Properties Don’t Pay Rent: How to Choose Real Estate Investments Based on Tenant Demand

Eric Fernwood (00:00)
Yes. What we teach in our classes: determine what your goal is and work backward. And you need to build a plan. Each step must be measurable, have a time constraint on it, and, you know, you need to be able to have actual steps. It’s kinda like “get rich.” That’s not a step, that is a byproduct of a well-executed plan. So get a plan, work backwards, and focus on the fact that your goal is not to accumulate property, your goal is to have a twenty-to-forty-year monthly paycheck that increases faster than inflation

Scott Bursey (02:05)
Welcome back to the Real Estate Pros podcast, powered by Investor Fuel. I’m your host, Scott Bursey. And today we have a special guest, Eric Fernwood of The Fernwood Team at Keller Williams VIP Realty. Eric is a true powerhouse, blending an engineering background with over 17 years in real estate, having delivered more than 600 investment properties and facilitated over 90 1031 exchanges. Pros, you can expect a masterclass on data-driven, process-oriented investing and managing the complete lifecycle of a property. Eric, welcome to the show.

Eric Fernwood (02:42)
Thank you for having me on. I appreciate this.

Scott Bursey (02:44)
It is wonderful having you on today, and to help our listeners get up to speed, please give us the front-row seat on how your career ignited and where you’re pouring your fuel now.

Eric Fernwood (02:55)
Well, I was an engineer f— well, I still am an engineer, but I I did engineering sales, engineering management, a bunch of things, primarily at a company called Hewlett-Packard when it was still a one of the premier engineering companies in the world. I was managing international sales teams, traveling about two hundred and fifty days a year internationally. You have no life in that situation, at least no private life. And then I was working primarily in the Middle East. My wife at the time thought I got killed a couple of times, got upset about that for some reason, and she gave me an ultimatum of change the job or change her. I made a mistake, I changed the job, but I corrected that later.

And then I decided… I looked back on what was the most painful and expensive task that I did, and it was buying… I think I owned eighteen or twenty investment properties at that time. And it was buying them from residential realtors. I mean, these were good guys, I’m not saying they weren’t, but they know about investing. And so I knew there was a business here. So I read all the popular books, discovered they were all opinions dressed up as facts, and then I turned to how national retail store chains like Whole Foods, Kroger, 7-Eleven, all these people, how do they determine what city to invest in, what area to put their stores, all that sort of stuff. So I reverse engineered what they did, and that’s what we’ve been doing. That’s why we’re successful, is I didn’t create anything, I just listened to other people.

Scott Bursey (04:19)
That is quite an impressive journey, Eric. Thank you for sharing that with us. It really sets the stage for what we’re going to dive into. And, you know, what really caught my attention about you was the way you’ve been able to leverage your engineering background to build such a systematic, data-driven approach to real estate over the last 17 years. Building on that, curious to know, what do you consider the biggest strength in your end-to-end lifecycle model?

Eric Fernwood (04:49)
I think it’s the fact that we are… we have the automation in place. I mean, right now a good property in Las Vegas is lasting on the market… good one, well priced, is lasting on three and four days. In twenty-four hours we can do a full analysis of that property, go on-site, take a video, come up with a renovation estimate, all that sort of thing. We can do that because of our software. So the software we… that this has been my primary area has enabled us to move really fast and get things done and get offers out while the property’s just been on the market a day or so. So that’s been really important to us.

Scott Bursey (06:16)
How has the strength of your software evolved, you know, as you’ve scaled over the the over six hundred properties?

Eric Fernwood (06:25)
Yeah. I started first of all writing these kinds of data mining engines in two thousand and six, failed consistently until about two thousand fourteen, and then I was reading PhD thesis summaries and I… there was a guy, I think it’s at Northwestern, I’m not sure about that, who had this wonderful mathematical description of it, but he was picking stocks. And I… when I read his summary, I knew how to do it. But it took me almost a year to implement it, developing software. So we’re a heavy software house, and the proprietary analytics are key. You can’t just look at what’s happening today, you have to look down the road, because a property that may not look like good on paper for today could be the best thing you could buy. But you’ve got to take a longer view, and we do all the mathematics for our clients so they can see that.

Scott Bursey (07:12)
Interested to learn: where do you see the most common bottleneck in the 1031 exchange process?

