All Forum Posts by: Eric Fernwood

According to data from ATTOM Data Solutions, Las Vegas home prices crossed the point in the last few years where it is more affordable to rent than to buy. This means that the demand for good rental properties will increase and rental rates will follow.

Their 2020 3-bedroom rental estimate is $1656, a $151 increase over 2019 or 10% increase, with a population increase of close to 77,000 or 3.78%. That is a large increase in demand and population, given the size of the market.

The population growth and diminishing developable land almost guarantees price and rental rates increases. And, do not look to new homes to offset the increasing demand for rental properties. Currently, the median cost of a new home is over $410,000.

Strong rental growth is one of the reasons why we believe Las Vegas is an excellent location to invest in at this time.

Hello,

IMHO, national data will do little good if you are looking for profitable investment properties. What you need is hyper-local data. Even general local data is of limited value because you will not be buying an "average" property in an "average" location. You will buy a specific property in a specific location that will target a specific tenant pool. (The property type, configuration, location and rent range defines the target tenant pool. Ask if you are interested in more details.)

The reason you need data for a specific tenant pool is that each tenant pool's needs/wants may be different. For example, it may be critical to one tenant pool that the property is within walking distance to public transit. For another tenant pool, easy freeway access may be critical. The point is that there are few generalizations other than that the property must be in a location that is perceived as safe, looks and smells clean and is priced correctly compared to what your target tenant pool perceives as your competition.

How I developed our software was neither easy or quick. My efforts started about 12 years ago when I decided to change professions and build a business selling investment real estate. My first decision was the location. I was living in the NYC area and quickly determined that this was not a place that would work well. After a lot of research, I chose Las Vegas. (If any one is interested as to why Las Vegas, let me know.)

Once I settled on the location I started researching the market. I quickly realized that the days of driving around looking at properties and cruising real estate sites was over. In Las Vegas, good properties typically remain on the market 3 to 5 days during peak times and with over 10,000 properties on the market at any given time, data mining was the only viable option.

In order to build the software I first had to have a clear understanding of the tenant pool I wanted to target. This required me to define what I considered to be a good tenant. I define a good tenant as someone who:

• Has stable employment in a market segment that is very likely to be stable or improve over time.
• Pays all 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 many years

I next determined the tenant pool with the highest concentration of good tenants. With the tenant pool identified, I then developed a property profile (location, type, rent range and configuration) that my target tenant pool would be willing and able to rent. Over time we've developed a number of rules to efficiently filter out properties that are unlikely to be good rentals. For example, if the ratio of bathrooms to bedrooms does not conform to the following, we generally remove the property from consideration: Bedrooms <= Bathrooms + 1. In total, we have about 40 such filters.

Once we reduced the number of candidate properties using filters, we next evaluate properties based on more computationally expensive factors. For example, one of the key factors is subdivision median time to rent. Basically, if it takes a long time for properties to rent in a subdivision, you do not want a property within that subdivision. Properties that take a long time to rent in the good times will be very hard to rent in the bad times, when you are most likely to need the income. How well did our clients do during the 2008 crash? Zero change in rent and zero increase in time to rent. The market value of their properties crashed like every other property in Las Vegas but their income stream was unchanged.

While data mining is critical to get the number of candidate properties down to a manageable size , you still need to go on-site and manually evaluate the property. For example, if there is a constantly barking dog next door the property will not rent, no matter how good the numbers are.

In summary, there is no alternative to targeting a specific tenant pool and acquiring a deep understanding of that pool. Acquiring the information you need to build filters and processes will take time. Also, once you identify candidate properties, you must have a process in place to validate them, never blindly believe what the numbers say.

Feel free to ask questions and I will do my best to respond.

Hello @Dan Mumm,

On my comments concerning rent to price ratio, I was responding to the use of rent price ratio for comparing properties in different locations. That was why I chose one in Austin and one in Las Vegas. And, I agree that as long as you are comparing similar properties, in the same location, rent/price ratio is not invalid. However, it is also not very useful. It provides no indication of how the property will perform due to factors like HOA fees, insurance, taxes etc.

Also, metrics like ROI are at best a snapshot in time. They predict how the property is likely to perform under ideal conditions on day one of a 30 year hold.

On returns in Las Vegas, with 25% down we are seeing 3% to 5% (real return). Cash purchases are 5%-6%. That said, such properties are difficult to find. We can find them only because we developed data mining software for this purpose.

