Investing in Vegas - best neighborhoods?

Question

Hi all. First-time investor here looking at single family homes and small multi-family in Vegas for buy and hold. I'm based out of state and interested in getting into Vegas during the potential downturn, as I'm bullish on the market long term once tourism returns.

What areas in Vegas do you invest in and why?

What impacts have you seen during covid and do you share my long-term optimism on the market?

What areas in Vegas do you invest in and why?

What impacts have you seen during covid and do you share my long-term optimism on the market?

Bill B. · Answer

@Brian Walters

I wouldn’t think so. I don’t think rent increases have matched property price increases in any country in the history of the planet. Lower priced properties have always returned a higher percent of the purchase price in rent than more expensive ones.

Think of it this way. A $400k property doesn’t get 4x as much rent as a $100k property. So as my $100k property I purchased 8-10 years ago became a $400k property, rents couldn’t keep up without breaking that dynamic.

I was getting $1100/mo for these properties say 9 years ago when I bought them for $100k, pretty much 1% rent to price. Hard to find someone to pay $4,400/mo today for a 2000sf cookie cutter Vegas property.

If this wasn’t true nobody would buy in the cheap Midwest properties that have near zero appreciation. They’re making all their money on the 1% price to rent rule by giving up on any chance of 100, 200 or 300% price appreciation in a decade. Because there’s plenty of inventory and available land.

People in the expensive west coast areas are taking the opposite side of that bet. They’re getting 0.5% rent to price but buying in markets where the quantity of new properties is substantial throttled by lots of rules/regulations/nimbyism and lack of vacant land.

Vegas is just a good compromise of the two, like Phoenix and a few other markets.

As an added thought after I hit post. Lower priced properties have to demand a higher percent of value as rent or nobody would rent them out.
When an appliance, the AC, or a roof needs replacing on a 2000sf house. They cost about the same if the property is worth $100k or $400k. So suddenly it matters if your rent is 1% of $100k or 0.5% of $400k.

Eric Fernwood · Answer

Hello @Bill Brandt,

Another great post. Thank you!

I agree with your assessment on rent increases not matching prices in the short term. According to the research I've read, there is a strong correlation between rent and property prices. Depending on the market, rent lags property prices by 2 to 10 years. So, rents will catch up to price increases, but it will take time. The same is true for declining markets. See the image below.

In declining markets, any market where appreciation and rent increase slower than the inflation rate, the rent today reflects property prices from 2 to 10 years ago. That is why declining markets tend to have a higher initial return than appreciating markets.

However, along with higher initial rent comes a guaranteed long-term decline in inflation-adjusted dollars. I've had questions on this, so I will use an example.

A couple of years ago, a client did a 1031 Exchange from a popular mid-western investment location. He was pleased with the performance of his property but felt the area was getting rough and would not continue to do as well in the future. Below is what he originally paid for the property and what he sold the property for.

He was happy the rent and the price both increased by 10% over the hold period. But what actually happened? Before I continue, a little about money and the effects of inflation.

Money in and of itself is of no value. The value of money comes from the goods and services you can buy with money. Inflation is the decreasing amount of goods and services the same amount of money will buy over time. Below is a chart showing how much money it would require today to buy the same basket of goods you bought in 1990 for $50.

Back to the mid west property. What actually happened is that he lost money on both the rent and the sale price, if you correct for inflation or buying power. If I assume 3% inflation, here is what happened:

• $900/Mo. in 2009 dollars has the same buying power as $1,174 in 2018 dollars. So, the $1,000/Mo rent he was receiving was actually a 17.4% decrease.
• $100,000 in 2009 dollars has the same as $130,477 in 2018. So, a sale price of $110,000, was actually a 15.7% loss.

My point is that you need to think of buying power and not just the number of dollars. If property prices and rents are not rising faster than the inflation rate, your income is declining over time, guaranteed.

How Are Things in Las Vegas?

For the narrow segment of properties we target, YoY rent increased by 18% and prices increased by 19.3%. See the charts below.

Rentals - Median $/SF by Month

Sales - Median $/SF by Month

So, things are going very well for our clients. And, we are seeing excellent returns from the properties we close each month.

The Eviction Moratorium is...Maybe Not Over?

The "experts" are predicting an eviction apocalypse. One of the advantages "experts" enjoy is that any prediction is probably right somewhere at some time. Just not in Las Vegas at this time. I will explain.

