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All Forum Posts by: Eric Fernwood

Eric Fernwood has started 52 posts and replied 675 times.

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

Eric Fernwood
Agent
Posted
  • Real Estate Agent
  • Las Vegas, NV
  • Posts 699
  • Votes 1,477

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:

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 $230,000
    • 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

Post: Is it still worthy of investing SFH in Vegas?

Eric Fernwood
Agent
Posted
  • Real Estate Agent
  • Las Vegas, NV
  • Posts 699
  • Votes 1,477

There was at least one comment stating that there is little or no appreciation or rent growth in the middle America. This is a broad generalization that I feel is not applicable to any specific area. I will respond to the comment concerning appreciation and rent growth for a specific location, Las Vegas. Also, a comment was made that you are better off putting $5000 in a bank and withdrawing $500/Mo. than investing in real estate. This is a mistake because real estate investments are very different from stocks, bonds, CDs, bank accounts, etc. I will respond to this comment as well.

No Appreciation And No Rent Growth

Broad generalizations of any kind are usually meaningless when you attempt to apply the generalization to a subset of a population. For example, according to Edmund's, in 2015 the average value of a used car in the US was $18800. What percentage of used 2015 Mercedes Bend's C-Class sedans in good condition could you purchase for $18800? My guess would be zero. According to Kelly Blue Book, the fair market value for a 2015 Mercedes Bends C-Class is approximately $65000. Another example would be the number of children per family. According to the census, in 2015 the average number of children per family is approximately 1.8 children. How many .8 children do you see walking (flopping?) around? The answer is zero. Broad generalizations make good sound bites but are most often useless for specific situations.

Averages become even less useful when you select a very small subset from the total population. For example, the software and processes we developed enable us to find the best 0.1% of properties that are good investments from a total available property population of between 10000 and 14000. So we have a common understanding, I define a good investment property as any property that meets the following 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 Exchange to reinvest equity or adapting to market changes. Appreciation is a function of demand which is dependent upon growth in job quantity, job quality and local population.
  • Located in an area where you can make money and business risks are low. Items to be aware of 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. 

Note that the third criteria is a location factor rather than a property factor. I chose to move to Las Vegas (from NYC) when I decided to go into real estate because Las Vegas was almost unique in that it met all three conditions plus it has almost no urban sprawl. (For more information about the unique nature of Las Vegas, go to my profile page and click the link titled: "Is Las Vegas for You?")

Understanding that our proprietary selection software and processes equates to a pool of properties that represents less than 0.1% of the total population, we believe that our appreciation and rent growth are better than average. As part of our response, we wanted to provide actual historical data showing both appreciation and rent growth in Las Vegas. However, our process is too selective to retroactively select conforming properties. After some consideration we decided to mine historical MLS data based on:

  • A specific geographical area (shown below)
  • A specific rental rate range: $1000/Mo. to $1400/Mo
  • A specific configuration: single family home, 2+ car garage, 3+ bedrooms, no pool and 1000+ SqFt of living space.
  • Sold or rented between 1/1/2010 and 12/31/2015

Below is a graph showing the average $/SqFt for conforming properties sold through the MLS during the 1/1/2010 and 12/31/2015 period.

As you can see, sales appreciation has been significant since 2012. Below is the graph showing the average $/SqFt for conforming properties rented through the MLS during the 1/1/2010 and 12/31/2015 period.

As you can see, the monthly rent has increased from approximately $.69/SqFt at the beginning of 2014 to approximately $.75/SqFt at the end of 2015, or 8.7% over the last two years. We expect rents to continue to increase due to the shortage of properties that will profitably rent in the $1000/Mo. to $1400/Mo. range, steadily increasing population, increasing job quantity and job quality and diminishing build-able land in desirable areas.

$5000 and Withdraw $500/Mo

Real estate is fundamentally different from other types of investments. Non-real estate investments (like a bank account) are based on the accumulate and draw-down concept while real estate is based on the accumulation of income streams.

Accumulate and Draw-Down

The traditional investment concept (stocks, bonds, savings, CDs, 401Ks, etc.) is to accumulate enough capital at one time so that later you can draw-down (withdraw) funds over a period of time.

For example, if you put $5,000 in the bank and draw $500/Mo. it will last you 10 months. What if you put $50,000 in a bank account and withdrew $500/Mo? Assuming zero inflation and zero capital gain (for simplicity), that will last you 100 months or about 8 years.

