All Forum Posts by: Eric Fernwood

@Jeff Hall

You are right Jeff, and this is one of the largest land auctions by the BLM that I can remember. However, it is only 900 acres and spread out over the valley. 900 acres is nothing to a city growing at 2% to 3% per year with 2.1M people. Also, at $200,000 to $500,000 per acre, if new homes are built they will likely be over $300,000. Today, the average new home is 323,000. We typically target properties priced between $160,000 and $260,000 (for return and appreciation reasons) so new homes rarely have any impact on our clients. 

@Teddy T.

On the Raiders and other companies moving to Las Vegas, I have a wait and see attitude. When the Raiders (and other businesses) open their doors for business, I will believe they are here. Until then, they are not. Assuming they do come, it will have a positive impact on tourism. There are other factors that I think will have a greater impact on Las Vegas in the foreseeable future. For example, future manufacturing. Manufacturing will return to the US, but not in the labor intensive form it was when it left. Returning manufacturing will be highly automated with relatively few employees. So, location, cost of doing business, utility cost, transportation cost, labor cost and the ability to attract qualified employees will be the critical factors. Below are a few examples:

• Nevada has no state income tax
• Reasonable electricity cost and dual power supply sources.
• Labor cost - 28 states (including Nevada) have enacted legislation prohibiting employees being compelled to join a union, nor compelled to pay for any part of the cost of union representation. I think new businesses will look to right to work states for future expansion. A 2008 editorial in The Wall Street Journal comparing job growth in Ohio and Texas stated that from 1998 to 2008, Ohio lost 10,400 jobs, while Texas gained 1,615,000. The opinion piece suggested right-to-work laws might be among the reasons for the economic expansion in Texas, along with the North American Free Trade Agreement (NAFTA), and the absence of a state income tax in Texas. Another Wall Street Journal editorial in 2012, by the president and the labor policy director of the Mackinac Center for Public Policy, reported 71% employment growth in right-to-work states from 1980 to 2011, while employment in non-right-to-work states grew just 32% during the same period. The 2012 editorial also stated that since 2001, compensation in right-to-work states had increased 4 times faster than in other states. See: Wikipedia article.
• Crime - When manufacturers and other employers are opening a new facility, they need a location where management will want to move. I believe that any city on the list of the 100 most dangerous places in America will not be considered a desirable location.

Another major economic factor for Las Vegas (and Nevada) is California. California’s virtual war on employers has forced over 9,000 businesses to leave California (Article 1, Article 2) since 2008. A reasonable percentage come to Nevada. This is another factor driving the economy. So, I see a lot of positive indicators in Las Vegas’ future.

Hello @Jack B.

The short answer is yes, there are good investment properties in Las Vegas. I define a good investment property as one that meets all three of the following criteria:

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
• Likely to appreciate over time.
• Located in an area where you can make money and business risks are low.

The above criteria is a combination of location, the individual property, legislation, ongoing demand and other factors. I will talk more about this a little later once I provide a more comprehensive answer to your question.

Are there good buys in the current Las Vegas market? Yes. There are not a lot but we find them all the time. What level of return can you expect? Between 3% and 5% on class A properties (financed, 20% down, including all recurring costs). However, there are many ways to calculate return and some formulas do not include all recurring costs while others include principal reduction and other such unrealized gains. The formulas we use for comparing properties are below. Note that we do not include a constant for vacancy rate or maintenance when we compare properties. These two factors are property specific. Also, we do not take into account personal income tax benefits which generally increase effective return.

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

Cash Flow = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax)

Note: There is no personal state income tax in Nevada but we include this variable (StateIncomeTax) for when we compare properties in states that do have a personal income tax. For a return comparison between a similar property in Austin, Texas and a similar property in Las Vegas, see this post. This post demonstrates the impact of property taxes and insurance has on return.

So, why should you consider investing in Las Vegas? Two reasons: current and future return. First, current return.

Current return - ROI and cash flow only indicate how the property will likely perform today. Below are examples of short term cost factors.

• Price
• Property tax (~0.55% in Las Vegas)
• Insurance (~$450/Yr on a $200,000 single family home)
• Periodic fees
• Management cost
• Financing cost

Remember that ROI and cash flow are only snapshots in time and that the only constant in life is change. Like an elevator, they can either go up or down but rarely stay in one place.

Long term profitability is a function of demand. Below are some of the factors which affect demand.

• Population trends
• Urban sprawl
• Job quality and quantity
• Regulations
• Ongoing maintenance cost

Below are notes on how I believe Las Vegas will perform in the foreseeable future.

Population trend - Depending on which study you read, Las Vegas’ population is expected to continue to grow at a very desirable 2-3% per year.

Urban sprawl - While not largely discussed, this is a major factor to consider. In every major city I’ve seen, there are areas that were once “the place to live” and are now distressed areas. This is usually the result of urban sprawl. People want newer floor plans, better schools and more space. So, they move to newer areas. The people who remain generally have lower incomes thus driving down home prices and rental rates over time. Note that such declining markets can be very appealing because they can have high returns today as rents tend to lag sales price by (depending on which study you read) 3 to 10 years. Below is a diagram I created to illustrate the effect urban sprawl can have on investments over time as higher income families move to newer areas.

Las Vegas is completely surrounded by federal land; there is very little land left to develop. Las Vegas’ only growth path is redevelopment. Today’s class A properties will very likely remain class A properties in the future. See the map below.

