have talked with a few property managers who seem to be very flexable on when and how much is paid. My standard (which conforms to Nevada laws) is that rent is due on the 1st. Period. No exceptions unless the tenant notifies the property manager in advance and the delay in payment is approved. If the rent had not been received on the first, a Pay or Quit notice follows very quickly. And, there is no let up until either the tenant pays the back rent plus late fees and such or they are evicted.

The property manager (or their delegate) must see the property on a regular basis. For example, if there are tree branches touching the roof, you are going to have roof damage over time. Also, if there are drainage issues, you need to get these taken care of before they become a problem.

One last point on this is that every time maintainance people are in a property, they need to be taking note of the condition of the property. If the property is not being cared for, the property manager must have a clear and well defined process for addressing the problem.

There are more topics I could cover but I hope this gives you a start on interview topics. Email me if you want the questions I use.

Hello @Chad Adams ,

Good question. I've faced the same question several times and have found an approach that worked for me as an individual investor and now as a Realtor in Las Vegas whose business is almost exclusively investors.

By education I am an engineer and I've learned that you have to reverse the process in order to find the solution you are seeking. So, instead of looking for a niche, I suggest you look for what niche is profitable. Once you know what is profitable you can then decide if other aspects of that niche work for you. Here is what I would do (and have done multiple times in the past):

I have found property manangers the best source for information on what rents well. Most people think of property managers as someone who collects rent after you already have the property. To me, this is completely backwards. I would start by finding two or three mid-sized property managers. Make an appointment and go see them. Tell them that you are getting into the rental property business and would like their advice on:

* What type of property rents best: By this I mean condo, single family, duplex, etc.

* What configuration rents best: two bedroom, three bedroom, etc.

* What is the best location for such properties: North of the river, east of 35th St, within two blocks of mass transit routes, etc.

* Best rental price range: If the median income for the people who rent properties is $4,000/Mo., trying to rent a property for $2,000/Mo. is not going to work. The rental price must be consistant with the median income of the renters you desire to attract.

The intersection of these four factors are what I call the "Sweet spot". Below is a graphical representation of what I am intending to communicate.

Note that the approach I recommend does not depend on the city or property type. It applies equally well to commercial or residential. And, it is easy to do since you are getting your information from property managers, the people who know the most about what rents and what does not rent.

A few more points:

* Just becase you determine the rental sweet spot for your area does not mean that such properties are profitable. NEVER buy a property for long term capital gains. If it does not make money today you can not afford to buy it. This is what drives so many investors to do remote investing. In fact, almost none of my clients live in Nevada. They do remote investing because they can make money and the laws are pro-business here. What does this mean to you? I have clients that formerly bought properties in California and they learned that it can take up to one year and thousands of dollars to evect a knowledgable tenant. In Las Vegas, typical evection time is under 30 days and it costs about $500.

* I consistently read people who want to buy damaged properties and rehab them. This is only valid if there is a significant price difference between a damaged property vs. a property in good condition. In Las Vegas the gap is very small, which is why flipping does not work in Las Vegas in the current market.

* Do not let your personal bias affect you judgement. You might "believe" a 2-bedroom condo is the right investment property. But if multiple property managers tell you that single story duplexes are the best renters, listen to them. Property managers want properties that will rent quickly. They only make money if the property is rented.

* When it comes to rehab, ONLY do what the property manager recommends and do EVERYTHING that the property manager recommends.

In summary, start by talking to multiple property managers and find out what type, configuration, location and rent range is the best for your area. Determine whether you can generate a positive cash flow. If you can't, don't buy in that area.

My best wishes to you.

Eric Fernwood

Hello,

Does anyone know the file format(.jpg, .png, .gif etc) and size (resolution, pixels, etc.) of a company logo if I would like to upload one?

Thanks.

Hello @Joe Belanger ,

You need a (good) property manager. Before I continue, know that I am a Realtor in Las Vegas, and my business is almost exclusively with remote investors.

Most people think of property managers as someone who collects the rent after they buy a property. This is absolutely not the case. Property managers are a gold mine of information. Property managers know what rents and what doesn’t because they deal with rental properties every day. If you talked to only one person about investment properties, talk to a good property manager.

Having owned over 20 properties and working almost full time with remote investors, one of the surest ways to fail is to manage the property yourself. I occasionally hear statements like, “I will manage the property myself to save the management fee.” Don’t do it, you will fail. For example, unless you have access to the right databases (you need several and they are not cheap) you can’t even properly qualify a potential tenant (credit history is not the important factor). If the property manager does not save you far more than their fee, you are working with the wrong property manager.

When I first bought properties I managed them myself. I quickly learned some hard lessons:

• Tenants are extremely creative when it comes to why they are late this month with the rent. Also, you needed to be both firm and fair at the same time. Not a skill you learn in a few months.