What will you get if you put the $50,000 in real estate?

Real Estate - Income Streams

With real estate, the concept is to accumulate sufficient income streams over time such that the aggregated income streams meet your income needs today and into the future. 

Below are numbers from one of our client's recent properties.

* Purchase Price: 150000
* Mo. Rent: 1250
* Ann. Rent: 15000
* Mo. Fees: 117
* Mo. Debt Service: 608
* Interest Rate: 4.5%
* Down: 20.0%
* Loan Term: 30
* Ann. Insurance: 450
* Management Fee: 8.0%
* RE Tax Rate: 0.86%
* ROI: 9.7%
* Cash/Cash: 7%
* Mo. Cash Flow: 281
* Rehab cost: 10000

Total cash outlay: $30,000 down + $4,500 closing cost + $10,000 rehab = $44,500. So out of the $50,000, he would have $5,500 left over and a $280/Mo. income stream for, well, practically indefinitely. And once the mortgage is paid off the monthly income will increase to about 900/Mo. (Note, the property rented in less than 2 weeks).

What if there is inflation? Rents and property prices have historically tracked inflation. This makes inflation beneficial to your rental cash flow because your largest cost, debt service, is fixed. The other costs (taxes, insurance, etc.) will certainly increase somewhat with inflation but they will remain a relatively small part of the collected rent.

Real Estate Vs. Other Fixed Income Assets

There are fundamental differences between the accumulate and draw-down concept of non-real estate investments vs. the income stream concept of real estate. Real estate has many other unique advantages which is why over 90% of the worlds millionaires became rich through real estate.

Post: Out of State Newbie

Eric Fernwood
Agent
Posted
  • Real Estate Agent
  • Las Vegas, NV
  • Posts 699
  • Votes 1,477

Hello @Cailyn Aune,

Thank you for your kind words. My partner and I are engineers and we believe that almost everything can, and should, be converted into a process. Only a process can be repeated, adjusted and improved. You might find the articles linked on my profile page interesting. 

As to our service locations, just Las Vegas. I was living in NYC when I decided to go into real estate. After a lot of analysis, I chose Las Vegas due to the fact that properties here met what I consider to be the three key criteria for investment properties:

  • 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. 

I wanted to move to Phoenix, Albuquerque, even Orlando. I do not smoke, gamble or drink so Las Vegas was not a preferred location. However, none of the other locations met the above criteria plus, I discovered another huge factor which impacts profitability and that is reoccurring costs. This includes property taxes, insurance, on going maintenance, etc. For more information on the unique nature of Las Vegas, go to my profile page and click the link titled: "Is Las Vegas for You?"

People were very kind to me when I was just starting in real estate investing and my way to pay them back is to help others. So, feel free to send me an email or post a question and I will do my best to respond.

Thank you again for your kind comments.

Post: Is it still worthy of investing SFH in Vegas?

Eric Fernwood
Agent
Posted
  • Real Estate Agent
  • Las Vegas, NV
  • Posts 699
  • Votes 1,477

Thank you for the votes, kind words and excellent follow-on questions. I will attempt to answer all the questions in this post.

On North Las Vegas: We recommend few properties in North Las Vegas except for one relatively small area. The problem with most of North Las Vegas is that there are too many vacancies (too little demand) resulting in rents that are lower than Las Vegas or Henderson and a longer time-to-rent. The numbers just do not work.

On Apex, it might alter the real estate investment landscape in the future but it has not as of today. I cannot recommend properties to clients that might be profitable in the future when we can consistently find good properties that generate a 4% to 8% return today and a high probability of appreciation. Below is a comic that is part of a book I will publish later this year on investing which depicts my opinion of buying for future gain.


On Strip investments: The majority of non-commercial strip investments are high-rise condos. We've looked at all the high-rises and the cost + HOA fees vs. typical rents generally do not allow you to break even let alone make a profit.

@Matt R. @Account Closed

We have clients who have experienced evictions taking from 6 months to 9 months in California. How long it takes depends on how informed the tenant is and how hard they resist. The time and cost of evictions and inability to find positive cash flow properties is one of the reasons so many of our investors are from California.

You may own 50 properties in California and never have to evict. However, I view a troublesome eviction as I do cancer. The odds of your getting pancreatic cancer is 1.5% which is very low. However, if you get pancreatic cancer, averages go out the window and it is a nightmare for you. The same would be true if you get a tenant who is determined to fight eviction. Having a non-paying tenant in your property doing damage for 6 to 12 months would be a financial disaster for most people.