Job quality and quantity - 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 (or have already left) 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 today than they did in the past. 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 inflation adjusted per capita income is flat or declining, you need to carefully consider the long term value of the investment before you buy.

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.

Regulations - State/county/city legislation can make an otherwise great investment a financial disaster. One of the easiest barometers is the time and cost to evict a non-paying tenant. It can take up to one year to evict a non-paying tenant in California. In some cities you can not evict during the winter. Other places have rent control and other regulations that curtail ownership rights. In Las Vegas, there is no rent control and evictions usually take less than 30 days and cost less than $500. If you owned 10 properties in California, will you have a nightmare eviction? The odds are low. However, nightmare evictions are like cancer. If it happens to someone else, it’s a statistic. If it happens to you, it is a disaster.

Ongoing maintenance cost - When I owned properties in Atlanta, Houston and other places, I was always replacing roofs, siding, wooden windows, dealing with termites and the landscaping. These costs were a continual drag 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 class A home.

In summary, I believe Las Vegas is not only a good place to invest today, it has a high probability of continuing to be a good investment location into the foreseeable future.

Hello @John Gardner,

The short answer is yes, there are good investment properties in Las Vegas. I define a good investment property as one that meets all three of the following criteria:

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
• Likely to appreciate over time.
• Located in an area where you can make money and business risks are low.

The above criteria is a combination of location, the individual property, legislation, ongoing demand and other factors. I will talk more about this a little later once I provide a more comprehensive answer to your question.

Are there good buys in the current Las Vegas market? Yes. There are not a lot but we find them all the time. What level of return can you expect? Between 3% and 5% on class A properties (financed, 20% down, including all recurring costs). However, there are many ways to calculate return and some formulas do not include all recurring costs while others include principal reduction and other such unrealized gains. The formulas we use for comparing properties are below. Note that we do not include a constant for vacancy rate or maintenance when we compare properties. These two factors are property specific. Also, we do not take into account personal income tax benefits which generally increase effective return.

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

Cash Flow = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax)

Note: There is no personal state income tax in Nevada but we include this variable (StateIncomeTax) for when we compare properties in states that do have a personal income tax. For a return comparison between a similar property in Austin, Texas and a similar property in Las Vegas, see this post. This post demonstrates the impact of property taxes and insurance has on return.

So, why should you consider investing in Las Vegas? Two reasons: current and future return. First, current return.

Current return - ROI and cash flow only indicate how the property will likely perform today. Below are examples of short term cost factors.

• Price
• Property tax (~0.55% in Las Vegas)
• Insurance (~$450/Yr on a $200,000 single family home)
• Periodic fees
• Management cost
• Financing cost

Remember that ROI and cash flow are only snapshots in time and that the only constant in life is change. Like an elevator, they can either go up or down but rarely stay in one place.

Long term profitability is a function of demand. Below are some of the factors which affect demand.

• Population trends
• Urban sprawl
• Job quality and quantity
• Regulations
• Ongoing maintenance cost

Below are notes on how I believe Las Vegas will perform in the foreseeable future.

Population trend - Depending on which study you read, Las Vegas’ population is expected to continue to grow at a very desirable 2-3% per year.

Urban sprawl - While not largely discussed, this is a major factor to consider. In every major city I’ve seen, there are areas that were once “the place to live” and are now distressed areas. This is usually the result of urban sprawl. People want newer floor plans, better schools and more space. So, they move to newer areas. The people who remain generally have lower incomes thus driving down home prices and rental rates over time. Note that such declining markets can be very appealing because they can have high returns today as rents tend to lag sales price by (depending on which study you read) 3 to 10 years. Below is a diagram I created to illustrate the effect urban sprawl can have on investments over time as higher income families move to newer areas.

Las Vegas is completely surrounded by federal land; there is very little land left to develop. Las Vegas’ only growth path is redevelopment. Today’s class A properties will very likely remain class A properties in the future. See the map below.

Job quality and quantity - 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 (or have already left) 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 today than they did in the past. 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 inflation adjusted per capita income is flat or declining, you need to carefully consider the long term value of the investment before you buy.

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.

Regulations - State/county/city legislation can make an otherwise great investment a financial disaster. One of the easiest barometers is the time and cost to evict a non-paying tenant. It can take up to one year to evict a non-paying tenant in California. In some cities you can not evict during the winter. Other places have rent control and other regulations that curtail ownership rights. In Las Vegas, there is no rent control and evictions usually take less than 30 days and cost less than $500. If you owned 10 properties in California, will you have a nightmare eviction? The odds are low. However, nightmare evictions are like cancer. If it happens to someone else, it’s a statistic. If it happens to you, it is a disaster.

Ongoing maintenance cost - When I owned properties in Atlanta, Houston and other places, I was always replacing roofs, siding, wooden windows, dealing with termites and the landscaping. These costs were a continual drag 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 class A home.

In summary, I believe Las Vegas is not only a good place to invest today, it has a high probability of continuing to be a good investment location into the foreseeable future.

Hello @Brandon Duff,

Before I continue, know that most of the properties I've owned in the past have been multi-family. So I have no bias against them as an general investment. However, you are not buying a "general" investment. You are buying a specific property in a specific location and local realities outweigh theories or generalities.

