Realistic beginner strategy? (Las Vegas)

[Jennifer Dargento]

If I set a goal to house hack for my first BRRRR property using either 203k loan and/or small multi-family (duplex, triplex or quad) in a B class neighborhood in Las Vegas in 2024, would you say this goal is realistic?

Note: I currently live in the Midwest but would like to relocate to Las Vegas.

Any advice or tips welcome.

[Eric Fernwood]

Hello @Jennifer Dargento,

Some considerations.

203K loans

With 203K loans, the loan amount is based on the home's projected value after renovations have been completed. To get this loan, the borrower works with a HUD-approved lender to create a detailed renovation plan and budget. Funds are released in stages as the work is completed. Some considerations:

• A 203K loan can only be used on a personal residence. It cannot be used for investment properties or second homes.
• You are required to use licensed contractors. Generally, the cost of licensed contractors is about three times that of a handyman.
• Finding a licensed contractor who was willing to do all the paperwork and hassle for a relatively small renovation job is difficult.
• Closing a 203k loan typically takes 60 days or more, while a typical FHA loan takes about 30 days. There is more paperwork involved with a 203k loan, and a significant back-and-forth process with the contractor to get the final bids. This puts you at a disadvantage as you will be competing with other buyers who can close faster.

The concept of 203K loans is outstanding. The reality is somewhat lacking.

Multi-Family in Las Vegas

The concept of multi-family is that you reduce vacancy risk and you can live in one of the units and rent out the others. I have experience with multi-family in Las Vegas, Houston, and Atlanta and offer the following considerations.

• Although Las Vegas multi-family properties may seem promising on paper, their actual cash flow is likely to be significantly less. I learned this lesson firsthand with my first investment property in Houston, which was a C (or D) class property. Before buying the property, I estimated my return at between 12% and 14%. However, it turned out to be a money pit due to continuous tenant turnover, evictions, vacancies, property damage, and vandalism. For instance, one of the tenants who signed a one-year lease moved out after only two months, leaving extensive damage. At first, I was losing over $1,000/Mo. By doing all the maintenance myself, I was able to reduce my losses to about $1,000 per year (after tax savings). I spent every Saturday and many Sundays making repairs. The best day in my early investment life was when I sold that property. The multi-family properties in Las Vegas are similar to the one I owned in Houston.
• The majority of multi-family properties in Las Vegas were built prior to 1987. Almost all are in distressed areas where only minimum-wage or near-minimum-wage workers are willing (forced) to live. There are some that are newer multi-family but these typically cost $1,000,000 or more.
• Investors never sell performing assets. In over 15 years of dealing with investment properties in Las Vegas, I have never seen a single performing property sold by an investor. 100%, all, of the properties were losing money either due to deferred maintenance or tenant issues, or both.
• It's important to take the information provided by the listing agent with a grain of salt. I learned this lesson firsthand a few years ago on a multi-family property that a client was considering. According to the listing agent, all units were rented for $900 per month, and all tenants had been in place for at least a year. As part of my due diligence, I spoke with all tenants. When I spoke to one tenant, the answers seemed off. So, I offered him $50 for the facts. He told me that he had only been living there for six months and believed he was the longest-tenured resident. Additionally, tenants had the option of paying $900 by check or $600 in cash. The leases they signed stated $900 per month, but they were all paying only $600 per month. A thorough due diligence is essential.
• These properties commonly have Section 8 tenants. While many believe that Section 8 provides guaranteed income, the only guaranteed portion is the portion paid by the government. In my experience, Section 8 tenants have a poor track record of paying their portion of the rent. For instance, a client of mine has four Section 8 tenants, but he only receives the government portion of the rent, as none of the tenants have paid their portion. While he could evict these tenants, the replacement tenants would likely have similar payment issues.
• Almost no matter what improvements you make to most Las Vegas multi-family properties, you will not be able to increase the rent significantly. These properties are located in high-crime distressed areas. If anyone could afford to pay higher rent, they would not live in this area.
• These are older properties that require significant maintenance.
• Typically, tenants attracted to these properties stay for less than a year. The shorter the tenant's stay, the more money you lose.
• There may be some multi-family properties on the market with nice-looking interiors. However, cosmetic improvements are cheap compared to updating systems. For example, installing granite kitchen counters in these properties should only cost around $2,000 per unit. In contrast, replacing the sewer line between the property and the main can cost anywhere from $5,000 to $40,000. These are older properties that have experienced significant wear and tear and require expensive updates to their systems.

You may think that I do not like multi-family properties, but this is not true. Although I had a terrible experience with a multi-family property in Houston, I purchased two 4-plexes in a suburb of Atlanta that targeted young professionals. My experience with these properties was vastly different. The rent was always paid on time, with no skips or evictions. I cannot even recall a single late payment.

The primary difference between the Houston and Atlanta properties was the tenant segment the properties attracted, not the property itself.