@Yi Roberts

On your friend's trouble renting a $270K home: In my opinion, it is very difficult to profitably rent a $270K property in Las Vegas (except in Summerlin or Green Valley). The problem is the target tenant pool income vs. the amount of rent needed to be profitable. 

In any location you are considering, you need to understand the income range of the probable tenant pool and how it defines the price range of viable investment properties. Explaining my previous statement will take a bit so please bear with me.

The maximum rent a tenant can typically pay is approximately 1/3 x their income. So, if your target tenant pool has a medium income of 4000/Mo., then the maximum rent they can reasonably pay is 1/3 * 4000 or about 1300/Mo. If you were to plot demand (the number of tenants who can afford the rent) vs. the amount of rent you would get a curve something like the one shown below. This is called a bell curve due to its shape.

Simplistically, you can subdivide the bell curve based on the rent range. Below a certain rent, the majority of the tenants will be cash based; they may not even have a checking account. Cash based tenants tend to have little or no concern about leases, eviction, skips or property damage judgements. They live cash based lives so they carry no "credit history"; what they did in their financial past has little or no impact on their present or future. Above a certain rental level the majority will be credit based. Credit based tenants tend to respect leases and are less likely to do damage or skip because it will impact their future ability to get credit. And, above a certain rental rate, potential tenants are what we call transitional, they have sufficient income to buy a property so they are only renting because of a specific issue that will likely resolve over time. These types of tenants respect leases but tend to only stay one or two years until they buy a property. These are generalizations and are certainly not true under all conditions. To illustrate these groups, I marked them on the curve below. 

The goal of every landlord is to get a good tenant in the property as soon as possible and to keep it rented to a good tenant. Before I continue I will define what I consider to be a good tenant:

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

Good tenants are the result of effective screening by the property manager. In most cases, effective screening is only possible with credit based tenants. But, even with credit based tenants you need several applicants so the property manager can select the best of the applicants. The best way to have multiple applicants is to have properties that rent profitably in what I call the "rental sweet-spot", which I marked on the curve below. Properties renting in this range attract the greatest number of potential tenants which gives the property manager the highest probability of selecting a good tenant. 

Based on our experience, I believe the rental sweet spot in Las Vegas to be between $1000/Mo. and $1400/Mo. Using a free tool that we provide, you can estimate the purchase price of a property that rents for $1000/Mo. and $1400/Mo. I would provide a link to the tool here but every time I did in the past the link was somehow removed. So to access the tool, go to my Biggerpockets profile page and click on the Break-Even Estimator link. See the video to learn how to use the tool. Below is a screen shot of the tool with typical Las Vegas values, a 4% return and $1000/Mo. rent.

What the above shows is that the estimated maximum price you can pay for a property in Las Vegas that rents for $1000/Mo. with a 4% return is about $168408. The key word in the prior statement is "estimated". This is optimized for ease of use as opposed to accuracy. Below is the same calculation but for $1400/Mo.

So the price range of properties that will rent in what I believe to be the rental sweet spot is between $160000 and $242000. 

Going back to the property your friend purchased for $270K: In order for the property to generate a 4% return, it must rent for about $1550/Mo. as you can see below.

Check the rental comps and time-to-rent around your friend's property and you may discover that it will be difficult to get $1550/Mo. This is why we work backwards from the rent to determine the maximum (or break-even) price we can pay for any given property. Our software enables us to perform a break even analysis vs. listing price (plus about 50 other tests) on the 10000 to 14000 available properties in seconds. Typically, less than 0.1% meet all our investment criteria. If you would like to see some sample properties, click the link on my profile page titled, "Click here to see our recent investor newsletters." In each newsletter we include sample single family and townhouse properties as well as Las Vegas investment analytics and an investment article. You may find this interesting. 

I hope I answered your questions. If not, please post them and I will do my best to answer.

Post: Is it still worthy of investing SFH in Vegas?

Eric Fernwood
Agent
Posted
  • Real Estate Agent
  • Las Vegas, NV
  • Posts 699
  • Votes 1,477

Hello @Yi,

An interesting thread. If I summarize your question and some of the following comments I think the question is, "Is Las Vegas still a good place to invest?" 