I am a Realtor and part of the Las Vegas Real Estate Investment Group. All we do is investment real estate. And, while we make just as much money selling a multi-family as a single family, we do not sell Las Vegas multi-family properties due to Las Vegas specific reasons. Simplistically, no one gets hurt on our watch and buying any of the multi-family properties (duplex, triplex and fourplex) that I have seen will likely not turn out well. I will explain why I say this. Note that the remainder of this post only applies to multi-family properties in Las Vegas and not to anywhere else.

I subdivided my concerns about multi-family properties and this deal specifically into the following sections:

• Investors do not sell performing assets
• Property age
• Cash based tenants
• Fantasy vs. reality
• Questions/comments on your proposed purchase

Investors Do Not Sell Performing Assets

In Las Vegas, multi-family properties are only owned by investors. Over the years I have looked at many multi-family and commercial properties and, except for 1 or 2 properties, I have never seen a performing property sold by an investor. Stated another way, every multi-family or commercial property I have seen on the market was being sold because it was not performing. The information provided by the seller or the listing agent has always been glowing. Once I dug into the provided information and talked to residents, all the properties were losing money due to one or more of the following reasons:

• Problems associated with the tenant pool
• High maintenance costs (age, damage, invalidism, etc.)
• Deferred maintenance issues

The moral here is that if you are buying a property from an investor, you need to find out why the current owner is selling.

Property Age

Below is a graph showing the number of 4-plexes currently for sale vs. the year when they were built. As you can see, the majority are between 30 and 50 years old. The 4-plexes I have seen have not had easy lives and need significant rehab. I have seen a few where someone has invested a large amount of cash to rebuild them, but these were not for sale. 

Some of the properties I have seen for sale had what I call "cosmetic rehabs" and roofs, plumbing and electrical issues ignored. Another major cost item is the sewer line connecting the property to the sewer main. Any property over 30 years old is probably due to have the line replaced, which will cost between $8,000 and $15,000. Buildings that are 30 to 50 years old that have had hard use will need a lot of rehab. However, the problem is that the returns rarely justify investing an additional $20,000 to $30,000 rehab into such a property.

Cash Based Tenants

In order to make money with any investment property, you have to keep it filled with good tenants. 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 not an accident or the norm. Good tenants are the result of careful screening by a skilled property manager. In order to select a good tenant the property manager needs two things:

• Multiple applicants - If you have only one or two applicants, you are stuck.
• Financial history - Past behaviors are a good indicator of how people will behave in the future.

In Las Vegas, the vast majority of tenants renting properties in the $400/Mo. to $800/Mo. range live cash based lives. Most have no bank accounts, no credit cards, no financial history. With cash based tenants you have no financial history by which you can screen out the bad actors. With misdeeds of the past having no impact on the present or future, skips, evictions, property damage, judgments, etc. mean nothing. They can just move down the street to the next property and they start clean. As one property manager who handles such properties expressed to me, as long as they can show two months rent plus enough for a small deposit, they are in. The property managers who focus on such properties benefit greatly from the frequent skips, evictions, property damage. Every such event is more money in their pockets. Also, since cash based tenants do not make a practice of regularly paying bills on time, the property manager has to go on site at the first of each month (and perhaps multiple times) to collect the rent. This requirement will limit your property manager options to the few property managers set up to handle such collections and will likely increase your property manager cost.

As an example, we have one class C property (class D?) which was purchased to convert to an office. The client's situation changed and the decision was made to rent it. The first tenant signed a year's lease, stayed two months and did $2,000 in damage. The second tenant signed a year's lease and stayed 3 months and did $3,000 in damage. This is the problem with cash based tenants. There is a way to increase your odds of finding a good tenant. Rent the property for well below market rate and the property manager will have enough applicants to (hopefully) find a good one.

In support of the statements I made concerning skips and evictions, I did some research a few years ago into the average time a tenant stays in a 4-plex. Since most rentals go through the MLS, the data was available for a number of such properties. I assumed that all tenants signed one year leases. If they stayed the full year, then the units would only come on the market about once every year. What I saw was that many of the 4-plexes averaged 5 to 7 turns per year. This means that on average the owner of the building experienced:

• More than 4 rent-up fees per year.
• More than 4 rehabs per year.
• Significantly more than desirable vacancies.
• More evictions than desirable.

The result of all the above is that real returns are likely to be significantly less than "claimed" returns.

Fantasy Vs. Reality

I worked on a model for a 4-plex recently using the numbers provided by the listing agent. Below are the results:

A return of 9.5% is fantastic. However, let's add a bit of reality. Let's assume:

• 6 tenant turns a year
• $300/turn lease-up fee
• $700 rehab per turn
• 3 weeks total vacancy per turn
• $500/unit remedial maintenance per year

If I include the above factors into the spreadsheet, I get the following:

I've talked to a few 4-plex owners and reality is closer to 2% than 9%, unless you bought the property during the crash at a very low price, which is much less than what you would pay today.

