Las Vegas market question

[Sutton Zolner]

From the few people I have spoken with from Las Vegas have generally said that the market is good for buy and hold and not so much for flipping right now.  Is this true from others experiences.  I am new to Real Estate and am trying to learn as much as I can right now.

How are others finding deals in Vegas for SFRs and multifamilys?  Any help would be great.

[Eric Fernwood]

@Sutton Zolner @George Chang

Some very interesting discussions have come up in this thread. There are a few points that I will comment on:

• Las Vegas returns
• Maintenance and rehab costs
• HOA fees

Las Vegas Returns

I see a lot of people talking about rate of return but not taking into account all the cost factors for each location. For example, property taxes in Dallas Fort Worth are about 2.5%. In Las Vegas typical property taxes are .86%. There are no state income tax in Nevada or Texas, but in California you could pay 9% or more state income tax. The formula we use for comparing returns is:

ROI = ((Rent - Debt Service - Management Fee - Insurance - Real Estate Tax - Periodic Fees) x (1 - State Income Tax))/(Down Payment + Closing Costs + Estimated Rehab Cost)

As an example, suppose you found the identical property (not realistic, I know) in Austin, Indianapolis and Las Vegas. And, assume that you get the same rent for each and had no rehab costs. Below is a summary of the property specifics:

• Purchase price $150,000
• Rent: $1,000/Mo. or $12,000/Yr.
• Financing: 20% down, 4.5% interest, 30 year term. Resulting debt service is $608/Mo. or $7,296/Yr.
• Down Amount: $30,000
• Periodic fees: $0 (for simplicity)
• Management fee: 8% or $12,000/Yr. x 8% = $960/Yr.
• Rehab cost: $0 (for simplicity)
• Closing cost: 0% (for simplicity)

Below are three cities with tax rates and landlord insurance costs:

Note:
• State income tax source
• Insurance rate source. Note that this site contains national average homeowners insurance rates. I could not find a similar site for landlord insurance. Landlord insurance is typically 10% to 20% more expensive than homeowners insurance. The $710 rate shown here for Las Vegas is higher than what our clients pay, but I will keep it here just for comparison reason.
• Property tax source

Calculating ROI for each of the three cities:

Austin: ROI = (($12,000 - $7,296 - $960 - $1,625 - 1.9% x $150,000 - $0) x (1 - 0%))/($30,000 + $0 + $0) = -2.4%

Indianapolis: ROI = (($12,000 - $7,296 - $960 - $802 - 1.07% x $150,000 - $0) x (1 - 3.4%))/($30,000 + $0 + $0) = 4.3%

Las Vegas: ROI = ($12,000 - $7,296 - $960 - $710 - 1.07% x $150,000 - $0)/($30,000 + $0 + $0) x (1 - 0%) = 5.8%

The point of the above is that differences in state income tax, property taxes and landlord insurance can have a huge impact on return. 

Another huge difference are the applicable laws and regulations concerning rental real estate. For example, clients tell me that in California if a tenant knows how to play the legal system it can take up to one year to evict them. In some eastern states you can not evict tenants during the winter, period. In Las Vegas, typical evictions take less than 30 days and cost about $500 if you use a full service agency. While I know of no way to include eviction cost risk in an equation, the cost of eviction will become all too real if it happens to your property.

Remember, all calculations such as ROI or cash flow are really only snapshots of the market at one moment in time. Typical hold times for real estate is 7 plus years so what is happening in the foreseeable future can have a huge impact. Some examples:

• Population - If people are moving out of an area, housing prices and rental rates are likely to fall. If people are moving into an area, then property prices and rents are likely to rise. Also, don’t forget about urban sprawl. You could have a stable metro population while a location within the metro area has a falling population.

• Job Quantity and Quality - For example, in many parts of the US manufacturing and similar jobs are going away and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing jobs so the families of these workers have less disposable income. Less disposable income means that they cannot afford to pay the level of rent they did in the past.

There are other factors I could mention but these are two of the largest factors to consider. Las Vegas is landlocked by federal land and has limited expansion space so urban sprawl is not a significant issue. In other cities it is an ever present factor to consider.

Las Vegas is projected to have about 1.5% annual population growth for the foreseeable future. 

Maintenance and Rehab Costs

Due to the climate, the predominate construction in Las Vegas consists of:

• Stucco exterior
• Desert landscaping (rocks)
• Metal windows and doors
• Concrete block fences
• Tile roofs
• Concrete slab foundations

The result is a low cost of ownership. Typically our clients budget $1,000/Yr in maintenance but average closer to $600/Yr.

On rehab costs, it is impossible to give a “fits all” guess. Typically, we are seeing between $4,000 to $5,000 rehab on $200,000 properties here in Las Vegas. These properties average about 1,800 SqFt so you could say that the cost/SqFT for rehab is $4,500/1,800SqFt = $2.5/SqFt. In a recent article on buying properties in Detroit, the estimate was between $75/SqFt to $100/SqFt “and that’s just for bare-bones repairs, and it doesn’t include anything structural like a roof or foundation.” (What It’s Actually Like To Buy A $500 House In Detroit ) 

HOA Fees

Most class A properties in Las Vegas are in an association. While association fees vary all over the place depending on the area and amenities (guard gated, community pools, etc.), most of the properties our clients buy are in the $25/Mo. to $45/Mo. range. While you will get some benefits from the HOA, we view the HOA fees as asset value preservation fees. One bad house in a subdivision can hurt property prices and rental rates. For example, I was looking at a house a couple of weeks ago in a subdivision with no HOA and saw that the residents at one property were essentially operating an auto repair service out of their garage. Cars (some obviously derelict) were parked all around the area. Is this always the case with subdivisions without HOA's? No. We developed analytics for estimating how likely such a subdivision is to remain as it is. We have no problems with stable subdivisions without HOA fees but subdivision stability has to be considered.

I hope I addressed some of the concerns expressed in this thread.