Before I talk specifically about Las Vegas, I want to establish a common understanding. I believe that every investment property and investment location must meet three criteria:

• Sustained profitability - The property must generate a positive cashflow today and into the foreseeable future.
• Likely to appreciate over time - Appreciation should never be the primary goal of investment but is advantageous in that it offers you future flexibility. Appreciation is dependent upon ongoing demand, which is a function of population growth and sustained job quantity and quality.
• Located in an area with investor friendly taxes and legislation - Taxes include both state income tax and property tax. Regulations include property related laws like the time and cost of evictions.

Select Las Vegas investments meet all three of the above criteria. I will cover each of the above criteria below as they apply to Las Vegas.

The Problem with ROI

ROI and similar measurements only show how a property is likely to perform today but real estate investing is a long term proposition. Typical hold times are 10+ years so how the property performs over the foreseeable future is just as important as how the property performs today. I will talk first about short term factors and then long term factors.

Short Term Profitability 

We are able to consistently find properties which generate between 4% and 8% (assuming 20% down conventional financing) using the formula below. This formula closely reflects what our clients actually experience. There are many variants of the ROI calculation and most show much higher return because they do not include all the recurring costs or include such things as unrealized gain.

Note that good investments in Las Vegas, like everywhere else, are not common. We are able to consistently find the 0.1% of the available 10,000 to 14,000 properties that are good investments using software we developed over several years. Without our software, it would be very difficult to find any good investment properties. 

Other major factors affecting short term profitability compared to other locations include property taxes, state income taxes and insurance. Below is a comparison between Las Vegas and two other locations. Costs such as state income tax, property taxes and insurance are direct hits to bottom line profitability.

Longer Term Profitability 

Longer term profitability factors can slowly change a high performing asset into a financial nightmare. Below are some of the more common factors but each location might have others.

Incentives to Pay All the Rent on Schedule

In order for a tenant to consistently pay rent they have to have both the ability to pay and the willingness to pay. The ability to pay is dependent upon the target tenant pool for the property remaining employed at similar wages. The willingness to pay is driven by incentives to pay or not pay. For example, in California it can take up to one year to evict a non-paying tenant. Tenants know that they can skip paying the rent for months with little risk of being evicted; the incentive to pay the rent in California (and places with similar anti-landlord legislation) is very weak. In Las Vegas, a typical eviction takes less than 30 days and costs less than $500. Tenants know this so they prioritize paying the rent because they know that they will be quickly evicted if they don't. Thus, the incentive to pay all of the rent on schedule in Las Vegas is very strong.

Population Trends

If people are moving out of an area, housing prices and rental rates are likely to fall due to decreasing demand. If people are moving into an area, then there is likely to be appreciation and rising rents due to increased demand. However, even if the general area population is stable, specific sub-areas could be losing or gaining population. One major cause of this is urban sprawl. People want newer floor plans and newer homes and, if they have the money and freedom to do so, they will move to areas where they can buy such properties. As people with money move out of an area those left behind will, on average, have lower incomes. Property prices will then start to fall due to decreased demand. As property prices fall, property tax revenues will fall. City services are largely dependent on property tax and local sales tax revenues so as these fall, cities have no choice but to cut services. This starts a downward trend from which few locations have recovered. Below is an illustration showing the effects of urban sprawl on investment properties.

Las Vegas is one of the few major cities not subject to urban sprawl because it is virtually an island; it is surrounded by federal land. The map below shows the Las Vegas metro area. The gray area is federal land. Las Vegas has extremely limited undeveloped land in desirable areas.

Unlike other cities, there are few alternative cities from which people could commute to jobs in Las Vegas. As you can see on the map below there is little development within commuting range outside of the Las Vegas metro area. Also, since most properties in Las Vegas are still selling below replacement cost, prices in the few surrounding cities are not significantly less than metro Las Vegas so commuting does not make sense. 

As far as the Las Vegas population trends, depending on which study you choose to believe, Las Vegas' population is projected to increase by 1% to 2% per year for the foreseeable future. When you combine a growing population with no room for expansion we feel that appreciation and rent increases are almost inevitable.

Job Quantity and Quality

The value of a property is no better than the jobs around it. 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. A key indicator is inflation adjusted per capita income over the past few years. If you see an inflation adjusted declining per capita income you need to carefully consider the long term value of the investment.

Inflation adjusted income in Las Vegas has been slowly increasing (except during the 2008 to 2011 crash) and projections are that the increases will continue according to a Federal Reserve Bank study.