Questions/Comments On Your Proposed Purchase

• Ignore "rules". In my experience such "rules" do not apply to specific properties. The rules sound good and might apply somewhere but not to any property that I have seen. You or your agent need to put together a spreadsheet with actual costs and make your evaluation based on this, not on theoretical rules.
• Assume at least 6 turns per year, 3 weeks vacancy per turn and $500 to $800 rehab/turn.
• Talk to the tenants and spend time in the area to get a "reality check". I almost always hear from the listing agent that "the property is in good shape and all units are rented." However, when I spend time at the property and talk to the tenants and the neighbors, it has been a very different story. On one memorable occasion I was investigating a 30+ unit commercial property. I was told that all units were rented and that there was no deferred maintenance. After spending a day on the property I determined that no more than 20 units were rented and some of these were at about half of what was claimed. All units had moderate to serious maintenance issues including active plumbing leaks, non-functioning HVAC, dead electrical outlets, etc. This is a huge cost for the owner. Have a good inspector evaluate the property so you know the actual condition of the property. 
• I would be very concerned about the financing. This sounds like a hard money loan and the ones that I have seen either have a large fee up front or high interest rates or both. Plus, at the end of two years you will be forced to accept whatever rate and terms you can find. I recommend getting permanent financing now. If you can't get good permanent (30 year) financing today, why do you think you can get good re-financing two years from now? In addition, if you finance the property at time of purchase, you can get 80% financing at a reasonable rate. If you refinance later, I believe you can only refinance 75% of the appraised value at that time. So, if you pay $250,000 for the property, refinancing later will require an additional (5% x $250,000) $12,500 in cash outlay. A lot of money to delay financing for two years.

Summary

There is a Latin phrase that comes to mind when considering such opportunities, "Caveat Emptor". A loose translation would be, "Buyer Beware". Brandyn, before you go too far, do your own due diligence and determine what you are really getting for your money. Do not believe what anyone else is telling you and do not rely on "rules". Get permanent financing now. You should not "hope" you can get good re-financing in the future, especially with rising interest rates.

We recently published our Las Vegas real estate investment outlook for 2017 and it seems to make sense to share it here. Your feedback is appreciated.

Our 2017 outlook is divided into 3 sections. The first is an update on the Las Vegas economy. The second an update on the Las Vegas real estate investment market. The last section is about the impact of probable interest rate increases.

Las Vegas Economy

Growth in 2016 was steady and should continue through 2017 but at a slower pace. Some Las Vegas metro area facts:

• In 2016, Nevada surpassed pre-recession employment with 70,000 fewer construction jobs. Construction jobs are one of the first to be eliminated when there is financial turbulence. So, reaching pre-crash levels with fewer constructions indicates that the economy is more stable than it was in 2008.
• Modest economic growth is predicted in 2017.
• The metro population continues to increase at between 1.6% and 2.2% per year, depending on the source.
• For residential real estate, it is a seller’s market with a 3 month supply where a balanced market is considered to be having a 6 month supply. However, prices are stabilizing.
• Per capita personal income continues to rise.
• Average price of a new home is $322,000. This is well above the current maximum target price of $250,000 so new homes are not diluting the investment pool.
• Current single family home prices are still about 33% below pre-crash prices.

In summary, we expect the Las Vegas economy and housing market to continue to grow steadily but modestly in 2017. This is the best news possible for real estate investors.

Las Vegas Real Estate Investment Market

The broad metrics reported by local and national sources do not necessarily reflect the actual situation in the narrow market upon which we focus. In this section I will discuss what we are seeing and what we expect in our investment focus. First, I will describe our market focus.

The majority of the single family homes and town homes upon which we focus are within the area marked in green below.

The single family homes typically have the following configuration: 3+ bedrooms 2+ bath, 2+ garage, selling between $200,000 and $250,000 and HOA fees less than $70/Mo. On town homes, we focus on a very small set with the following configuration: 1+ garage, 2 to 3 bedrooms with HOA fees less than $130/Mo. All the information below is based only on conforming properties.

Rental rates

Rental rates started climbing in mid 2014 after a long flat period. See the 5 year trend below. We expect this trend to continue through 2017.

Property Prices

Prices have risen slowly over most of 2016 but headed slightly down in the fourth quarter as you will see below:

We expected the sales volume to decline the entire last quarter but, to our surprise, it jumped up in November and then back down in December as you will see below.

Sale Types

Below is a breakdown of the types of sales. As you can see, bank owned (REO) properties constitute a small percentage of total sales where as in 2009 they were the majority of sales.

Actual Returns

We have no attributable data source for the following but we believe it to be true based on talking to existing clients. Our client’s pre-tax actual returns in 2016 ranged between 3% and 6%. We expect returns in 2017 to be similar, despite the anticipated increases in mortgage interest rates.

The Impact of Interest Rate Increases

We’ve been asked about the impact of increasing interest rates on investments.

In the last 2 months, rates for 20% down, 30 year fixed rate investor loans have increased from about 4.5% to about 5%. If we only consider the cost of money, a $200,000, 20% down, 30 year fixed rate mortgage has risen from about $811/Mo. to $859/Mo. However, there are several factors at play including:

• As mortgage rates rise, fewer people will be able to purchase homes. People who will not be able to purchase a home will have no option but to rent, which will increase rental demand.
• Rents are not only increasing (details above), the upper rent range of long term renters is also increasing. 5 years ago, the maximum long term rental rate was ~$1,350. Today it is between $1,700 and $1,800 per month. This means that the rental sweet spot of Las Vegas has enlarged and higher priced homes (250k-300k) can now be good investments.
• Property prices may decrease due to the rising interest rates. However, there are multiple factors combined that make such simple statements questionable. Here is an article from National Association of Realtors that describes the complexity of multiple factors affecting home prices.

Considering the above factors, we expect the impact of the rising interest rate to be offset by increased rents in 2017.

Summary

2016 was a great year for our Las Vegas investors and we expect 2017 to be about the same or slightly better. We see no significant changes occurring in 2017. Lack of develop-able land, increasing per-capita income, increasing rents and the increasing metro population will combine to make 2017 another great year for real estate investment despite foreseeable increasing interest rates.

