October 2021 Market Report

Written By Eric Fernwood

Fernwood Real Estate Investment Group Market Report: 2021-10
In This Report

I am regularly asked whether investors should buy high cash flow or high appreciation properties to maximize property accumulation and future cash flow. It depends on your investment goals and time frame. In this article, I will explain why an appreciating market is the key if your goal is to scale up your portfolio as fast as you can and have a medium to long-term investment time frame (7 to +10 years). Before I continue, a quote from Albert Einstein,

“Everything should be made as simple as possible, but no simpler.” ... Albert Einstein

I oversimplified the following example to the point where Albert would not be happy. But the calculations are only intended to illustrate the concept.

My assumptions:

  • Property A appreciates at 7% annually, but has zero cash flow.
  • Property B has a 7% cash/cash return but zero appreciation.
  • Combined state and federal income tax rate is 30%.
  • Purchase price: $400,000.
  • Down: 25%
  • Acquisition cost: $100,000 (25% X $400,000)
  • No inflation
  • No rent increases
  • No loan costs
  • No closing costs
  • No renovation costs
  • No vacancies
  • No maintenance cost
  • No management expenses
  • No principal pay down

Below are the two models.

Property A - No Cash Flow Property B - No Appreciation
Appreciation 7% Appreciation (%) 0%
Market Value 400000 ROI (%) 7%
End of year 1 428000 Annual cash flow 7000
End of year 2 457960 Taxes (@ 30%) -2100
End of year 3 490017 Annual after tax cash flow 4900
End of year 4 524318 Investable Cash after 5 Years $24,500
End of year 5 561021 Investable Cash after 5 Years even if you ignore taxes $35,000
75% cash out refi at the end of year 5 420766
Pay off existing loan -300000
Investable Cash after 5 Years $120,766
As I stated earlier, while the assumptions are overly simplistic, the example shows the benefit of focusing on appreciation instead of cash flow to grow your portfolio and future income.

Below is a case study showing how we took advantage of appreciation to add a property to our portfolio.

In Conclusion

Appreciation is the key to rapidly accumulating properties and generating a long-term reliable income stream. Appreciation enables you to take advantage of compound value growth of the property. You can reinvest the accumulated equity through refinancing, if the property is performing well, or 1031 if you want to replace a property - with minimal tax consequences.

Also, because rents follow prices, in a rapidly appreciating market, rents rise rapidly as well. What is happening today is what rents are likely to do in the future. Appreciation is also a change barometer. If appreciation declines significantly, you will likely have two+ years before rents stop increasing. This will give you time to make changes as needed.

Always invest in a market where pre-COVID appreciation was greater than the current inflation rate if you want to maximize your investments.

Your comments and feedback are always appreciated.

...Eric & Cleo

 

Potential Investment Properties

Below is a link to this month's Investor Tool containing investment candidate properties. Our proprietary data mining software generates this list. The software does two things:

  • It is excellent at selecting properties that appear to meet all of our target tenant profile requirements.
  • It attempts to estimate return. Our software provides better results than Redfin, Zillow, Rent-O-Meter, and others because it has more data to work with and the algorithm is optimized for the Las Vegas market. However, our software suffers from the same problems in that it only has objective data (square feet, bedrooms, baths, etc.). Therefore it can not be the only method to base an investment decision on.

The limitations of software to analyze properties is why we have a multi-step validation process; the Investor Tool list is just the first step.

 

Below are charts from our latest trailing 13 month market report, which includes September data. Remember that this data is only for the property profile that we target, not for the entire metro area. To see all the charts please click here.
Rental Statistics
Sales Statistics
Rentals - Median $/SF by Month
YoY rents grew an amazing 16.7%!
Sales - Median $/SF by Month
YoY prices increased by 24.7%!
Rentals - List to Contract Days by Month
The median time to rent is about 11 days for September.
Rentals - Median $/SF by Month
Median days on market has stayed below 10 days since February 2021.
Rentals - Availability by Month
This chart shows the average daily number of properties that were for rent in a particular month. Pre-pandemic level was about 1000 (units).
Sales - Availability by Month
This chart shows the average daily number of properties that were for sale in a particular month. Inventory has been steadily declining since June 2020.
Rentals - Months of Supply
Just a little over half a month of supply for our target rental property profile. This is what is continuously driving the rapid rents increase.
Sales - Months of Supply
There has been just about half of a month of supply since March 2021. This is what is driving the sharp price increases.

 

About the Fernwood Real Estate Investment Group
You Provide The Capital, We Provide Everything Else

For the past +15 years, we've worked with clients worldwide. Most of whom have never invested in real estate before. Our results: over 90% of our clients buy more than one property, and the average number of properties is about 4.5. Below is a 2-minute video on the services we provide.

Want to know what we can do for you?

© Cleo Li and Eric Fernwood, all rights reserved.

Eric Fernwood
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November 2021 Market Report