Is Las Vegas still a good investment for buy & holds?

Question

I have been living in Las Vegas for 9 years now and have been actively researching the real estate market here for at least 4 months and SFH seem to be where I think I would be most comfortable with having a rental. All the multi-units seem to be in not the best parts of town or in the student housing area, which I'd like to stay away from. So, it looks like SFR are my only option. I am still new to investment real estate, so I may be naïve, but....

Can you really get good returns here? It seems to me good deals are really hard to come by and are few and far in between. Plus with the price rentals are at for 3-4bd, 2-3ba, they don't seem to be priced remotely low enough to make any profit off it.

What kind of returns are Las Vegas/ Henderson investors seeing in the valley for Cash ROI and Total ROI for SFR? What is a realistic return to shoot for in the Valley? Are you primarily getting deals from homes listed on the MLS or other off-the-market ways? Is anyone really actively investing in Vegas consistently?

Thanks!

Dan Mumm · Answer

@Stephanie Hardy, I'm a full time Realtor and investor in LV and I agree with the sentiment of the above posts. It just depends on how much you expect with regard to returns. By what criteria are you assessing properties' investment value? 1% rule? What type of financing are you using? Cash?

I'm basically just trying to assess your position - for example, when you state that 3bed/2ba's don't seem to be priced close to low enough to make any profit... I'm assuming you mean you can't find positive cash flow w/ 20% down?

Here's a basic example with some realistic (ballpark) LV numbers.

$150k SFR.

20% down = $30,000 initial investment.

Mortgage bal = $130,000 @ 5% (conservative) = PITI $796.69

Plus $50 HOA (rough estimate) = $846.69 financing cost per mo.

Rental income of $1250/mo - $846.69 financing cost = $403.31 remaining.

Subtract out property management (10% = $125), vacancy/repair estimate (10% = $125), and you are left with $403.31 - $250 = positive cash flow of $153.31/mo.

153 x 12 = $1836 / $30,000 (initial investment) = 6% ROI. Plus appreciation.

Even after taking out garbage and sewer you would probably still be slightly cash flow positive. $1250 rent on a $150k property is fairly difficult to find but certainly not impossible.

Let me know if you need any help here, I'd be happy to work for you and find you a good positive cash flow in LV.

Eric Fernwood · Answer

Hello,

There are multiple topics covered in this thread. The ones I will comment on are listed below.

• My investment property criteria
• Comparing properties in different locations
• What is a reasonable return?
• Cash based tenant considerations
• Is Las Vegas Still a Good Place to Invest?

My Investment Property Criteria

I believe that every property must meet three criteria:

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
• Likely to appreciate over time - You would never buy a property just for appreciation but appreciation is very desirable. Especially when using a 1031 to reinvest equity or adapting to market changes.
• Located in an area where you can make money and risks are low. Key factors include state income tax, property tax, insurance cost and landlord favorable regulations. Regulations include property related laws like the time and cost of evictions, rent control, code compliance requirements, etc. Nevada / Las Vegas is a business friendly state. No state taxes and evictions typically take less than 30 days and cost less than $500.

Sustained profitability and appreciation are functions of demand and legislation. Ongoing demand is dependent on the following factors:

• Sustainable population growth (no boom towns)
• Increasing job quality and job quantity (measured by per-capita income growth)
• Little or no urban sprawl. A metro area can have a stable population but areas within the metro area may have a declining population or declining income.
• The major employers are in market segments which have proven to perform in the past and are very likely to perform well in the future.

How Does Las Vegas Match These Criteria?

When I decided to change professions and sell real estate I did a careful study of potential metro areas. Las Vegas best met all the above criteria, especially urban sprawl. Las Vegas has very limited remaining build-able land; it is surrounded by federal land as shown below. Urban sprawl is not an issue in Las Vegas.

In most metro areas, urban sprawl can slowly change a good investment into a financial disaster. Below is an illustration showing the effects of urban sprawl over time on an investment property.

As to other long term factors:

• Las Vegas population trend.
• Las Vegas per-capita income trend.
• Las Vegas investments and the 2008 market crash - I can't link directly to our case study so please see my profile and click on the link titled: "Case Study - Real Estate Investment and the Las Vegas 2008 Market Crash"

Comparing Properties In Different Locations

When you compare return in different locations you need to consider all the major recurring cost factors plus rehab cost, rehab risk and long term maintenance cots. As an example, suppose I could buy the exact same property in three different locations and it rented for the same amount. This is impossible but the point is to compare the impact of landlord insurance, property taxes and state income taxes on return. Below are details on the "identical" property.

