Best Investment in Las Vegas?

[Account Closed]

Hey everyone, 

I'm just curious to know what you think the best real estate investment in Las Vegas is and why? Is it single family homes? Multifamily apartments? Industrial? etc.

Thank you!

[Eric Fernwood]

Hello @Aj,

Since I do not know your investment goals, below are the characteristics that I feel represent the best types of investments.

1. Sustained profitability: The property must generate a positive cash flow today and into the foreseeable future, in good times and bad.
2. Appreciating: The price and rent must increase at a rate above the rate of inflation.
3. Low Operating Cost: In a location where operating costs are low, and regulations favor investors.

Notice that my goals do not specify a type of property because the property type does not matter. What matters is that you consistently make money. To make money, the property must remain occupied by a tenant who pays all the rent on schedule and takes care of the property. So the real challenge is selecting the right tenant pool. Below is the process I followed when I first moved to Las Vegas.

After some consideration, I determined that the most important tenant pool characteristic for making money is that the tenant stays in the property for many years. I did a study and discovered a strong correlation between the monthly rent and the length of tenant stay, 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. Typical rent is about $850/Mo. and the typical time to rent, 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 three 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, divorce, death of a spouse, etc. Once they sort out the problem, they buy a home. The typical tenant stay is two years. The typical renovation cost per turn is about $2,000. The average tenant stay is two years. Typical rent $2,500/Mo. Typical time to rent, eight weeks.

Next, I determined the approximate annual cost of vacancy for each of the three segments. The turn cost is the sum of the renovation cost and carrying cost. Carrying cost is dependent on time to rent, financing, taxes, insurance, and other property-specific costs. To keep this example reasonable, I will only look at lost income. To calculate an annual estimated cost, I will evaluate over ten years. To keep things simple, I will ignore inflation, probable rent increases, and similar variables. Below are the turn costs for each segment based on the above assumptions.

If I multiply Total Turn 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 7000 = 35,000 or 3,500/Yr

Below I normalized annual turn cost to show how much more annual cash flow the Transient and Transitional segment must generate above the Permanent segment to have the same annual net cash flow.

• Transient segment: +$2,800 per year more than Permanent.
• Transitional segment: +$3,100 per year more than Permanent.

Based on the above calculations and research concerning cash flow and tenant turn rate from properties that target the three tenant pool segments, I determined that the highest net cash flow (for the same amount of capital invested) is from the Permanent segment.

Once we identified our target segment (the Permanent segment), the next task was to determine three important segment characteristics: rent range, needs, and location. Once we understood these, we translated them into four property characteristics: type, configuration, location, and rent range. Below is a description of each of the four characteristics.

• Type: Condo, high rise, single-family, etc.
• Configuration: For example, 2,000SF, two bedrooms, three-car garage, large back yard, single-story, two stories, etc.
• Location - Where the target tenant pool wants to live.
• Rent range - The rent must be within the target tenant pool's acceptable rent range and generate a sufficient ROI and cash flow.

I determined that the vast majority of this tenant pool rents single-family homes and a narrow selection of townhomes. The overall process is illustrated below.

How has this pool performed for our clients over the last 15 years?

• Average stay is five years.
• Average turn cost is less than $500 (The landlord friendly regulations in Nevada help.)
• During normal times, the time to rent is 2 to 3 weeks. Today, most rent in less than one week.
• During the 2008 crash, zero decrease in rent and zero vacancies. During Covid, out of about 230 properties, five tenants moved out because they could not pay the rent.
• Five evictions in 15 years.
• The average annual maintenance cost is between $300 and $400, excluding the occasional water heater or air compressor.

Below is a map showing where some of our client's properties are located and the green area is where we find the most conforming properties. Note that while the green area looks homogeneous, it is more like Swiss cheese.

Bear in mind though, that conforming properties represent only about 0.4% of all available properties on the MLS. And they do not stay on the market long especially in today's market. We are only able to find the 5 to 10 properties we need each month for clients due to our data mining software and related processes.

In Conclusion

In order to determine the best investment property type in a particular market, you first need to determine which tenant pool to target in order to achieve your investment goals. From there, you can determine a property profile that attracts your target tenant pool.

Aj, I have some recommendations.

• C class and most B class and multi-family properties in Las Vegas are poor investments because of the tenant turn cost; actual returns are much lower than paper return. Also, B and C class properties tend to be older and require more maintenance and renovation.
• Conforming single-family and select townhomes are the best performers today and have been for the last 15 years. I recently ran our monthly statistics on conforming properties. YoY rent increased by 15.7%. YoY prices rose by 16%. If you would like this data, let me know and I will post it.
• The number of skills and knowledge required to find such properties, renovate them, and monetize them is more than any individual can do. I've been doing this for many years, and I would never consider doing this on my own. My recommendation is to find a good investment team. I would start by finding an investment Realtor. Investment Realtor's have little similarity to residential Realtor's. Investment Realtors sell income streams while residential Realtors sell homes. If you'd like information on selecting an investment Realtor, let me know, and I will post that information on this thread.

Aj, I hope the above will help you find an investment property that will meet your goals. I wish you success.