The Smart Investors Roadmap

There is a common misconception that successful real estate investing requires gurus and “secrets.” There are no secrets in real estate investing and no gurus. Successful real estate investing is a straightforward process, which you will learn in this guide.

How This Guide Came About

In 2004, based on my experience of purchasing multiple investment properties, I decided to establish an investor services business. The realtors I worked with offered minimal assistance beyond providing MLS datasheets. This resulted in wasted time, frustration, and excessive costs.

As the basis of such a business, I needed a repeatable and measurable process for finding, validating, closing, renovating, and monetizing investment properties.

I started by reviewing all the current popular investment literature. What I found was self-proclaimed “experts” making claims without any factual basis. As an engineer, I value repeatable and measurable processes, not opinions and self-proclaimed “experts.”

Once I knew that popular investing books were a dead end, I turned to the commercial world. There, I found what I was looking for: repeatable and measurable processes. The most relevant processes concerned how national retail store chains select new store locations.

Simply put, retail chains identify new store locations by pinpointing areas with the highest concentration of their target demographic.

From additional research, I learned that location is the most important investment decision because location determines all long-term income characteristics. Based on this research, I selected Las Vegas.

After moving to Las Vegas, I downloaded ten years of historical rental data from the MLS. I identified subdivisions where the average tenant stay exceeded five years. I then created a property profile, a concept you will learn about later. This profile was a physical description of the properties that my target tenant segment was both willing and able to rent.

Next, I developed processes based on national retail chains methods and set up an investment team to make everything a measurable and repeatable process. In this guide, you will learn the processes I developed and refined over the last 16+ years to deliver more than 500 investment properties to over 180 clients worldwide. This guide will save you time and money on your journey to financial freedom.

I wish you success,

…Eric

Eric Fernwood
Eric@Fernwood.Team
702-358-8884

Financial Freedom

The goal of real estate investing is financial freedom. Financial freedom is more than just replacing your existing income. Financial freedom requires an income that enables you to maintain your current lifestyle for as long as you live. To achieve this, your income must meet three requirements:

Rents must outpace inflation: If rents outpace inflation, you will always have the additional dollars to pay inflated prices.
Income persistence: Financial freedom requires that your income lasts throughout your life.
Income reliability: The rental income must continue, even in bad economic times. Income reliability depends on the tenants who occupy your property.

There are three steps to purchasing properties that will generate reliable income, as illustrated below.

Location/City Selection

The most important investment decision you will make is the location, not the property. The location determines all long-term income characteristics, including:

Whether rents will outpace inflation.
How long your income stream will last.
How much equity growth will you achieve.
How much of your rental income is lost to overhead.
Whether you or the government controls your rental property.

The location selection process begins with a list of all U.S. cities with a metro population of over 1 million. Smaller towns tend to be too dependent on a single business or market segment and are less stable during economic turbulence.

Next, remove any city that does not meet all the criteria listed below.

Significant and sustained population growth: Do not buy anywhere if the state or city populations are static or decreasing.
Low crime: Do not invest in any high-crime city.
Low operating cost: High operating costs can turn what appears to be a profitable property into a financial burden. The two largest operating costs investors face are property taxes and insurance.
No rent control: Rent control and similar regulations are a hidden cost. These regulations might restrict you from raising the rent quickly enough to keep up with inflation. In some cities, the government dictates the tenants you must accept. You can not consider poor payment history, criminal convictions, evictions, or other indicators of antisocial behaviors. Additionally, some locations make evicting non-performing tenants a lengthy and expensive process. Never invest in any location with any form of rent control.

After you've excluded all cities that don't meet the above criteria, you'll be left with a shortlist of cities for further investigation.

Tenant Segment Selection

Your rental income comes from the tenant who occupies your property, not the property itself. The only way to have a reliable income is to have a reliable tenant occupy your property.

A reliable tenant stays many years, always pays the rent on schedule, and takes good care of the property. Reliable tenants are the exception, not the norm. Moreover, since you'll own the property for an extended period, you will require multiple reliable tenants over the years.

The best way to achieve this goal is to buy properties whose characteristics match the housing requirements of a tenant segment with a high concentration of reliable people. Because people are unlikely to rent any property unless it matches all their housing requirements, you can select a specific tenant pool based on the characteristics of the properties you buy. Below is an example of a segment’s housing requirements, which I call a property profile:

Rent range: $1,500/Mo. to $1,850/Mo.
Type: Single-family
Configuration: 3+ bedrooms, 2+ baths, 2+ car garage, 1,200 SF to 2,100 SF
Location: North of the river and east of Line Rd.

Below are the characteristics of a property that matches the above housing requirements.

Rent: $1,700/Mo.
Type: Single-family
Configuration: 3 bedrooms, two baths, two car garage, 1,500 SF
Location: North of the river and east of Line Rd.

The process is to determine what tenant segment has the highest concentration of reliable people and buy properties that match their housing requirements. You can identify this tenant segment by interviewing multiple local property managers.

Property Selection

You identified a target tenant segment and derived a property profile. Given a property profile, any realtor can find conforming properties. However, just because a property matches your target segment's housing requirements does not mean it will be a good investment property. It must meet the following additional criteria.

Low time to rent: Tenants will move out multiple times during a life-long holding period. Every day your property is vacant, money is lost. You want a property with a historically short time to rent.
Acceptable renovation cost and risk: Every property requires some degree of renovation, and each renovation costs money and has a certain level of risk. Choosing a property where the renovation cost and risk are acceptable is crucial.
Acceptable initial ROI and cash flow: ROI and cash flow are useful for comparing properties, but they have serious limitations. They only estimate how a property is likely to perform under ideal conditions on day one. Return calculations do not provide any indication of future performance.
Acceptable purchase price - The total acquisition cost must be within your budget. Acquisition costs include the down payment, closing costs, renovation costs, and other costs.

Summary

Acquiring reliable income investment properties can be a straightforward process by following the steps in this guide. Here's a summary of the process:

Select a city with significant and sustained population growth and a metro population >1M.
Select a tenant segment with a high concentration of reliable people through property manager interviews.
Buy properties similar to what the target tenant segment is renting today.

This process takes away any guesswork. It is straightforward, with no secrets or gurus involved.

If you would like more detail on our investment methodologies, contact me.