• 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)

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

City

County

Income Tax

Property Tax

Insurance

Austin

Travis

0%

1.9%

$1625

Indianapolis

Marion

3.4%

1.07%

$802

Las Vegas

Clark

0%

0.86%

$710

Data sources:

• Property taxes - Tax Foundation
• Insurance -  Insurance by State. I was unable to find a single site that compared landlord insurance cost by state so I used homeowner's insurance with is reasonable for comparison purposes. Landlord insurance is typically 10% to 20% more than home owner's insurance.
• State income tax  - Source

We use the following formula for calculating ROI because it is close to what our clients actually experience :

ROI =((Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateTax)) / ( DownPayment + ClosingCosts +RehabCost/AmortizationPeriod)

Using the above formula to calculate comparative returns for the three different locations:

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%

As you can see, taxes and insurance can have a huge impact on return.

Another factor is rehab and maintenance. When I owned properties in Houston and Atlanta I seemed to always be replacing roofs, siding and dealing with termites and landscaping. Below is a typical Las Vegas A or B class property.

As you can see, there is not a lot to maintain.

As far as rehab cost goes, our typical rehab cost for a single family home is between $3000 and $7000 for a 3 or 4 bedroom 1500 to 2000 SqFt property. The costs of rehab in other areas (What It's Actually Like To Buy A $500 House In Detroit) tend to be much more expensive because of age, climate and construction.

What Is A Reasonable Return?

This is a deceptively simple question but there is not a simple answer. When people ask me such questions, I usually reply, "Compared to what alternative investment?" When I look at investments that offer a similar level of security to A and B class properties in Las Vegas I look at instruments like CDs. Currently, CDs are paying in the 1.5% to 2% range depending on the term and amount deposited.

In general, we consider a 4% or higher on A and B class properties to be a reasonable return in the current market. Note that the formula we use for calculating return is:

ROI =((Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateTax)) / ( DownPayment + ClosingCosts + RehabCost/AmortizationPeriod)

However, we have a property generating 9% return but that is the exception. (Note, properties purchased several years ago have even higher returns.) We are only able to find such investments because we developed software, processes and an investment team that enable us to consistently find the 0.1% of available properties that are good investments in locations that have a track record of appreciation.

Cash Based Tenant Considerations

I see a lot of discussions of high returns (10%+) but these are usually for C class properties. Las Vegas, like any major city, has areas that were once "the place to live" and over time have fallen on hard times. Properties in these areas frequently appear to have high returns. For example, I had a new investor contact me concerning a property, which his calculations showed a 14% return. In general, I consider class C properties to be the real estate equivalent to junk bonds so I carefully check such properties and do not rely just on the numbers.

When I looked at the property and other properties in the same complex (if you would like the MLS number, send me an email) and recent sales and rentals I came to the following conclusions:

• The average time to rent is between 40 and 60 days. This alone lowered the return to about 4%.
• The unit was part of a 4 plex and two of the units in the same building had obvious signs of being recently broken into.  I saw other such damage in the complex. Based on this I believe that maintenance and turn costs would be significant.
• I talked to several residents and learned that there was a lot of crime in the complex including cars stolen or vandalized and burglaries.
• Rents were in the ~$600/Mo. range, which means that you would primarily be dealing with cash based tenants.

Before I talk about cash based tenant considerations I want to describe what I consider to be a "good tenant". I define a good tenant as someone who:

• Pays all of the rent on schedule
• Takes care of the property
• Does not cause problems with neighbors
• Does not engage in illegal activities while on the property
• Stays for multiple years

Good tenants are the result of effective screening by a skilled property manager.  Cash based tenants are extremely hard to screen because they have no "financial history". Screening of cash based tenants usually consists of "a heart beat and first and last months rent." Since they have no credit history, there is little more you can do.

In our experience, compared to credit based tenants, cash based tenants are more likely to pay late, skip, be evicted and damage properties since there is little or no consequence for their actions. Also, the property manager frequently must go knock on the door just to collect the rent.

In contrast, credit based tenants are dependent on credit cards, bank accounts, car loans, etc. and know such poor tenant behavior will have short and long term consequences.

Be very careful when you are considering properties that will primarily rent to cash based tenants.

Is Las Vegas Still a Good Place to Invest?