Hello @Chad S.

Before I respond to your observation on Las Vegas multi-family properties I want to state the three criteria by which I think every investment property should be vetted:

• 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 adapt to market changes.
• Located in an area where you can make money today and risks are low. Key factors include state income tax, property tax, insurance cost and landlord favorable regulations. Regulations include property related laws that impact the time and cost of evictions, rent control, code compliance requirements, etc. Nevada / Las Vegas is a business friendly state. No state taxes, evictions typically take less than 30 days and cost less than $500.

I believe that Las Vegas multi-family and most Las Vegas condos do not meet the above requirements. Below I will state my reasons for saying this and offer two alternatives.

Multi-Family Properties

Multi-family are almost exclusively owned by investors and investors rarely sell performing assets. Of the many multi-family properties I’ve seen, all had significant problems related to the tenant pool and/or the condition of the property. First, the tenant pool.

Properties are only profitable if you can keep them filled with good tenants. 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 not the norm. Good tenants are the result of careful screening by a skilled property manager. The information needed to screen applicants includes their financial and rental history. All the multi-family properties I’ve seen in Las Vegas rent in the $400/Mo. to $650/Mo. range and the tenant pool in this range are almost exclusively cash based. Few in the cash based tenant pool have bank accounts let alone credit cards; they live cash based lives so they have no “financial history”. About the only screening factor you have with cash based applicants is whether they can show two months rent plus a very small security deposit. Because of this lack of a “financial history” there is no way to determine their past behaviors. Even collecting rent is different with cash based tenants. They have no checking account and paying bills that way is not routine, you frequently have to knock on the door and ask for the rent. Skips, evictions, property damage, financial judgements, etc/ mean little to cash based tenants because such events are invisible to future landlords.

Many investors are drawn to the high paper returns of class C properties but are shocked once skips, evictions, and damages rip away potential profits. One four-plex owner I talked to told me he bought the property based on an estimated return of ~14% but in reality was netting less than 2% once skips, evictions, damage and vacancy costs were included.

Another problem I have with all the four-plexes I have seen in Las Vegas is the location and condition of the properties.

All the properties I have seen in Las Vegas are located in high crime areas. High crime and long term profitability are incompatible.

All the four-plexes I have seen for sale required a significant upfront infusion of cash to correct long deferred maintenance. About 5 years ago we worked up the cost to bring a ~$160,000 four-plex to a supportable condition. The major rehab items included: new roof, plumbing, electrical, wall and flooring repairs, water damage repair from leaking plumbing, etc. The cost was close to $60,000. Needless to say, we did not proceed with the purchase.

The last problem I will mention is the physical layout of the units I have seen. All the doors open to a common area so one bad tenant will cause the others to leave. Also, the units are close together so a bad tenant from an adjacent building can drive off your tenants since leases mean little and they can depart at will.

Condos

Most investors consider condos due to the low cost of such units. However, condos in Las Vegas have several problems for investors:

• Financing - One of several requirements lenders have is >50% owner occupied properties. Very few condos in Las Vegas meet this requirement so most are cash only purchases.
• High HOA fees eat into profit. It is true that they handle exterior maintenance but HVAC, plumbing and electrical are still your expense.
• Since condos are almost exclusively cash purchases, you have a limited buyer pool when you eventually choose to sell.
• Condos have no strong differentiation from apartments and there are many new mega-apartment developments going in around Las Vegas. Why would tenants choose an older condo vs. a new mega-apartment, which offers all sorts of amenities? The only condos I know of that seem to do OK are the ones in a desirable area on a metro route and close to the Strip.

What has worked well for our clients:

Town Homes

Select town homes and single family home properties have performed extremely well. First, town homes.

We are regularly asked about the difference between town homes and condos. Simplistically, with condos all that you own is the use of the air gap between the walls of your unit and an undivided interest in the entire complex. This is why lenders are so concerned about the “health” of the overall community. You, as a individual, have no real property. Town homes are quite different.

Town homes in Las Vegas have little difference from single family homes except that most share one or more common walls. With town homes, you own the structure and the land upon which the building sits. Because of this, we have never had a problem with town house financing. Also, all of the town home complexes we deal with are in premium, built out areas, are A class properties and have one or two garages, which few condos or apartments offer.

However, not all town home complexes are good investments. Based on our research, only about 20 complexes (but not all floor plans) have proven to be good investments. We are very selective.

Single Family Homes

Only about 0.05% of the available single family homes are likely to be good investments, i.e. that will meet all 3 criteria I mentioned above. These are all class A properties in very specific locations. We are only able to find this small population of properties because of the software we developed. Note that these properties also performed extremely well even during the crash. We did a study of how conforming single family home properties performed during and after the 2008 crash and there was no increase in vacancy rates or decreases in rent during the 2008 through 2014 period. If you would like to see the study, click the link titled “Case Study - Real Estate Investment and the Las Vegas 2008 Market Crash” on my Biggerpockets profile page.

In summary, I recommend you focus on town homes and single family properties in Las Vegas.

As to Las Vegas as an investment location, Las Vegas has unique characteristics that make it one of the best investment locations in the US. If you would like to learn why this is the case, see the article titled, “Is Las Vegas for You?” on my profile page.

Chad, I hope the above helps. If not, feel free to post another question or send me an email.