How the (eventual) end of the eviction moratorium impacts the rental market depends on the tenant pool. In Las Vegas, we have three primary tenant pools:

• Transient - This tenant pool is primarily low-skilled hourly workers making little more than minimum wage. Whenever there is economic turbulence, they are the first to be laid off and the last to be rehired. When you hear about tenants not paying rent during the moratorium, this is the tenant pool segment. These are the primary tenants for C and most -B Class properties, of which we do not target.
• Permanent - This is the tenant pool we target. Very few were laid off during the 2008 crash, and the same is true doing COVID. So, this tenant pool was largely unaffected by either event. Also, the driving factor for this tenant pool segment is not an eviction (having to move); it is the credit impact. They know that if they have a late payment, let alone an eviction, they will not be able to rent an A-Class property again. Their only option will likely be moving to a C Class property with unsafe and terrible schools in a bad area. In my opinion, this tenant pool will rob gas stations to pay the rent. So moratorium or not, this tenant pool performs.
• 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. Once they sort out the problem, they will buy a home. The 2008 crash seriously impacted this tenant pool and some were hurt during COVID. We do not target this tenant pool.

Transient tenants are the primary tenant pool that have not been paying rent. However, even with Transient tenants, I disagree with the “experts” that there will be a tenant apocalypse. The “experts” forgot that all Transient tenants will need a place to live and all landlords will need tenants. So, some shuffling around will occur but not a lot more.

Will the landlords of C and most B class properties ever get paid for the back rent? In my opinion, most will not. When I was working with property managers handling C-Class properties, I heard many times that most of this tenant pool have multiple evictions and skips in their past. So, the threat that they might get evicted again is not an issue. And, why should this tenant pool bother filling out paper to get rental assistance money to give to someone else when another eviction has no impact on them at all? I think many landlords of properties targeting C and B class properties are unlikely to get past rent. This is another example of why C Class properties do not measure up to the paper returns.

So much for today and my prognostications!

Janice V. · Answer

I lived in Las Vegas from 2009-2020 and own few apartment complexes and SFH's. I personally prefer southwest area (Rhodes Ranch, mountain edge) for SFH it got hit hard during recession but it bounce back and its one of the good neighborhood and strong rent growth. Easy access to the strip, freeway 215... less traffic comparing to congested Green Valley, far away Inspirada :P.  For small multi near UNLV, scattered 4plexes and small apartment complexes.

Michael Robbins · Answer

@Laurie Wang I like Anthem, Inspirada, and Green Valley Ranch for rental property investment.  I have still seen strong rent growth and very low vacancy.

Eric Fernwood · Answer

Hello Account Closed,

Your experience is far different than ours. I believe the difference has to do with the tenant pool your properties target, the management company, and your service contacts.

Our clients and we own over 200 properties. They all target the same tenant pool. Our results over the last 15 years:

• Average tenant stay: 5 years.
• Average annual maintenance: about $350 plus the occasional water heater or air compressor.
• Average turn cost, less than $500. The low cost reflects our property selection process, the tenant pool we target, how we renovate a property, and the Nevada lease agreement. Regulations in Nevada, specifically the Las Vegas metro area, enable you to put a lot of the cost onto the tenant. For example, if any glass is broken in the house, the tenant is responsible. It doesn't matter how or why the glass was broken. When they move out, they have to return the property in a similar condition, except for  reasonable wear and tear. They do have to have the carpets professionally cleaned, touch up paint, and many other tasks. So, the turn cost to the owner is very low.
• Evictions: 5 in 15 years
• 2008 crash - our clients had no (zero) decrease in rent and no vacancies. Property prices fell, as did all properties, but the income stream was unchanged.
• COVID - of the 200+ properties our clients and we own, five tenants had to move out due to job loss and such. To the best of my knowledge, all five paid 1 to 3 months penalty for early termination of their lease. And, the property was rerented in about a week at $100 to $300 more a month more. So, COVID and the eviction moratorium had little to no impact on our target tenant pool.
• YoY rent increase: 18% (July 2021)
• YoY appreciation: 19.3%. (July 2021)
• Time to rent in the current (crazy) time, <1 week. Under normal conditions, 2 to 3 weeks.

On property managers, we feel your pain. There are VERY few good property managers. We select one, work with them for a few years, they go bad, and we have to find another. (If you would like to read our paper on finding the right property manager, let me know.) Finding a good property manager takes interviewing dozens of property managers and a lot of research and time. (Hint: You cannot afford a property manager with a good yelp review.)