Eric Fernwood (07:18)
Well, as you know, we’ve done over ninety of those. So, but the biggest problem is people wait until their forty-five-day identification period to start looking. We change that process, and what we do is when somebody puts a property under contract, their relinquished property under contract, we then start giv— providing them with ho— properties that will match their investment goals. And then once the pr— all contingencies clear on the relinquished property, then we actually put properties under contract. We typically close—and we’ve done one-to-sixes, one-to-sevens—we typically close on all the properties within two weeks of the start of the 45-day identification period. Now, the reason we do this, for example, last year we were doing one and we found out that the… there was a shadow on the deed, we couldn’t get a clear title, so we had time to turn around and do it again. So it’s taking advantage of all the time in the process for finding properties. We’ve never put anyone on a drip feed. We find the specific properties that are gonna match their financial goals, and that’s another place our software really pays off. You don’t have time to go through a thousand properties with a spreadsheet. I mean, you just can’t do that.

Scott Bursey (08:30)
Eric, what new market data trends are you currently most excited about?

Eric Fernwood (08:36)
Well, AI is a a big part of it, but it it’s not very useful for doing what you might expect. You can’t ask it how much of the rent of this property is going to be, because it doesn’t know the condition of the interior and stuff like that. And even if there’s photos, may or may not match reality. And like one that I walked into about two months ago, I opened the door and this tidal wave of smoke, cigarette smoke, rolled out the door. So you can’t… the AI doesn’t get you there, but we use AI very heavily, especially in the math area, because I do a lot of math, but some of it’s fairly complex and I use Claude to verify what I’m doing makes sense, and it frequently finds problems. And we use also use Claude and other such AI tools for reading the articles that I write, or we have a book coming out, all that sort of stuff. I use it to find errors and scan for what… dumb mistakes, you know, IIs, RRs and the text and stuff like this. Very good. Those are the major new areas of focus for us, but the software we have is unique and we have… I would never have been able to create it except for people at a few engineers at Google who helped me solve the problems. There’s no basis for the mathematics that I use.

Scott Bursey (09:53)
How are you positioning your team to capitalize on those specific shifts right now?

Eric Fernwood (10:36)
Well, since we only deal with investors, it’s actually easier than you might think, because we actually only target one specific tenant segment. That tenant segment stays on average over five years. We’ve had nine evictions in seventeen years out of a tenant population over a thousand. And during the two thousand eight financial crash, our clients had zero decreases in rent, zero vacancies. It didn’t have any impact on their cash flow. Property prices plunged 48% or more in Las Vegas, but your cash flow hasn’t changed. So we hit one segment, and they’re… they what they want doesn’t change much over time. And so we continue to select properties that attract that one segment, because they perform so well. We have less than 2% vacancy over the 600-plus properties.

Scott Bursey (11:25)
Thank you for highlighting that. Staying ahead of the curve is definitely the name of the game. Eric, thinking about the current landscape, what is the biggest external threat you’re watching in the investment market today?

Eric Fernwood (11:37)
Well, I would say the biggest threat is that high interest rates are certainly killing everything. They’re really making it difficult. Probably the other thing that’s making it difficult is the what the… the ambient environment, the the war in Iran and everything. People are just hunkering down, they’re not… they’re not making decisions. When people are stressed, they they stay put. And the high interest rates prevent inventory from coming on the market. I mean, that in a nutshell is our biggest problem, is dealing with high interest rates. We have some clients who view this as a real opportunity, they’re getting properties at good prices, but many just say, “Well, you know, I’m afraid something’s gonna happen in the war.” Well, maybe it probably will, I mean, it’s not gonna affect us.

Scott Bursey (12:23)
It’s fascinating to look ahead. So what is the primary focus for The Fernwood Team heading into the next year?

Eric Fernwood (12:30)
Well, we continue to grow our 1031 exchange business. Now, we don’t… even local properties, we typically don’t sell them. Like, we have one client who is selling seven of his fourplexes that he inherited, and… but we won’t represent them on selling the property, because that’s just not our area of expertise. We have a limited area, and we stick in that area. We don’t go outside of there. If you go outside of your your area of expertise, you’re gonna hurt people. We don’t do that. So going into the future, I mean, our focus remains 1031 exchanges, and we can deal with all the problems associated with that. We have checklists and everything for our clients, a lot of documentation on what to do, and especially what you don’t do.

Scott Bursey (13:16)
How can an investor best align themselves with that vision?