@Account Closed

You mentioned hard water and pipes. We have never had a hard water problem with pipes. We have had 4 occurrences where the water line from the main to the house leaked and had to be replaced. But that had nothing to do with hard water. I do believe that hard water shortens the life of water heaters. Water heaters only last 12 to 15 years here.

On the climate and the AC, I am of the opinion that the dry climate of Las Vegas is easier on AC systems than humid climates. Plus, the homes here are well insulated and windows are double pane. I've had problems with AC systems in humid climates but very rarely in Las Vegas.

The properties we deal with have very low maintenance cost. Part of it is due to our careful selection of properties and part is due to the construction. Below is a typical Las Vegas home. As you can see, there is not a lot to maintain. Even the "fences" are concrete block, not wood.

Hello @Account Closed

This was an example from our website where I had the complete data for both properties. Probably 2 or 3 years back. It in NO way represents the properties we deal with today. We ONLY deal in A class properties. I totally agree with you on C (D) Class areas. We will not touch them.

The actual point of my post is that Rent/Price ratios are misleading, at best. It was not an attempt to represent current opportunities in Las Vegas .

As stated in my previous post, for the properties (A class) we target today, we expect a rent of $1500-$1600 for a $260k-$265k home with <$10k rehab. For a home costing $340-$350k we expect the rent to be $2000 - $2100.

Hello @Account Closed

Rent to price ratios can be deceiving. Below is an example of two (actual) properties. One is in Las Vegas and one in Austin TX. Note, we own a home in Las Vegas and one in Austin. So, I have a pretty good understanding of both locations.

* Note: I used the same association fee for both properties to keep things "apples to apples". The property in Las Vegas actually does not have a HOA.

If I compute the rent/price ratio, the Austin property is the clear winner:

• Austin: $,1700 x 12 / $252,500 = 8.1%
• Las Vegas: $1,490 x 12 / $255,000 = 7.0%

However, rent ratios do not take into account differences in property taxes, state income taxes, insurance or anything else. Below I estimated the return for both properties. To provide a realistic comparison, I made the following assumption for both properties.

• 20% down
• 4.5% rate
• 30 year term
• 3% closing cost
• 8% property management
• 0% state income tax. Neither Texas or Nevada have a personal state income tax.

Below are the formulas I use for ROI and cash flow:

• ROI = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax) / ( DownPayment + ClosingCosts)
• Cash Flow = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax)

Calculations for the Austin property:

• ROI = (1700 * 12 - 1024 * 12 - 1700 * 12 * 8% - 1625 - 6022 - 41 * 12) / (3% * 252500 + 20% * 252500) = -2.9%
• Cash Flow = (1700 * 12 - 1024 * 12 - 1700 * 12 * 8% - 1625 - 6022 - 41 * 12) = -$1,659/Yr. or -139/Mo.

Calculations for the Las Vegas property:

• ROI = (1490 * 12 - 1033 * 12 - 1490 * 12 * 8% - 450 - 1511 - 41 * 12) / (3% * 255000 + 20% * 255000) = 2.7%
• Cash Flow = (1490 * 12 - 1033 * 12 - 1490 * 12 * 8% - 450 - 1511 - 41 * 12) = +$1,600/Yr. or $133/Mo.

Even though the Austin property is the clear winner based on the rent/price ratio, it is an absolute loser when you do a real world calculation. You must include all significant recurring costs when you are comparing properties. Simplistic calculations like rent to price ratio frequently produce invalid results.

In today's market, only 1 out of every 800 - 1000 properties in Las Vegas is a good investment. For the properties we target, we expect a rent of $1500-​$1600 for a $260k-$265k home with <$10k rehab. These properties provide a balance of cash flow and appreciation growth thanks to Las Vegas' outstanding economic outlook for the foreseeable future.

Hello @Edward L lauckern,

An excellent question. I will start my response with a quote:

“Live where you like but invest where you can make money.” …David Lindahl

If you can achieve your goals locally, then I recommend investing locally. The key question is, what is your goal? I believe that every investment property must meet the following three criteria.

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
• Currently and likely to continue appreciating for the foreseeable future at or above the rate of inflation - Properties appreciate in locations that have strong demand, which is the key driver for sustained profitability.
• In a location where you can make money and you control your property as opposed to the government dictating what you can do.