Ongoing Maintenance Cost

Ongoing maintenance costs can have a significant impact on profitability. Below are some generalizations about ongoing maintenance costs:

• Older properties require more maintenance than newer properties.
• Composition roofs require more maintenance than tile roofs
• Properties in climates with hard freezes require more maintenance than properties in milder climates.
• Properties in locations with a lot of moisture require more maintenance than properties in dryer climates.
• Wood siding requires more maintenance than aluminum or stucco siding.
• Properties with lush vegetation require more maintenance than properties with little or no vegetation.

Below is a typical Las Vegas single family home.

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

Summary

Las Vegas is an excellent place to invest but finding good properties is challenging using traditional approaches because less than 0.1% of available properties are good investments. For the foreseeable future, population growth, inflation adjusted per capita income, job quality and quantity are predicted to be positive. Nevada's eviction laws incentivize paying all the rent on schedule. 

I hope I was able to communicate why Las Vegas continues to be an excellent investment location.

Post: How to overcome economical downturn as landlord

Eric Fernwood
Agent
Posted
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  • Las Vegas, NV
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Hello @Nick Liu,

Great question. I will attempt to answer it from going through the 2008 crash in the Las Vegas market.

Buy the Right Properties to Start Off

During every market crash, some locations are hurt far worse than others. For example, the current drop in oil prices has hit North Dakota hard but has had little impact on Nevada. The same is true of business sectors within a metro area. Some sectors are hit far worse than others. However, it is hard to determine which are the affected by looking at the gross numbers provided by the news sources.

If you only looked at the unemployment rate and number of foreclosures in Las Vegas during the 2008 through 2014 period, you would expect all Las Vegas investors took a terrible beating. However, our clients reported that rents and time to rent did not change for class A and B properties. When one of our clients asked for specifics we dug into the data. In order to answer her question we analyzed MLS sales and rental data during the period from 2008 to 2014. One of the problems with most data is that it is too "averaged" to be truly useful. We decided to narrow our focus as follows:

• Single family
• 3 bedrooms
• 2 car garage
• 1,200 to 1,500 SqFt

We also restricted the geographical area to the region marked in green below. 


Restricting the data to this property profile and area matched the majority of our investor's properties at that time, which are A or B class properties.

We started by exporting data from the MLS for conforming properties that sold or leased between 2008 and 2014. We then computed the average $/SqFt by month and plotted the results as shown in the graph below.


As you can see, the average $/SqFt sales price plunged by almost 50%. What happened to the average $/SqFt rental price? As you can see below, rental rates remained virtually unchanged. 


The data showed what our clients were experiencing; A & B class investment properties saw little or no change in cash flow or time to rent during the 2008 to 2014 period. However, C class properties fared badly with vacancy rates exceeding 20% in some areas. We believe that the reason C class properties were disproportionately impacted by the crash has to do with the job sectors in which the different tenant pools worked.

Class C properties in Las Vegas generally rented in the range of $450/Mo. to $700/Mo. and were largely occupied by construction workers and hourly service workers. When construction virtually stopped in 2008, a great many of these people became unemployed and thus the high vacancy rate and falling rents. However, the tenant pool for Class A and B properties (largely casino workers), which generally rented in the range of $1000/Mo. to $1400/Mo., suffered income reductions but comparatively few became unemployed. Even those who lost their homes through foreclosure or short sales still needed a place to live and desired to stay in the same general areas so they became renters.

It is important to consider how the industry/business sectors which employ your target tenant pool are likely to perform during a downturn. We feel this is far more important than observing various purchase "rules" because it does not matter how little you paid for the property if there is no tenant paying the rent. Rental properties are only as good as the jobs in which the tenant pool works. 

There is another factor that contributed to the class A and B rental stability in Las Vegas: eviction laws.

Eviction Laws

Incentives are strong determiners of how people will behave. A great example from history is the survival rate of prisoners transported to Australia during the 1860's. Originally, ship captains were paid a fee for every prisoner that walked onto a ship bound for Australia. Under this incentive program, only about 40% survived the transit. When the incentive changed to being paid for every prisoner that walked off the ship in Australia, the survival rate increased to about 98%. 

In some states like California it can take up to one year to evict a non-paying tenant. So, if a tenant is undergoing financial stress, there is little incentive to pay the rent. As one client put it, "In California, tenants pay their bills in the following order: car payment, credit cards and, if they have leftover funds, the rent."