Our management costs are low - 8% of collected rent plus a $500 lease-up fee. Since our average tenant stay is 5 years, this is not a major cost. We also get reduced rates because of our volume. Some critical property manager characteristics:

• The property manager must be exceptional at selecting good tenants from your target tenant-pool or find another property manager. Tenant selection is a very difficult skill to master.
• Never work with a property manager with an in-house maintenance staff. Maintenance departments are a cash cow for property managers. I do not want my repairs to be a cash cow for the property manager. Also, I want the original invoice for all work and no markup.
• We specify which tradespeople the property manager will use. This greatly reduces our costs and increases quality.
• We have a detailed specification for the renovation company to follow. So far, the company had done well. They've probably renovated over 90 properties for us. We are about 80% of their total business, so if we need them working on Sunday, the only question we get is, "What time should I be there?".

Another frustration I believe you've experienced is managing your properties remotely. It isn't easy to find, qualify, renovate and manage properties remotely. You need a local investment team. However, there is rarely more than one such team in any metro area, and sometimes there is none. With a good investment team, remote investing is lower cost, easy and safe.

Of the 200+ clients we've worked with, only 10 to 15 live in Las Vegas. All our other clients live in other states or countries. We've never met half of our clients, and 1/3 have never been to Las Vegas. So, remote investing works, as long as you have a good local investment team.

Jack, I doubt any of this helped your situation but I hope it will help others.

Bill B. · Answer

North & east of 95, west of 15. All SFR.

Almost zero impact. 2 renewals with rent increases and one 2 week vacancy with a 20% rent increase since March.

Darius Ogloza · Answer

I like Summerlin/west Valley for stability and quality (especially in Palo Verde school district)  and also strip high rise condos (for potential appreciation).

Eric Fernwood · Answer

Hello @Siouxzie Hanes,

The importance of pools depends on the tenant segment you choose to target. See the image below. Every step in the investment process is driven by meeting your goals. For example, if your goal is a long-term reliable passive income stream, then the primary location factor is pre-COVID appreciation rate. Unless pre-COVID rents increased faster than the current inflation rate, your buying power will decline over time.

Once you select the location based on your goals, the tenant segment to target is your next decision. Low vacancy cost is the critical tenant segment selection factor. Once you select a target tenant segment, only buy properties that your target tenant is ready, willing, and able to rent. The property selection criteria are derived from the target tenant segment's rent range, needs, location, and wants. For example, below are three imaginary tenant segments. And assume that the red column contains the most important selection factors. If a pool is not near the top of your target tenant's desire list, then do not buy properties with pools.

In my experience (>350 properties), pools only add about $100/Mo. to $125/Mo. for our target tenant segment. The cost for a pool service alone is about $125/Mo. Plus, you will have the occasional heater, pump, etc. replacement. You must have a pool service or expect a lot of expensive repairs. So, at best, a pool is a break-even item. However, for higher end properties, it would be harder to rent a property without a pool. So, for this segment, a pool is a major plus.

There is another factor to consider. The tenant segment we target is primarily families with younger children. Families with younger children tend to view pools as a child safety hazard. So, for our target tenant segment, a pool is a negative factor to many.

In summary, whether a pool adds value or not depends on your target tenant segment.

Eric Fernwood · Answer

Sorry Laurie, I did not address your question on the best neighborhoods.

First, it depends on what you want to optimize; cash flow, appreciation, or a balanced investment. Most of our clients are interested in appreciation because they are building a future income replacement. Initially, optimizing appreciation may seem counterintuitive, but property values will rise faster than you can accumulate income in a rapidly appreciating market.

On specific neighborhoods, hard to give a simple answer. Every property targets a specific tenant pool. We selected a tenant pool many years ago and continue to buy properties that our target tenant pool is willing and able to rent. Below is a map showing where some of our client's properties are located. The green shaded area is where our data mining software finds over 90% of the properties.

On our target tenant pool performance:

• During the 2008 crash, our clients had zero decreases in rent and zero vacancies. The market value of their properties declined, but their rental income was unchanged. The crash was a time for our clients to load up on properties.

• During COVID, out of >230 properties, five to ten tenants had problems paying the rent and voluntarily vacated and paid a penalty to get out of the remainder of their lease. The properties were re-rented in days, usually at a substantially higher rent. The eviction moratorium had zero impact on our tenant pool. And, YoY rent is up 18%, and property prices increased 19.3% YoY.