Achieving these three criteria requires a combination of the right location, tenant pool, investment team and property. If you do not get one or more correct, you are likely to lose money or not achieve your goal. The two most important are the location and the tenant pool.

While I could list several criteria, I will include only three in order to keep this post short. If you would like my full criteria list for selecting a location including tenant pool, property manager, Realtor and location, let me know.

• Appreciation - Appreciation is the best indicator of demand. If properties are not appreciating, then there is limited demand which indicates poor economic condition for the area. Also, rents lag property prices by 2 to 10 years so the trends in property prices today are a good barometer of what rents will do in the future. Also, if property prices are not rising at or above the rate of inflation, rents are effectively declining.
• Population size - I would focus on cities with a population of 1M or more. Small cities tend to be reliant upon a single industry, which makes them vulnerable to economic changes.
• Jobs - Not just any jobs but jobs that pay similarly to what your target tenant population is making today. Remember that companies do not live forever, the average life expectancy of an S&P 500 company is under 15 years. So, unless new employers are setting up operations in the location, look somewhere else.

All the above said there is no perfect investment location. Factors such as not having a good investment team or properties that require a lot of money to rehab could make an otherwise good location unacceptable. So look for a strong good and not a “perfect” location, they do not exist.

@Bill Brandt

Hello Bill,

It is impossible for me to comment since I do not know the location or condition of your properties. Also, the statistics are the median $/SF for a range of properties that are: between 1,100 SF and 3,000 SF, built after 1985, have 3 or 4 bedrooms, a 2 or 3 car garage within a specific geographic area. All the properties match a specific target tenant pool. So, they are not typical properties and we may be getting a higher $/SF than most properties.

Bill, if you would like to contact me directly and provide the addresses, I will be happy to provide an opinion on the rent rates for your properties.

General statistical data available through the Las Vegas MLS and others do not include rental information. So, we developed our own capability to extract and display SFR rental data for the area we target and a property profile that rents well to our target tenant pool. Below are a few interesting charts.

Note that the data is NOT for the entire Las Vegas metro, it is only for single family homes < 3000SqFt and rented for < $2,000 in the area that we target.

As you can see, single family rental rates rose about 5%, even as the rental inventory built up towards the end of the year. This shows that rental demand remains strong.

Las Vegas remains an excellent investment location.

Hello @Carmen Ngai,

An excellent question. Whether you should invest locally or in another location is not an emotional decision, it is a spreadsheet decision. Let’s start at the end and work backwards to the location. I believe that every investment property must meet the following three criteria.

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
• Currently and likely to continue appreciating for the foreseeable future at or above the rate of inflation - Properties appreciate in locations that have strong demand, which is the key driver for sustained profitability.
• In a location where you can make money and you control your property as opposed to the government dictating what you can do.

Achieving the three criteria requires a combination of the right location, tenant pool, investment team and property. If you do not get one or more of the above correct, you are likely to lose money, at least for the short term. Of the four essential elements, the two most important are the location and the tenant pool. If you can meet all four in your neighborhood, there is no need to look elsewhere. If you cannot, then you have no choice but to invest elsewhere.

“Live where you like but invest where you can make money.” …Source unknown

Rather than suggesting specific locations, I listed below a summary of the criteria I would follow when selecting a location.