• Cost management is critical if you want to maximize profitability. This includes preventive maintenance and remedial maintenance. Here again, tenants are very creative. One of my tenants called that there was a broken window at the property and wanted me to fix it. By this time I had enough experience to know what to do. I asked how the window was broken. He stated that there was a break-in. I expressed my sorry and asked about what items were taken. He stated that nothing was taken. I told him not to worry, that the window would be repaired as soon as I received the police report. A long silence followed my statement. I proceeded with, unless I have a police report, you have to pay for the broken window. But not to worry, I would call the police now and they would be out to make a report, gather finger prints and such. I explained that it was amazing what the police could do now. That even if the burglar scrubbed the window and all the broken pieces, it did not matter. The finger prints would still be there. About this time he decided to pay to have the window repaired.

• Evictions - No investor wants to believe that any tenant will even have to be evicted. Believe me, they do. I ended up having to take time from work to go to court on two evictions. I lost an entire day waiting for my case to be called.

There are several more reasons I could list but I believe that hiring a (good) property manager is the best way to save time, money, and effort. You can not afford to manage your own properties.

I hope this helps.

@Mike H. 

How did you finance your 11th and onwards properties? The loan program for 11-20 houses went away this year and I have a few clients that are maxed at 10 properties now but want to buy more.

Thanks.

Hello @Marvin T.,

I am a Realtor in Las Vegas who almost exclusively deals with remote investors so I probably have a biased perspective. But, below are my comments.

Several of my current clients started by attending seminars and attempting to track down the owners of potential properties. I asked why they chose this approach and usually heard something along the lines of: If they contacted the owner before the property was listed, they could negotiate a better price and thus generate a higher return. I can tell you from talking to several people who tried this that it is not an easy task and I know of no one who had good results. (It could be that the only people I talked to were the ones who had no success; others must have been successful with this technique or it would not remain such a discussed question.)

My additional comments are as follows:

* If you contact a person only considering selling, the phychology is backwards from what you want. They are in a position of having something you want and, since they were not yet ready to sell, will ask for a premium. Alternatively, a seller who has had a property on the market for a significant period of time is more likely to accept a discounted offer.

* I believe that what you pay for a property is less important than what you earn from it. (Know that I would never pay more than market value for a property.) However, I would not consider buying a rental property even at 20% below market if it would not generate a profit today.

* One of the advantages of the MLS, Craig's List, Zillow, etc. is that there are a large number of properties from which to choose. Attempting to contact individuals on the chance that they are willing to sell is not an efficient use of your time.

* If you can not buy profitable properties in your community using more efficient approaches, perhaps you should look in a different area.

Anyway, that is my 2¢'s.

Hello @Brian Mathews

It depends on what you expect from a property manager. Before I continue, know that I am a Realtor in Las Vegas, and my business is almost exclusively with remote investors.

Most people think of property managers as someone who collects the rent after they buy a property. This is absolutely not the case. Property managers are a gold mine of information. Property managers know what rents and what doesn't because they deal with rental properties every day. If you talked to only one person about investment properties, talk to a good property manager.

Having owned over 20 properties and working almost full time with remote investors, one of the surest ways to fail is to manage the property yourself. I occasionally hear statements like, "I will manage the property myself to save the management fee." Don't do it, you will fail. For example, unless you have access to the right databases (you need several and they are not cheap) you can't even properly qualify a potential tenant (credit history is not the important factor). If the property manager does not save you far more than their fee, you are working with the wrong property manager.

When I first bought properties I managed them myself. I quickly learned some hard lessons:

* Tenants are extremely creative when it comes to why they are late this month with the rent. Also, you needed to be both firm and fair at the same time. Not a skill you learn in a few months.

* Cost management is critical if you want to maximize profitability. This includes preventive maintenance and remedial maintenance. Here again, tenants are very creative. One of my tenants called that there was a broken window at the property and wanted me to fix it. By this time I had enough experience to know what to do. I asked how the window was broken. He stated that there was a break-in. I expressed my sorry and asked about what items were taken. He stated that nothing was taken. I told him not to worry, that the window would be repaired as soon as I received the police report. A long silence followed my statement. I proceeded with, unless I have a police report, you have to pay for the broken window. But not to worry, I would call the police now and they would be out to make a report, gather finger prints and such. I explained that it was amazing what the police could do now. That even if the burglar scrubbed the window and all the broken pieces, it did not matter. The finger prints would still be there. About this time he decided to pay to have the window repaired.

* Evictions - No investor wants to believe that any tenant will even have to be evicted. Believe me, they do. I ended up having to take time from work to go to court on two evictions. I lost an entire day waiting for my case to be called.

There are several more reasons I could list but I believe that hiring a (good) property manager is the best way to save time, money, and effort. You can not afford to manage your own properties.

I hope this helps.