• Average tenant stay is about five years.

• We've had five evictions in the last 15 years.

• Average turn cost is about $500. This is also a function of the landlord-friendly lease agreements that seem unique to Las Vegas.

I cannot provide a list of "good" subdivisions because it is more complex than just any house in a given subdivision. Some examples:

• Some floorplans in a subdivision that otherwise rents well may not do well at all. An example is split levels.

• Depending on the condition of the property, the renovation cost may be too much. Also, just because the property looks good to you does not mean it will attract your target tenant pool.

• Some streets within subdivisions do not rent well. In most cases, we do not know why; we have the data that proves this. We have identified 2,065 streets as of today that rent poorly.

• The location within the subdivision can be any issue. For example, targeting young families and the house near the subdivision entrance takes longer to rent and rents for less.

• If any dimension of the master bedroom is less than 12', the time to rent increases. For example, a property with a 18x11.5' bedroom will take longer to rent than a 12x12' master bedroom.

I could continue, but I hope you understand that there is not an easy answer to the good subdivision question.

A frequent question is what database we are using. There is no public (paid or free) database with the property and tenant pool level data needed to evaluate properties. We've been accumulating our data over at least ten years. And, we continue to learn more about the market as we continue to collect more information.

If I had to give a simplistic answer, I would generally describe "good" investment properties as:

• Property prices between $300,000 and $425,000
• 3 or 4 bedrooms
• Bathrooms vs bathroom must be: bathrooms >= bedrooms - 1
• No pools or in-ground spas.
• Only tile roofs
• Probably built since 1990
• 2+ car garage
• Reasonable HOAs are very desirable and typically get higher rents.
• Do not buy three-story or split-level properties.

I hope this helped.

Account Closed · Answer

I had 28 single family homes in Las Vegas, gifted 6 to my children, sold 20 in the past 18 months and still have 2 left for personal reasons.

I purchased the properties between 2008 and 2010 and paid cash. The reason I sold the homes is I live in California about 280 to 300 miles from the homes because some were on the south end of Las Vegas, some were on the north end and Las Vegas is about 30+ miles from one end to the other.

Sorry! Back to why I sold the homes. The first problem with owning out-of-state is the costs for a property management company exceeds far more than 10% when the companies charge fees for re-renting units and many other fees. While some property management companies are great they are nowhere as efficient as a hands-on owner.

Example. My property management company called and said the sewer underneath the concrete floor in a living room was busted. The management company called 3 contractors and got bids. The lowest bid was for $3600 and the plumbing contractor was going to rip the carpets out move the tenant's furniture out, bust up the floor, excavate the broken pipe and get a pile of dirt in the living room and then when finished the plumber was not going to put the carpets back or put the furniture back in the room.

I am a plumbing contractor. I went to the property, found the sewer was crushed by tree roots outside the house and excavated and repaired the sewer pipe in 45 minutes (NO B.S.) and the cost for materials was about $25. I did take a worker with me from Los Angeles, but he doesn't charge me because we have ATV's at a house 35 miles southwest of LAs Vegas and we spend a few days there riding the ATV's.

I've had several situations where the management company was going to use their contractors and vendors and I saved a fortune by being hands-on, or at least by being able to do my own shopping for contractors and vendors. I recently had a house in escrow and the the air conditioner condenser was blowing a fuse and we had to replace all the baseboards on the first floor. The air conditioner compressor needed a $7 part and it took about 15 minutes to install and my worker and I replaced all the baseboards in less than 1 hour because we are lightning fast workers. If we called a contractor to replace the baseboards he would have screwed around for two days and would have charged us about $1,000 for labor plus about $200 for materials.

Even if you can't do your own work it is much better to be hands-on vs. writing blank checks to a management company that is nowhere near as experienced with finding good contractors as you may be. Especially, since it is your money you will automatically work much harder to save your money vs. going with the first contractor who agrees to take the job.

The second reason I sold the properties is because the HOA's are some super a-hoes and it because we are super busy with our rental units and plumbing, HVAC and construction business the HOA complaints and fines was daunting. Of the small amount of 28 homes we received no less than two complaints per month and the property management company claimed they handled the complaints, but thee management company did nothing and seemed powerless.