• Appreciation - Appreciation is the best indicator of demand. If properties are not appreciating, then there is limited demand. Rents lag property prices by 2 to 10 years so the trends in property prices today are a good barometer of what rents will do in the future. Also, if property prices are not rising at or above the rate of inflation, rents are effectively declining.
• Population size - I would focus on cities with a population of 1M or more. Small cities tend to be reliant upon a single industry, which makes them vulnerable to economic changes.
• Jobs - Unless your tenants are working they cannot pay the rent. Rental properties are no better than the jobs around it. Also, remember that companies do not live forever, the average life expectancy of an S&P 500 company is under 15 years. So, unless new employers are creating jobs of the same type and quality as your target tenant pool already has, look somewhere else.
• Population growth - If people are moving to a location, it is a good location for jobs and a desirable place to live. If people are moving away, demand will drop and prices will be static or declining.
• Urban sprawl - Not talked about much but you have only to look at any major city and you will see locations that were once the best in town and are now distressed. This is usually the result of urban sprawl. You need to be very aware of which way the city is expanding and buy in the direction where the population is moving. See this site for time lapses. Try: Memphis, Atlanta, Austin and Las Vegas. Las Vegas is surrounded by federal land so there is little room remaining for expansion or urban sprawl.
• Crime - High crime areas and long term profitability do not go together. I would not consider any city on the top 100 most dangerous cities list. You might know one of these cities well and know that there is a great area near the city. The problem is that companies looking to open new locations will not choose high crime cities. Also, people with sufficient funds will leave these areas and the area will go into further decline.
• Climate - Properties in areas with hard freezes and excessive moisture will tend to require more maintenance than in milder and dryer climates. Also, the materials generally used to build homes in cold clients requires more maintenance that materials used in hot dry climates.
• Age of the property - The older the property, the more maintenance it will require, unless all the major systems and components have been updated recently.
• Property cost - There is a tendency for new investors to choose locations with very inexpensive properties. Remember that price is a function of demand. No demand, low price. High demand, high price. Of course, you need to hit a balance. If your budget allows a maximum of $250,000, do not consider coastal California.
• Taxes - Both income tax and property taxes are a direct hit on profitability. High taxes are also a strong indicator of both an inefficient government plus a government usurping the rights of its citizens. We see across the US that people are leaving high tax states for states with lower taxes and regulations.
• Insurance cost - Insurance cost is a good barometer of the likelihood of damage, usually due to climatic or seismic events. Be certain to take the cost of landlord insurance into account when comparing locations.

Lastly, there is no perfect investment location. Factors such as not having a good investment team or properties that require a lot of rehab could make an otherwise good location unacceptable. So look for a good location and not a “perfect” location, they do not exist.

Hello @Pappy Mason,

As always a lot of good advice on this thread and decided to add my $.02. Before I start, I will tell you the conclusion: When a market correction happens, there is no way to protect the market value of your property but you can do a lot to safeguard the income stream. The key is to select the right investment location and target the right tenant pool. To explain my statement, a little history of how I got where I am, the decisions I made and the results.

I was living in NYC when I decided to change careers and sell investment real estate. I did not know where would be a good place to do this but I was convinced that NYC was not the right location.

As an engineer, I believe in processes and data. I have little regard for gurus, magic formulas and luck. I started developing my process by defining my end goal. Note, my “end goal” started at about 10 pages but over time I simplified it to the following criteria that I believe every investment property should meet:

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
• Currently and likely to continue appreciating at or above the rate of inflation. Properties appreciate in locations that have strong demand, which is the key driver for sustained profitability.
• In a location where you can make money and you control your property as opposed to the government dictating what you can do.

With my goal defined, I next developed a process for selecting a location and then a property. Originally my process was complex but over time I simplified it to the following diagram (click for larger size).

I want to underline that I believe selecting the right tenant pool is second in importance only to selecting a good investment location. You must target a tenant pool with the highest percentage of what I call “good tenants”. My definition of a good tenant:

• Has stable employment in a market segment that is very likely to be stable or improve over time.
• Pays all 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 many years

My number one concern was tenants that would stay employed even during a downturn. The math for this is simple: no job == no rent. Once I narrowed down my list of locations, I evaluated the likelihood of the major employers doing well over the long term. Satisfied with the major employers, I next looked at the range of employees.

Not everyone at every company will remain employed if the market takes a downturn. Generally, people who generate income will stay and others are likely to be laid off. From this range of employees, I selected a segment that I thought would stay employed and would meet the other good tenant criteria.

Once I selected my target tenant pool, I then developed a property profile that I believed this pool would be willing and able to rent. I called this the property profile. Based on the property profile, I selected properties and determined whether they would cash flow.

So, how well did my process work? Below is data on how properties that met my property profile performed during the 2008 crash in Las Vegas. The first chart shows $/SF for the 2008 through 2015 period. As you can see, property prices seriously tanked.

Below is the $/SF rental rate for the same period for properties that conformed to my property profile.

As you can see, rental rates for this segment were virtually unchanged during this period. So, if the property generated a 5% return in 2007, you continued to see the same return even during the recession. Instead of panic and loss, my clients saw the crash as a time to buy more properties. On balance, C class and most B class were a disaster for investors. A large percentage went into foreclosure. So you need a combination of the right location and tenant pool. Getting one right is not sufficient.

My Point

Pappy, I would worry a lot about selecting the right location and the right tenant pool. Whether the property’s price drops or rises is not as important as sustained profitability. There is no way to protect the market value of your property but you can do a lot to safeguard the income stream.