In Las Vegas, a typical eviction takes less than 30 days and costs less than $500. Tenants have a strong incentive to pay the full rent on time or they will be out on the street in less than 30 days. Due to Las Vegas eviction laws we believe that tenants in Las Vegas pay their bills in the following order: car payment, rent and, if they have leftover funds, credit cards. 

What about the class C tenant pool? We feel that two factors made the crash very hard for class C property owners. First, if the tenant does not have a job, they can't pay the rent. When construction virtually ended in 2008, so did the related jobs. Second, in our experience, class C tenants tend to be cash based (class A and B tend to be credit based). Cash based tenants have little to fear from evictions and judgements because they carry no financial "history"; what they did in the past has little impact on their present or future. Such cash based tenants have little incentive to pay the full rent on schedule; they can always move to another property.

In Summary

• You need to buy properties where the tenant pool is credit based and their job pool is likely to be stable even in turbulent economic times.
• Tenants constantly pay rent only when there is a strong incentive to do so. Do local eviction laws incentivize paying the rent or do they have the opposite effect?

Post: Historians Perspective needed - RE crash of 2007 -2010

Eric Fernwood
Agent
Posted
  • Real Estate Agent
  • Las Vegas, NV
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Hello @Cory Mccarthy,

You posted an excellent question but one without a simple answer. 

Investors were likely to be impacted by the 2008 crash in two different ways. First, if you sold the property during the crash under most conditions you would have lost money. However, if the property was still generating a positive cash flow during the crash few people would choose to sell so I will ignore this potential impact.

The main challenge for many investors was that they started losing money due to falling rents and rising vacancies. However, not every property in every location fared the same. Las Vegas was one of the hardest hit cities in the US during the 2008 market crash. And, if you only looked at the unemployment rate and number of foreclosures in Las Vegas, you would expect all Las Vegas investors took a terrible beating. However, our clients reported that rents and time to rent did not change. When one of our clients asked for specifics we dug into the data. In order to answer her question we analyzed sales and rentals during the 2008 to 2014 period ourselves. 

One of the more common mistakes people made when doing such a study is to combine everything together and compute an average. Usually, the results of such averaging will be of little value. For example, would you be comfortable living in an environment with an average temperature of 70°F? Sounds pretty good? What if I told you that the day time temperature is 450°F and the night time temperature is -310°F? The average is 70°( (450 - 310)/2 = 70°).

In order to provide valid data we narrowed our research to the typical properties the majority of our clients purchased. The property profile we used is as follows:

• Single family
• 3 bedrooms
• 2 car garage
• 1,200 to 1,500 SqFt

We also restricted the geographical area to the region marked in green below.


Restricting the data to this property profile and area matched the majority of our investors at that time, which would be considered A or B class properties.

We started by exporting data from the MLS for conforming properties that sold and leased during the period between 2008 and 2014. We computed the average $/SqFt by month and plotted the results as shown in the graph below.

As you can see, the average $/SqFt sales price plunged by almost 50%. What happened to the average $/SqFt rental price? As you can see below, rental rates (and time to rent) remained virtually unchanged.

Our clients who purchased investment properties prior to 2008 saw little or no change in cash flow or time to rent. However, C class properties did not do well. Depending on the area, class C properties vacancy rate increased to over 20% and rents fell as well. Why did Class A and B properties do well while Class C properties did so badly? 

Location and price range will primarily attract a specific tenant pool. In 2008, Class C properties, which generally rented in the range of $450/Mo. to $700/Mo., were largely occupied by construction workers and service workers. When construction virtually stopped in 2008, a great many of these people became unemployed and thus the high vacancy rate and falling rents. However, the tenant pool for Class A and B properties, which generally rented in the range of $1000/Mo. to $1400/Mo., suffered income reductions but comparatively few became unemployed compared to the tenant pool for Class C properties. So while the tenant pool for Class A & B typically had reduced income, they chose to prioritize paying the rent. Why? Based on our research we believe that the reason the rental market was so stable had to do with the eviction laws in Las Vegas, in addition to job stability. 

In order for a tenant to consistently pay rent they have to have both the ability to pay and the willingness to pay. If the tenant pool remains employed, even at a reduced rate, they have the ability to pay because of the income requirements required by the property manager we work with. The willingness to use limited financial resources was largely due to our eviction laws. 