Hello @Nick Arthor,

The property manager is the most important member of any investment team so it is critical to find the right one. Before I continue, know that I am a Realtor in Las Vegas and a member of Las Vegas Real Estate Investment Group. As you can guess from our name, real estate investments are what we do 6 or 7 days a week. Also know that we do not manage the properties our clients buy. We do work closely with a property management company we trust in all phases of the investment lifecycle. However, the one constant in life is change.

My experience is that despite good intentions, people and companies tend to lose focus and you will have to replace the property manager every few years (along with every other team member). Not good but that is what happens. Because finding a good property manager is so critical, we developed a process for finding the right one, which I will overview below. Our requirements should help you in your selection process.

What You Should Expect from a Good Property Manager

If the only thing the property manager does is to collect the rent, you have the wrong expectations. The property managers we’ve worked with provided value at all stages of the investment life cycle which we logically subdivide into four phases:

• Market Research
• Property Evaluation
• Rehab
• Property Management

Market Research

The knowledge you gain from seminars, books, podcasts and similar channels is by nature, general information. Little of this applies to any specific property in a specific location. You need detailed local information on a variety of topics and the property manager has the information you need. Some of the market research topics we require includes:

• What property type rents well in a given area? Condo, high rise, single family, duplex, single story, two story, etc.
• What configuration? Two bedroom, three car garage, large lot, etc.
• What locations are likely to do well today and into the foreseeable future.
• What rent range best matches the pool of tenants most likely to be good, long term tenants?
• What are the legislation issues (including eviction cost and time) that are likely to impact profitability?

Property Evaluation

How can you be certain that the property you are considering is a good investment? A good property manager will be able to provide the following information for any property:

• Estimated rent
• Estimated time-to-rent
• Rehab items - The rehab items a property manager will note are primarily cosmetic (paint, carpet, etc.) Cosmetic items are what tenants see in the photos when they are selecting properties to consider. Tenants assume that the water heater, HVAC, etc. all work.

Also, knowing the estimated rent, time-to-rent and approximate rehab cost will enable you to make an initial go/no-go decision on the property plus you can determine how much you can offer. I can go into more detail on this if you like.

Rehab

Every minute spent in rehab is time the property is not generating income. You want rehab to be as short as possible and as cost effective as possible (however never by cutting corners). And, you need to know which rehab items are required and which are optional. Optional rehab items should only be undertaken if they will pay for themselves in a relatively short time. This is another topic I can discuss if you are interested. So, in the rehab phase some of the key contributions the property manager should make include:

• Referrals to trusted handymen and such
• Review quotes so you know you are not overpaying or the quote is missing items.
• Before you make the final payment to the workers, the property manager must do a walk through of the property ensuring that the work is actually complete. A good property manager will likely find several small items that the workers will do for free now or you can pay for them later.
• Advise what colors, window treatments and such will appeal to the broadest range of potential renters.
• Help you select the optional rehab items in terms of increased rent or reduced time-to-rent. For example, if you learn that that an additional $1000 spent will increase the rent by $100/Mo., it is an easy decision to make. This is a place that the property manager can save you a lot of money because they can help you avoid wasting money and time on items that will not increase the rent.

Property Management

When rehab is complete it is time to get the property rented. This is the phase that, to many, is the only value of a property manager. The key duties of the property manager in this phase include:

• Generating appropriate marketing materials (photos, flyers, etc) and getting them in the right locations so your tenant pool will see them. The photos are critical. Only excellent photos of a bright, attractive and desirable property will grip the attention of prospective tenants.
• Screen prospective tenants - This is the critical task of the property manager. Unfortunately, most property managers select tenants based primarily on credit score. While credit score is somewhat important, the numerical credit score does not tell you much about the tenant. For example, what if a prospective has a very low credit score solely due to medical collections? If every thing else is excellent, they will likely become excellent long term tenant. Effective screening of prospective tenants is so critical that I cannot empathize it strongly enough. A bad tenant can turn your property into a financial nightmare. Note, effective screening only applies to credit based tenants. Cash based tenants have no financial “history” and can rarely be screened effectively. I would avoid properties that focus on cash based tenants.
• Collecting all the rent on schedule and depositing it into your account in a timely and consistent manner.
• Controlling costs. Some aspects of this include doing only the work that is required, periodic inspections and proactive maintenance.
• If necessary, pushing the eviction process as fast as the law allows.
• If there is damage (beyond reasonable wear and tear), retaining a reasonable amount of the tenants deposit.
• Quickly preparing the property after a tenant vacates so it can be rented again without delay. Turn time is lost income.

Some Key Characteristics

In order to achieve the above, some of the characteristics I would look for include the following.

Does not:

• Have an in-house maintenance department. An in-house repair staff is just another profit center to the property manager. This creates an inherent conflict of interest because in order to “make the numbers,” the repair people will be pressured to make repairs, even if they are not needed.
• Charge you an annual “renewal” fee.
• Include costs like utilities, sewer, etc. in the rent. These service fees must be separate line items (not included in the rent) which are paid by the tenant so you do not pay the property manager fees on service fees.
• Mark up repair costs. Many of the property managers I know add 10% to 20% on top of any repair charge. The only way you will know this is not occurring is if you receive the original invoice for the work performed. This assumes that the property manager does not have their own in-house maintenance staff. If they do, you will never know what the actual cost was.