So, what happened with a high percent of the HOA complaints was the issues were not corrected and resulted in crazy penalties like $100 per week because a tenant did not bring their trash cans in their garage quick enough. We had a complaint because when the home was built the contractor dropped two nails on the side of the house. We had a complaint because a week crossed 2 inches onto the sidewalk. We had a complaint because a tenant build a small photo developing room in his garage. The tenant never opened his garage door again and thought that would suffice, but the Nazi HOA scumbag kept peeking in the garage window and took pictures through the garage door windows. The penalty for that photo room rose to $1800 and then the tenant argued that he was not liable to pay the $1800 because we did not give him a proper notice of some sort (can't remember his argument).

The next and most critical reason I sold the properties is because the rents in Las Vegas are too low and every time a tenant moved the properties were destroyer. We own several apartment buildings and when a tenant moves from an apartment we can paint the entire apartment ceilings, walls and do a beautiful job and we can install new laminate floors, or carpets and have a new tenant in the rental unit in 3 days and even if we have to replace flooring our cost is less than $2500.

Most of the homes in Las Vegas are fairly large. Some of our homes were 2700 sq ft and the smallest we had was 1300 sq ft. but one major problem with the homes in Las Vegas is many of them have ceilings that are, If I am correct, 26 feet high and many homes have windows in living rooms that are about 18 feet high at the bottom of the window frame. Since property management companies don't visit properties very often, every home was a disaster when tenants moved. Almost every home had huge dogs that destroyed inside and outside the homes. We had to trim large trees, bring in 8 tons of rocks at many homes to make the yards look nice, paint the wood trim 2-stories high, bring in 20-cubic yard trash cans to removed all the debris, replace all the carpets, replace broken sinks, dishwashers, stoves, refrigerators and every home has washers and dryers.

The cost to clean and paint a home was never less than $6,000 and some cost $12,000 to prepare to sell. When you consider the low rents this cost cuts deep into your profits and there was no way I was going to pay $6,000 to put a house back together, rent it to a scumbag for one year for $1300 to $1500 per month, pay a management company, pay property taxes, insurance and all the other bills and then pay $6,000 to clean and paint the house one year later.

Las Vegas properties appreciated tremendously in the past 2 years and I am no expert, but when you consider the fact that the houses have already appreciated and consider the rent increases are not keeping up with the rising house costs I don't see Las Vegas as a good buy and hold with the exception that I am wrong and houses do continue to appreciate to where the appreciation offsets the destruction your tenants do.

I own homes in California, Las Vegas, Idaho and Massachusetts and in my 55+ years I've had almost zero property destruction in every state but Las Vegas. I have houses in Idaho and when tenants move a high percent of the houses are so clean when we inspect them there is absolutely nothing we have to clean with the exception of one property in Idaho where the damage to the property was $32,000 and I am going to refrain from saying who destroyed this house so this post remains within legal boundaries.

I drove from Los Angeles to Las Vegas to look at multi-unit properties because the low prices make them look so enticing. I guest it takes me a long time to learn my lessons because it is a long trip to Las Vegas and I am a serious buyer, but every time I looked at multi-unit properties in Las Vegas I was depressed because every multi-unit property is ghetto trash and when the properties when the properties selling today for $100k to $150k were $50k I would still not purchase then because the properties and the tenants are so trashy I would not want to have to so the constant maintenance necessary to keep up the properties and I would not want to deal with the type tenants who live in those properties.

The multi-unit properties always look nice in the pictures, but trust what I am saying and don't waste your time. Again, one problem with multi-unit properties is the rents are too low and the cost to clean and maintain then is too high. A high percent of the multi-unit properties look like you need a bodyguard and an assault rifle to collect your rent and you had better have a guard watching over any work vehicle with tools inside because your tool will be stolen within seconds and maybe the van. NO JOKE!

Even the 4-plexes in Las Vegas are not a good deal because the rents are too low and you need to factor your property management fees and the cost to paint, clean and install new flooring in units when tenants move. Dealing with the damage in the homes was bad and the type tenants that live in the multi-units look like serious trailer trash. You have to wonder what type of people and what are the reason people live in 115 degree heat and what do people do for a living in Las Vegas where there is almost zero factories, if any. People who rent the homes are more-established, have better jobs and many people with retirement income move to Las Vegas, but there is a super high percent of transients and homeless people all over the streets in all parts of Las Vegas.

I had relatives living in a nice community in Las Vegas and their biggest complaint was they were afraid to leave the community to go anywhere because of all the homeless people. They are literally everywhere and I think there is a higher percent than Los Angeles.

Investing in Vegas - best neighborhoods?

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