In my opinion, yes if you can find the 0.1% of properties that are good investments. If you randomly choose a property, probably not. I think the same could be said of most cities. Below are some general statements about investing in Las Vegas:

• How much do investment grade properties cost?Class A properties: $180,000 to $230,000Class B properties: $120,000 to $180,000
• Class A properties: $180,000 to $230,000
• Class B properties: $120,000 to $180,000
• What is the typical time to rent? Less than 30 days.
• What is the typical (real) return your clients are experiencing? Between 4% and 11% before tax advantages.
• What is the typical rehab cost? Between $3000 and $7000 on a 1500 to 2000 SqFt single family home.
• What is the ongoing maintenance cost? We use $600/Yr in our calculations and that is typically high.
• What is the typical vacancy rate? <3%
• Property tax rate: 0.86%
• Landlord insurance: Depending on deductible, <$650/Yr.
• Typical eviction time and cost: <28 days and $500. Note that evictions are rare due to the tenant's certain knowledge that they must pay or be evicted plus the effective screening by the property manager we work with.
• State income taxes: Zero

• Class A properties: $180,000 to $230,000
• Class B properties: $120,000 to $180,000

Andrew Fielder · Answer

@Stephanie Hardy Vegas was one of the hardest hit markets in America during the GFC, mainly due to the fact that it is a tourist base economy. When there is a recession, especially on a global scale those markets get hurt badly because people are not spending money going on vacations. That means less jobs, which means less demand for housing.

Even when you consider vacation rental/ airbnb it will take a big hit. Last thing you want to be doing is competing with the casinos during those times.

Ross Greene · Answer

Some great information in this thread!

I agree with Robert Adams.  I do see a lot of people putting significant down payments and or just all cash.

Robert Adams · Answer

Over the past several years returns were decreasing as prices skyrocketed and rents remained the same. Now that rising prices has slowed down (from 30% in 2012 and 2013 to a healthier 5%-10% in 2014 -2015) and rental rates are on the rise, the cash flow will also get better over the near future.

I disagree with the doom and gloom that our market is over leveraged etc. This is actually the healthiest the Vegas market has been in a long time. Sustainable and healthy growth, appreciation, NOD's and inventory levels all point to a balanced market. In additional to that, a lot of homes were bought by cash buyers and the financed buyers had to put some skin in the game. I do believe that as the market continues to cool off we will see more and more of the lenders pumping out looser guidelines to continue to drive demand. Builders will also continue to increase incentives to help sell their inventory as things cool down.

Dan Mumm · Answer

Hi @Stephanie Hardy, great question. Capex is important and often overlooked but I find that capex (as well as repairs to a degree) in LV tends to run significantly lower than other markets due to, as you know, how new the average home is here. A huge portion of the current inventory was built between 2000-2008. Most times you are not walking into ticking timebombs like in other areas with 50-60 year old homes. It is definitely a specific item to each and every property and should be looked at individually.

Just another reason why LV is a great place to invest, and why it is one of the few metro areas where you can maintain positive cash flow with 20% down. Also keep in mind that if you buy right, your cash flow will probably improve over time due to rental comps increasing.

Stephanie Hardy · Answer

Account Closed Thanks for the feedback. That is something I'm also afraid of. There are loans you can do with 0% down now. That's crazy to me! That is a reason I've been hesitant, as well, because I don't know where it might go again in Vegas and I'd hate to buy now when the market might crash again, but if I wait long, then interest rates might rise and then I'm out of luck even more!

Omar Merced · Answer

Hi Stephanie. The short answer is it depends. I hate to say that but it's true. It depends on what is good for your personal rate of return. When I talk to people I always ask them what the future looks like for them and what do they consider a good rate of return vs the risk that they are willing to take. This is very personal. I used to work for a SFR REIT and they were ok with 4% where I wouldn't get out of bed for that. As far as deals they come from everywhere but I've gotten some very good ones from fellow investors. I am an advocate for the local meet ups and meeting the local people doing the deals. Yes you are going to find a lot of "interesting" people trying to sell you some "interesting" things but it's your job to know what is good and what is hype. This is not hard but to does require work and anyone that is trying to sell you different is not the type of people you want to be involved in. Hope to see you around.

Account Closed Airbnb still not allowed here. For now...

Joe Woo · Answer

I've noticed that the cashflow numbers are much better when you go for multiplex units.

Using this property as an example - https://www.redfin.com/NV/Las-Vegas/3217-Arlene-Wa...

Price: $214,000

Monthly rent: $2,150

What are folks' thoughts around multiplexes in LV?

Stephanie Hardy · Answer

@Omar Merced thanks for the clarification. I knew people had vacation rentals, but wasn't sure about Airbnb. Vacation rentals still don't sound very fun to manage, to me, so I think I'll stay away from that...at least for now!

Is Las Vegas still a good investment for buy & holds?

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