Does:

• Have the in-house systems (including software) and processes to enable effective screening of prospective tenants, process move-ins and move-outs.
• Have reasonable startup and management fees.
• Have the systems and processes in place that enable tenants to report maintenance issues 24 x 7. The 24 x 7 emergency response phone number must go directly to someone on the property manager’s staff, not to a voice mail or answering service.
• Have the processes in place to detect and manage tenants who call in excessive repairs.
• Handle the entire eviction process, including going to court if necessary, for a reasonable fee. (In Las Vegas, the cost should be about $500 and take less than 30 days.)

I could go into a lot more detail but the above should get you started. We maintain our own “Property Manager Interview Questions” and if you or anyone else is interested in a copy, send me an email.

Hello @Phillip Dwyer,

Perhaps I did not make this clear earlier (and apologize for the confusion). When we are evaluating individual properties, we consider vacancy rate (time-to-rent) to be one of the most important selection factors. So, on individual properties I agree with you completely but the vacancy rate is specific to the individual property. We estimate vacancy rate or time-to-rent for each property based on recent rentals of similar properties in close proximity to the property in question. However, if you have a universal constant for vacancy or maintenance that you feel applies to all properties, I would greatly appreciate knowing what that constant is.

Hello @Phillip Dwyer,

Hope you are doing well. You asked a good question which I will answer in a couple of different ways.

Vacancy rate - As you know, we use the software we developed to locate the very few good investment properties (approximately ~0.05% of the +14,000 available properties). Our software evaluates properties based on many factors, including estimated time-to-rent. From this software we see time-to-rent ranging from less than 15 days to months. Thus, no constant for vacancy rate would make sense for all properties even in Las Vegas. The same is true for maintenance. You could have one property that requires a lot of annual maintenance due to climate, property age and other factors. And, you could have another property that requires far less maintenance due to being in a milder, dryer climate, built more recently, etc. Again, because of all the various factors that are specific to each property, no single universal constant for maintenance makes sense either. Another vacancy factor consideration is the type of property.

With multi-family properties, it absolutely makes sense to include a property specific vacancy rate because you could be receiving partial rent since some units can be occupied while others are vacant. With single family properties, the property is either 100% occupied or 100% vacant so a meaningful vacancy rate is harder to determine. You could create a multi year property specific vacancy rate factor based on expected tenant stay (1 year, 2 years, 3 years, etc.) and estimated time-to-rent but such a factor would again be property specific. But what if there was a universal constant for vacancy?

The effect of a universal vacancy constant - To show the effect of applying a universal constant for vacancy I added a vacancy factor (VacancyRate) to the formula we used before for calculating ROI. The revised formula is:

Recalculating the return for the three cities assuming a 3% vacancy rate:

Austin: ROI = (($12,000 - $7,296 - $960 - $1,625 - 1.9% x $150,000 - $0 - 3% x $12,000) x (1 - 0%))/($30,000 + $0 + $0) = -3.6%

Indianapolis: ROI = (($12,000 - $7,296 - $960 - $802 - 1.07% x $150,000 - $0 - 3% x $12,000) x (1 - 3.4%))/($30,000 + $0 + $0) = 3.2%

Las Vegas: ROI = ($12,000 - $7,296 - $960 - $710 - 0.85% x $150,000 - $0 - 3% x $12,000) x (1 - 0%)/($30,000 + $0 + $0) = 4.7%

The table below compares the ROI with out and with the 3% vacancy rate. As you will see, ROI was equally reduced for all three properties but the difference between the ROIs remains the same. This is why adding a constant for vacancy rate does not make sense for the purpose of comparing properties.

Philip, I hope I answered your question.

Hello @Dan Trinh,

I just saw your post and wanted to respond. I choose to cover more than just responding to your specific observation on a specific price range of properties in Las Vegas. Before I continue, know that I am a Realtor in Las Vegas and a member of the Las Vegas Real Estate Investment Group. Here is my profile. Now that you know my potential bias, I will continue.

So we are on the same page, I believe every investment property/location must meet three criteria:

• Sustained profitability - The property must generate an acceptable 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 to adapt to market changes.

• Located in an area with acceptable business risk. Many location specific business risks are the result of legislation. For example, if a tenant in California knows what they are doing it can take up to one year (and thousands of dollars) to evict them. In Las Vegas it usually takes less than 30 days and usually costs less than $500.

Note that the above does not specify a location or type of property. What it does specify are the characteristics that a successful investment must have. Assuming that we are now on the same starting point, I want to address your concerns in a more general manner using the following topics.

• Comparing properties in different locations.

• Market changes - The return today is not a predictor of return in the future.

• Las Vegas Real Estate Investments - Looking at Las Vegas from a long term investment perspective.

Comparing Properties In Different Locations

I've seen many methods of calculating ROI and cash flow. And, as long as you are comparing similar properties in close proximity, most methods will work. However, if you are comparing properties in different locations, you need to compare all the major common recurring costs, which may be different depending on the location. I will use the three most common recurring costs in my explanations in this section.

The formula we use to calculate ROI is as follows:

While there could be dramatic differences in factors like maintenance, vacancy rates and such, I will keep it simple and only show the impact of variations in state income tax, property tax and insurance.

Below are details on the example property I will use:

• 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 payment amount: $30,000

• Periodic fees: $0 (for simplicity)

• Management fee: 8% or $12,000/Yr. x 8% = $960/Yr.

• Rehab cost: $0 (for simplicity)

• Closing cost: 0% (for simplicity)

Below are the three locations with the recurring costs for state income tax, property tax and insurance for the respective locations. Below the table are the sources for the location specific data.

