How to choose a neighborhood?

Question

Hello BP, I am new here. I am in Las Vegas and I would love some experience on how to choose a neighborhood to flip homes.

I am very tempted to begin in the neighborhood I grew up in because it has gone downhill over the decades and needs attention. It was built in the mid 60's.  About every 10th house has been kept up or rehabbed. The other 9 are terrible. But they are STILL at a price that surprised me. By that I mean high for the area.

But I suspect the smarter idea is to start in the newer places, 80's or 90's  that probably requires less work.

Any advice/experience is welcome. Thanks

Abbey Humphreys · Answer

Hey Stacey- welcome! I think that investing in a market that you know well is a good plan, though I definitely hear what you're saying. If the neighborhood is run-down, you may get bogged down with repairs and end up not achieving your cash-flow goals. If you do decide to invest in a different market, be sure to familiarize yourself and establish connection so that you can find the best deals and you can stay apprised on changing rules and regulations.

Stacey Michaels · Answer

Thanks Abbey! I’m not actually looking for another market, just possible neighborhoods, but you are absolutely right. Keeping on top of regulations etc is important. I’ve had friends run head long without getting informed and seen the results. No thank you. 😬

And the regulations certainly change a bit by neighborhood here, development fees and limitations, different HOA rules , and so on.

Bill B. · Answer

I think after 10-15 years of existing homes increasing 10-20% per year and new homes only going up 5-10% the difference has just kind of evaporated. I never considered a new home in the last 25 years of Vegas investing. Last month I bought my first one. It was 10% more than an existing 10-20 year old home (the oldest I look at it. )

There are some downsides. The new builds northeast of aliante casino where I bought have a $20k assessment from the city on a 30 year amortization at 8% interest, that’s not shown in the price. The backyard is dirt, that’s another $10k. There’s no laundry or fridge, that’s another $3-5k.

But I was looking for 3 car a garage, single story homes between 2500 and 3500sf less than 10 years old and that really narrowed my selection. But I sold an existing 20+ year old home home for $265/sf and bought new for $220/sf. I wanted to sell and I didn’t want to pay $65k in income tax. Plus maybe I’ll move in to it in a year or two if it doesn’t work out as a rental.

Ps. They have new build big 2 story homes for $152-$160/sf.  With sellers unwilling to sell this will certainly be the year of the new build in regards to percentage of the sales in Vegas. Why would any owner occupant that wasn’t leaving the area sell? It will cost at least an extra $1,000/mo after paying $30-40k to aell if they simply want to buy the same priced home.

JD Martin · Answer

DO NOT chose an area because you feel bad and want to see it brought back to life. Recipe for disaster. Assuming you've already decided on the market you want to work in and know how much and where your funding is coming from,

#1: Decide what type of homeowner class you want to serve - millionaire, upper middle, middle, lower middle, working poor. That's going to determine what kind of houses you buy.

#2: Decide what neighborhoods offer the best possibility of return on investment. If you decide on upper middle, then you need to know what those home buyers are looking for and what kind of prices they can support.

#3: Determine if you have the capacity to hit your points within your constraints - time, money, availability of contractors, materials, etc. If you want to sell millionaire homes and have found neighborhoods that are the next millionaire's row, but you can't find anyone to do Venetian plaster ceilings or install Carrera marble shower inlays you may have to back up and punt.

Remember that not everywhere or every neighborhood makes a good flip, rental, Airbnb or anything else.

Bill B. · Answer

At least 80% of the houses, and 99% of what I buy are built after 2000 in Vegas, a most of those were 5-10 years ago. There’s just about zero discount given for homes with bad layouts, old hvac/plumbing, or aged patios/driveways/roofs/or obsolete windows.

Heck, my last purchase was my first new build as it was as cheap as 15 year old homes. When I moved here there really wasn’t much “c class” housing more than a few miles from the strip. It is spreading to maybe 8-10 miles now.  I really think you’ll get a better experience with nicer homes in nicer neighborhoods. The returns won’t be as good but you’ll get tenants that stay 5-15 years instead of 1-2, and you’ll only hear from them once every couple years when an appliance needs repair.

I stuck mostly to the west side, then north west and now north towards aliante/215. If you check the map on some of @Eric Fernwood posts you’ll see the same kind of map where he manages property. Though they may have more in the southwest as that was barren land when I was buying, and then an unknown.