Eric Fernwood (13:21)
Well, I think for most new investors, they look for deals. I mean, “This one is off-market, this one’s cheap,” or… I have never seen a property that was actually cheap. What I’ve seen… ones that were priced correctly for their condition, I’ve seen them priced correctly for their location, but no property ever paid rent in the history of the world. Tenants pay the rent. And so that’s why our focus is on who pays, not… I mean, a a property is a container someone rents to live there, and that’s where you’re making your money, it’s not off the property, so… So that is what, you know, we continue to do what we’re doing, focus on that one tenant segment. We continue to research on them and and refine what we know about our… our demographic that we target is it’s pretty simple: it’s families with younger children earning between sixty and eighty-five thousand dollars a year, and so that is very, very stable.

Scott Bursey (14:14)
Curious, Eric, what does your professional network look like right now?

Eric Fernwood (15:00)
A lot of my network is clients, believe it or not. They… many have taken a very active interest in what we do, and they… I can call up… I mean, there’s a couple of like really incredible Apple engineers. I call them and say, “Hey, I’m trying to solve this problem. How would you do that?” And so our network really is a lot of our clients who are brilliant people for the most part. And so that is who I mostly deal with. We don’t really have other network to speak of, because I mean, how am I gonna reach someone in Singapore, or how am I gonna reach someone in Hong Kong or in Germany or something? There’s no network you can get that’s gonna get you down. Publishing technical articles which get picked up by various sources, and success from our existing clients.

Scott Bursey (15:48)
Eric, if an investor came to you today wanting to replicate your success, what is the most important data point they should be analyzing before their first acquisition?

Eric Fernwood (15:58)
That’s a really good question, actually. Most people learn from guru books, you know, “This is the magic formula, do this, and you’re gonna be wealthy overnight”-type thing. We actually have a two-hour training class that every new client must go through where we teach them to make decisions based on analytics, not feelings. And that’s hard for people to step aside from their feelings. And the other thing is to look at the numbers, not today’s numbers, but also the future numbers, because you’re gonna own this property for twenty to forty years. And you need to… you can’t just do everything based on day-one cash flow or something. You have to look at what’s gonna happen likely over the next several years. And that’s more of a fact for the city, it’s not a property feature when you talk about appreciation and rent growth. You’re you’re stuck within that city, and so you cannot raise your rents faster than the city does, or anything like that.

Scott Bursey (16:50)
Thank you for dropping that level of insight for our listeners. And you have given our listeners a tremendous amount of valuable insight here today, Eric. But is there any additional advice or golden nugget or two you could leave with our pros?

Eric Fernwood (17:04)
Yes. What we teach in our classes: determine what your goal is and work backward. And you need to build a plan. Each step must be measurable, have a time constraint on it, and, you know, you need to be able to have actual steps. It’s kinda like “get rich.” That’s not a step, that is a byproduct of a well-executed plan. So get a plan, work backwards, and focus on the fact that your goal is not to accumulate property, your goal is to have a twenty-to-forty-year monthly paycheck that increases faster than…

So once I get people to quit thinking about deals and start thinking about their goals, everything falls into place, because what we teach is stolen, liberated—what do we call it?—from Whole Foods and Trader Joe’s and 7-Eleven, all these other places. And we teach them about localization. For example, when I was working in South Korea, McDonald’s sells beer there, and in France with their meals. When you go to Hawaii, they sell poi and Spam. Poi is this purple pasty stuff, it’s disgusting, but anyway, it’s really bad, but I mean, the locals have grown… grew up on it, so they love it. And so McDonald’s is very sharp in localization. And so we change it from an opinion-based or feelings-based to a analytics, goal-based. And that’s a big change for people to do. People who can’t, we don’t work with.

Scott Bursey (18:31)
Thank you for that, Eric. And for those of our listeners that want to keep this conversation moving, stay in your lane, or collaborate with you, what is the best way for them to plug into your pipeline and reach you directly?

Eric Fernwood (18:42)
Just send me an email. An easy email address is [email protected]. So just send me an email and we’ll get you set up. We usually have an initial Zoom meeting so we can determine whether we and/or Las Vegas are going to match your needs. And it doesn’t always, it really doesn’t. We’re not trying to sell them in, we’re trying to make sure that they have clarity on what they want. So just reach out to me, we’ll get going.

Scott Bursey (19:08)
Eric, thank you so much for joining us today.

Eric Fernwood (19:10)
I appreciate this opportunity. Thank you.

Scott Bursey (19:12)
This has been an absolute masterclass. And to our listeners, we appreciate you. If you receive value from today’s episode, please subscribe. We’ll be filling your tanks with the lineup of elite guests, just like Eric Fernwood, who are accelerating and setting the pace for the rest of the industry. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.