Data sources for the above:

• State Income Tax Rate

• Property Tax by County

• Insurance by State - Note: I was unable to find a single site that compared landlord insurance cost by state so I used homeowner's insurance which is reasonable for comparison purposes. Landlord insurance is typically 10% to 20% more than homeowner's insurance.

Below are calculations for the example property in the three 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%

So, if you did not include location specific values for state income tax, property tax and insurance the returns for all three locations would have been the same. Also, I have not considered other factors that can greatly affect your real return like climate (maintenance), construction, property age, local regulations, eviction cost and time, etc.

Market Changes

"The only constant in life is change." (Heraclitus) This statement also applies to investment locations. A property can generate a high return today and 10 years later can generate a loss due to changes in the local market. Below are some of the most common factors that alter asset value and return:

Population - If the population in the specific area (not just the metro area) is declining, then property prices and rents are likely to fall. Las Vegas metro population is projected to increase by 1% to 2% per year for the foreseeable future according to the linked study.

Urban Sprawl - This is a factor I almost never see discussed but it is a critical factor over the long run. In every major city I've seen there are areas which were once the best places to live and over time have become distressed areas. The major cause of such a change is urban sprawl. People want newer floor plans, newer homes, less crime, better schools, etc. If people have the income, they will choose to move to a location that better meets their current needs. As people with sufficient income move out of an area and those left behind will, on average, have lower incomes. One result of the outward migration of people with income is that property prices (and rents) will tend to fall because the remaining residents have less disposable income. As property prices fall, property tax revenues will fall. City services, which primarily depend on tax revenues, will be reduced. This creates a downward spiral which few locations ever recovered. Below is a diagram showing the impact of urban sprawl on return over time. The colors represent monthly rent. Green represents a high rent and red represents a low rent. The diagram is overly simplistic but I believe it conveys the real risk urban sprawl presents to investors.

Las Vegas is completely surrounded by federal land and almost all the available land is built out. The probable result of an increasing population and limited ability to expand (as shown on the map below) means that there is little chance of significant urban sprawl compared to most cities which have no such expansion limitations.

Business Risk - The best example of business risk to investors is eviction cost and time. I contrasted the eviction time between California and Nevada. Odds are that you would never face a nightmare eviction but it is sort of like cancer. If you hear of someone having cancer, it is a statistic. If it happens to you, it is a disaster.

Job Quantity and Quality - In many parts of the US, manufacturing and similar jobs have gone 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. According to the linked Federal Reserve study, Las Vegas per capita income has been slowly increasing (except during the 2008 to 2011 crash) and projections are that the increases will continue.

The Next Economic Crash - The crash of 2008 hit most of America hard, especially Las Vegas. If you would like to see what happened to the class A and B investment properties our clients owned in Las Vegas, please click the link titled, "Case Study - Las Vegas and the 2008 Market Crash" on my profile page. I would include the direct link here but the moderator would not allow it.

Las Vegas Real Estate Investments

I addressed your specific comments on Las Vegas investing below. If you would like to read more about Las Vegas as an investment location, please click the link titled, "Is Las Vegas for You?" on my profile page: Link.

Are properties overpriced? - In my opinion no, based on at least three factors:

• Replacement value - When you obtain insurance, one of the cost drivers is the cost to replace the structure if the property burns to the ground. Since the crash, the replacement value has been (and remains) higher than the property purchase price.

• Build cost - In all the cases I have seen the $/SqFt cost for new homes is significantly more than that for resales.

• Current price vs. the price before the crash - According to the linked article, home prices in Las Vegas are still 44.5% below their peak prices before the crash.

How much do typical investment properties cost in Las Vegas?

• Class A properties: generally from $160,000 to $240,000

• Class B properties: generally from $130,000 to $200,000

• Class C properties: generally from $50,000 to $150,000

What are typical returns on class A and B properties? - These are properties which we feel offer a balance of current return and probable appreciation. We are typically seeing between 4% and 8% using the formula shown above. And, since rents are rising, we expect this rate of return to continue due to the increasing population and the limit to expansion.

Are good properties hard to find in Las Vegas? - Yes. Good properties represent between 0.05% and 0.1% of available properties. We are only able to consistently find good properties because of the analytic software we developed, the evaluation/selection process and rehab process we have in place, our investment team and our own personal investment experience. So, I am not surprised that you did not find good investment properties on your own, especially in the $150,000 range.

What is a "Good" Return - This sounds like a simple question and should have a simple answer. It does not because it depends on many factors including your:

• Alternative investment options

• Need for liquidity

• Financial goals

• Purchasing power

• Expected hold time

• Risk tolerance

To talk about these elements at any depth would require a lengthy document and beyond the scope of this reply. I will provide an overly simplistic answer but it still might be helpful.

There are only a few common "secure" investments. One that comes to mind is a CD. Here is a link to a number of CDs. Many of the rates are around 1.2% to 1.3% for a 1 year CD. Since the official inflation rate is about 3%, at best you lose about 1.6% in purchasing power after the year plus you will pay taxes on the gain. However, CDs are secure so you are very unlikely to lose your principal. If you buy class A real estate in a good area, you will generate higher return, virtually forever since rents track inflation while your largest cost is fixed. And, while properties generate a positive cash flow, you may have a tax loss due to depreciation and other real estate friendly tax rules. But this only works if you buy properties in a location with a high probability of appreciation and your selection met all or most of the long term factors I listed earlier in this article.

Dan, this is a long answer to your post but I hope you will find the material useful.