Drove the neighborhoods during a weekday. See if it’s full of people hanging out or broken down cars. If anyone’s parking on the lawn. Are the lawns low maintenance and kept up. That kinda thing.

Good luck and ask questions. Lots of helpful people here.

Stacey Michaels · Answer

Thank you. I did not know about the differences in appreciation on the older homes versus the new build. That explains a bit.

Stacey Michaels · Answer

This is all so helpful! Thank you. i laughed at the map. The very area I’m wondering about is conspicuously lacking any investments.

I’m very curious about something. It was mentioned that new builds are going for almost the same price as the older houses in the less desirable areas. I have noticed this as well. What might be the reason for that in your opinion?

Our property manager says its location, but your examples of demographics would suggest otherwise

Would love to hear your thoughts on this

Thanks

Eric Fernwood · Answer

Hello @Stacey Michaels,

Some background: Over the last 15+ years, our investment team has successfully delivered over 480 investment properties to more than 180 clients worldwide. Our clients evaluate our performance very positively - over 90% of them purchase two or more properties, and our largest source of new business is referrals from existing clients. My point is that I have a solid understanding of how to find performing investment properties in Las Vegas. I am not just another armchair guru.

The goal of real estate investing is financial freedom. It does not matter what property type or anything else. However, financial freedom depends on keeping a reliable tenant in the property.

A reliable tenant is someone who stays for many years, always pays the rent on time, and takes care of the property. Reliable tenants are the exception, not the norm. And, you will need multiple reliable tenants over the years you own the property.

The best way to always have a reliable tenant occupy your property is to purchase a property that attracts people from a tenant segment with a high concentration of reliable tenants. How do you find such a segment? Through interviews with multiple property managers and additional research. This is what I did in 2005. Once I identified the right segment, I determined where and what they rented. The, we bought similar properties. These are the properties we’ve delivered for 15+ years and our results have been excellent.

• Average tenant stay >5 years
• We’ve had 6 evictions in the last 15 years with a tenant population of over 1,000.
• Our client's income was unaffected during both the 2008 crash and COVID-19 pandemic. Meanwhile, properties that attracted other tenant segments experienced high vacancy rates.

Notice that I did not pre-define a property type or location. The tenants I wanted to occupy our properties defined everything. It is really that simple. And, this method works anywhere. In some cities, the target segment property type might be multi-family, while in others it could be single-family homes or condos. The property type is not what matters. Income reliability is what matters.

It's Not as Simple as Selecting an Area

The map below shows where many of our client’s properties are located.

As you can see, there are areas with a high concentration of properties and areas with few or no properties. How did we know what and where to buy? Because we listened to our target tenant segment.

How Do We Consistently Find Performing Properties?

Below is our process:

• Using data mining software we developed and exported data from the MLS, we eliminate all properties that do not match our target demographic. Only about 0.4% of all properties pass the data mining software.
• Next, we compare the characteristics of each remaining property to the financial profile of each client. The ones that appear to match, we manually evaluate. About 60% of properties we manually evaluate are eliminated.
• Next, we conduct an onsite evaluation of the remaining properties. If we determine that a property is likely to attract our target tenant segment, we take a video and send it to both our client and the property manager we work with.
• Based only on the MLS number and the video we provide, the manager responds with probable rent, time to rent, pros and cons, and a list of renovation items necessary to attract our target tenant segment and maximize the rent.
• We next use software we developed to generate an estimated renovation cost based on the list of renovation items provided by the property manager.
• If the property and renovation costs match the client's profile, we provide actionable analytics and recommendations. We never send MLS data sheets because they contain nothing of value to an investor. If the client is interested, we submit an offer.

How long does it take to complete this process? Typically, it takes between 6 and 10 hours. Good properties tend to stay on the market for only 2 or 3 days, so we have to move quickly. On average, we close 4 to 5 properties every month.

A common question I receive in, “How much does it cost to work with an investment team like ours?” I can’t answer for others (there are no others in Las Vegas to the best of my knowledge) but we’ve only charged a fee 4 or 5 times out of the over 480 properties we’ve delivered. And these few occasions were due to exceptional circumstances. For all other properties, our fees were paid by the seller's listing agent, not our client. This enables you to take advantage of 15+ years of experience and a team of experts, without any additional cost to you.

Summary

I’ve worked almost exclusively with investors for over 15 years and selected hundreds of investment properties. Could I find a good property by driving around or cruising websites? No, there are too many properties and the time they are on the market is too short.

Reach out if I can help.

How to choose a neighborhood?

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