For example, in California it can take up to one year to evict a non-paying tenant. So, if the tenant has limited financial resources, they know that they can skip paying the rent for months with little risk of being evicted. In Las Vegas, a typical eviction takes less than 30 days and costs less than $500. Tenants know this so they prioritize paying the rent because they know that they will be quickly evicted. 

In summary, we came to the following conclusions:

• Not all jobs were affected equally in the 2008 crash. Metro averages do not provide a reliable indication for any specific tenant pool.
• Some business sectors/occupations were hurt less than others. You need to consider how the business sectors which employ your target tenant pool are likely to perform in a downturn.
• Tenants pay rent when they have the ability and willingness to pay the rent. Local eviction laws can play a significant role in ensuring the rent is paid on schedule.
• The typical hold time for real estate is 10+ years. What can be a great investment today can become a financial disaster if the market changes. You need to look at both the return today and what it is likely to be in the foreseeable future.
• Careful selection of properties which the tenant pool found highly desirable enabled properties to still rent quickly during this turbulent period.

I hope this helps, Cory. Best of luck to your success.

Post: Las Vegas Investment Properties 2016 Outlook

Eric Fernwood
Agent
Posted
  • Real Estate Agent
  • Las Vegas, NV
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Hello @Allan Maerina,

Thank you for your kind words. Are there any topics that you would like me to cover in the future?

Best Wishes,

Eric

Post: Las Vegas Investment Properties 2016 Outlook

Eric Fernwood
Agent
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  • Las Vegas, NV
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Wrote the following for our clients in mid December 2015. Would welcome comments from fellow BP members.

National Economy

We think that a quote from Business Wire summarizes the national economy fairly well.

Las Vegas Housing Market

For the general Las Vegas housing market, the Las Vegas Review-Journal summarized the 2016 outlook as follows:

What We Are Anticipating in 2016

Our predictions are based on the following assumptions:

Interest rates will rise in 2016 but at a modest rate. "Interest rates are headed up, but at a fairly mild pace." Forbes - Interest Rate Forecast 2015 - 2016

• China's economy will continue to slow down and there will be less cash property purchases in 2016. "China's Economy: More Volatility Ahead in 2016?" Bloomberg Business

• There will be no significant world events that will create volatility in the world economy.

Assuming the above, we predict the following for class A and B investment properties in Las Vegas:

• Sales Volume - The sales volume in 2016 will remain about the same as it was in 2015. If interest rates rise more than expected towards the end of 2016, we will see the sales volume trending down.

• $/SqFt - With sales volume declining, $/SqFt growth has flattened in recent months. We see $/SqFt as stable at least through the first half of 2016.

• Rents - Single family rents have steadily increased starting in mid 2015. Las Vegas has very little remaining develop-able land that is desirable. Because of this and continued economic growth in Las Vegas, we expect the trend to continue in 2016. For example, "Faraday chose the (North Las Vegas) site over locations in Georgia and Illinois that offered usable auto plants and better relocation incentives because it likes the business environment Nevada offered." Las Vegas Review-Journal. It is predicted that Faraday will employ 4,500 direct employees and approximately 9,000 indirect employees. We are seeing other businesses relocating from California and other states with less business-friendly laws and high taxes.
• Cash vs. Financed Purchases - With the Chinese economy slowing, we expect further declines in cash purchases. A year ago the percentage of cash sales was close to 50% and now it is down to 23%. The large number of cash buyers was making it difficult to get financed offers accepted through the first half of 2015.


In Summary

We do not see any significant overall change in the market if interest rates do not increase significantly. Las Vegas remains one of the few large metro areas with:

• Positive cash flow with 20% down financing 

• Business friendly environment

• No state income tax

• Low property taxes (~0.86%)

• Low landlord insurance (~$500/Yr)

• Timely and cost effective evictions (28 days / $500)

• Almost zero urban sprawl since Las Vegas has little develop-able residential land in desirable areas

• Steadily growing population.

• Steady economic growth.

Post: Out of State Newbie

Eric Fernwood
Agent
Posted
  • Real Estate Agent
  • Las Vegas, NV
  • Posts 699
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Hello @Sean Autry,

I've been in Las Vegas for about 9 years. I was living in NYC and when I decided to change careers (in my last life I traveled internationally 200+ days/year), I chose real estate because there was little or no viable software for selecting good properties. I considered many locations in the US and Asia but decided on Las Vegas due to its unique characteristics. So far, the market has not disappointed me.