Buying multifam in Vegas

[Rafal Soltysek]

IS anybody investing in multifam in Vegas? -- duplexes, 4-plex etc?.... is this market here so volatile (Wild wild west :)) worth to look into? ...I've noticed those types property here, are located in really bad areas, - wonder if other cities are different in this regard.

Raf

[Eric Fernwood]

Hello @Rafal Soltysek,

I've owned multi-family in the past and did well on some and lost money on others. For example, I owned two four-plexes in Atlanta that did well. These properties were located in A or B+ Class areas and targeted young professionals. I also owned a four-plex in Houston in a C Class area. On paper, the Houston property looked outstanding. However, after deducting the skips, evictions, and maintenance (the properties were built in the late 1970s), I lost money each month, even though I did all the maintenance myself. After tax savings, I only lost a little money each year on the Houston property. My point is that there is nothing good or bad about multi-family. It all depends on the tenant pool they target, the location, and the property's condition.

The tenant pool for C Class properties in Las Vegas is largely cash-based; no credit cards, no bank accounts, no loans, nothing. So, skipping out on a lease or eviction has no impact because they do not depend on credit. Also, without a credit history, it is impossible to weed out the bad actors. In the words of one of the property managers I know, "If they have two paycheck stubs and enough cash for the first month's rent, they are in." The average length of tenant stay in multi-family properties in Las Vegas is a little less than one year. The result is a huge vacancy cost. The following applies to the three major tenant pools in Las Vegas, but I suspect it may be similar in other areas.

In my demographic research, I found that tenant stay strongly correlates with monthly rent, as shown below.

Comments on the three tenant pool segments:

• Transient - This tenant pool is primarily low-skilled hourly workers making little more than minimum wage. The typical renovation cost per turn is $1,500. The average tenant stay is one year. The average rent is $850/Mo. The average time to rent is eight weeks.
• Permanent - This tenant pool could be hourly or salaried, but they earn well above minimum wage. The typical renovation cost per turn is $500. The average tenant stay is five years. Typical rent $1,500/Mo. Typical time to rent, two to four weeks.
• Transitional - This tenant pool has a high enough income that they are typically home buyers. They typically only rent if there is a major negative event in their lives. For example, a divorce, the death of a spouse, just moved to town and wanted to rent for a year, etc. Once they sort out the problem, they will buy a home. The typical tenant stay is two years. The typical renovation cost per turn is $2,000. Typical rent $2,500/Mo. The typical time to rent is eight weeks.

Vacancy Cost for Different Tenant Pools

Vacancy cost is the sum of renovation cost plus carrying costs until another paying tenant is in place. Carrying cost is dependent on financing, taxes, insurance, and other property-specific costs. I will base the following example only on lost income due to vacancy over a ten-year period. To keep things simple, I will ignore inflation, rent increases, and similar variables. Below are the turn costs for each segment based on the above assumptions.

If I multiply Total Vacancy Cost by the 10 year turn frequency, I get the following:

• Transient: 10 turns x $3,200 = $32,000 or $3,200/Yr
• Permanent: 2 turns x $2,000 = $4,000 or $400/Yr
• Transitional: 5 turns x $7,000 = $35,000 or $3,500/Yr

As you can see, to have the same net cash flow from the three different segments, you need to have a far greater return from properties that target Transitional and Transient tenant pools than the Permanent tenant pool. For example, a 12% return from a Transient type property might generate the same net income as a 3% return from a Permanent type property.

There is another issue besides the tenant pool. Almost all multi-family properties in Las Vegas are over 40 years old and are located in high-crime areas. See the chart below.

The newest multi-family property I am aware of was built in 1986. All the Las Vegas multi-family properties that I am aware of are in poor condition. Note that in some cases, the investor selling the property updated the interior. But, the cost to update the interior is nothing compared to replacing the aging infrastructure. For example, installing granite counters in a small unit is probably about $1500. Replacing the plumbing, which is usually falling apart, is $10,000 to $20,000. Replacing the roof is probably between $15,000 and $25,000.

A few people purchased these properties and updated them significantly, hoping they could raise the rent. It did not work. The problem is that anyone who can afford to pay more rent than the typical $850 a month would never choose to live in such a high-crime area.

There are excellent investment properties in Las Vegas, but C Class and most B Class properties are not the best options. Below are two charts showing how rents and prices increased over the last 12 months for properties that conform to our target tenant pool property profile.

Rentals - Median $/SF by Month

YoY increase of 18%.

Sales - Median $/SF by Month

YoY increase of 27%.

Long term performance of our tenant pool:

• 5 evictions in 15 years
• $500 average renovation turn cost
• Average tenant stay 5 years
• 2008 crash - Our clients had zero (no) decline in rent and no vacancies. In terms of rental income, 2008 was a non-event. However, property prices fell by 50% or more.
• COVID - Out of +200 properties, we have approximately five tenants who had to move out because they lost their jobs. I believe all paid an early release penalty of 1 to 3 months of rent. All the properties were re-rented in about one week for $100 to $300 more than before.

In summary, there are excellent properties in Las Vegas, but I do not recommend C Class or most B Class in general and multi-family in particular.