All Forum Posts by: Eric Fernwood

@Bryan Christopher,

A very good question. I will start by saying that when I owned properties in Houston and Atlanta, they were four-plexes. Some single family in Houston too. All things being equal, I personally prefer multi-family dwellings if the market is right. What is best depends on the individual market at the time you are buying, your goals, your cash and financing.

Single family homes could be the best property today but specialty small commercial might be the best in 2 years. There is no single simple answer. And, what is best today will likely not be the best 5 years from now. 

Everything I am about to say only applies to Las Vegas, today; in 12 months the market could be different. And, what is the best investment also depends on your cash, credit and willingness to take reasonable risk. Below are some examples: 

If you are looking for 5% to 7% real return (see my post on real return) and probable appreciation and you have $50,000 and you qualify for 20% down conventional financing, I would recommend:

1) Select single family class A properties in the $175,000 to $220,000 price range.
2) Select town homes in the $150,000 to $200,000 range.

I do not recommend condos in this price range because very few condos in Las Vegas are finance-able. There are much better ways to use cash than tying it all up in one property. After all, by definition the return on equity is always zero.

If you have $100,000 and are looking for 9% to 12% and you care little about appreciation (other than tracking with inflation), I would suggest a few of the older condos and town homes. Many of these generate $400 or more per month and cost less than $80,000.

If you are mainly looking for appreciation and returns in the 2% to 4% range are OK, class A single family homes in specific areas in the $220,000 to $350,000 range would be a good buy. This sort of investment is perfect for higher income earners who are building up a retirement income stream.

If you have $400,000 to $600,000, specialized commercial properties are good. We are working on a $2.4M 50 unit apartment complex that, with some renovations, will be very profitable (6% to 7.5%). However, the real value of the property is 5 to 10 years from now. Based on city of Las Vegas plans and talking to the major stake-holders around the property, we expect the property to double or triple in value when it is re-purposed to offices in the future. 

I could go on about goals and what is most likely to match these goals but I think I made my point in that there is no "one size fits all". And, the best answer for one person might be a disaster for the next. Plus, one or two years from now the market could change due to the market itself, changes in financing rules or tax regulations or ????? 

On HOA's, Las Vegas is unique in that most of the class A properties are built with HOAs. We like HOAs in the $20/Mo to $50/Mo. range. Tenants love the appearance and tend to pay a little higher rent that non-HOA subdivisions. In subdivisions with no HOA, you frequently see things like someone operating an auto repair shop out of their garage. We see reasonable HOAs fees as asset value protection. However, HOA's could be an absolute waste of money in another city. It all depends.

Wherever you plan to invest, it is critical that you have a trusted team who knows investments and has a deep understanding of the investment market. This is very different than a traditional agent selling homes.

Bryan, I jumped around quite a bit in this post. I hope I answered your questions. If not, post again or give me a call.

I will comment on two points related to the market crash issue:

1) Predicting when it is likely to occur. As people stated, tracking NODs is usually the easiest approach I know of. Our source is one of the title companies. What you are looking for is not an absolute number. What you are looking for is the changes in the rate of NOD's. In general, in Las Vegas, NOD's proceed foreclosures by about 6 months and they are likely to hit the market about one year later.

2) What's going to happen to your buy and hold properties during a market crash? Since we have access to actual data (we are Realtors in Las Vegas) we recently decided to look at the rental rates vs. $/SqFt rates from 2008 through 2014. Remember that the crash was severe in Las Vegas, and that most properties went down by 50% or more (many have since recovered to pre-crash values). When we started the study we discovered that the metro area data we could obtain from news sources was virtually worthless because there was no granularity; they averaged the entire metro area and even different property types together in some cases. We choose to base our research on one of the prime rental areas, which is shown in the map below. The property profile we selected is: 3 bedrooms 2 car garage, 1,200 to 1,500 SqFt. 

Using actual sales data from the MLS we looked at property prices ($/SqFt) and below is a chart showing the monthly average $/SqFt sale price between 2008 and 2014.

As you can see, prior to the crash in 2008, conforming properties in the selected area were selling for an average price of approximately $120/SqFt. By 2012 the average price fell to approximately $70/SqFt. What happened to rental rates during the same period? Below is a chart showing $/SqFt rental rates for conforming properties in the same area for the same time period as the above.

As the above shows, rental rates were virtually unaffected by the 2008 real estate market crash. So, if you purchased an investment property in late 2007 at the market peak and the property was generating an 8% return, it continued to generate an 8% return, even though the market value of the property went down 50%. However, this is not true of all areas and even all rent ranges in Las Vegas. Lower end rental properties that were primarily leased by construction workers and such (who really got hurt) fared much worse. I think this shows the importance of selecting the right location and properties that will rent to a stable tenant population. 

In summary, watch for changes in NOD patterns and select properties in locations and rent ranges that are likely to be stable even during a market crash.

@Bryan Christopher, @Sutton Zolner

There are still good properties in Las Vegas. We have been able to find class A properties that cash flow well. The challenge is (always) how to find them because you may have to consider hundreds to find one good property, which is why we developed software for finding good properties. We typically start with between 7,000 to 10,000 properties and our software will get us to under 50. Based on our experience, we eliminate more than half of these properties. The resulting class A properties have a real ROI (more about real return later) between 5% and 9%. Rehab is typically less than $5,000.

For balanced cash flow and appreciation, the basic characteristics we use include:

• Single family
• Two+ garage
• Three+ bedrooms
• Two+ baths
• Within a minimum and maximum lot size
• Built after specific year
• Average time to rent below 20 days
• One or two levels
• Association fees below a specific amount

We eliminate from considerations most properties based on a number of negative characteristics (we have about 50 such "negative" characteristics) including:

• Known bad floor plans
• Subdivisions with rent restrictions
• Known undesirable subdivisions
• Properties with traffic or access issues
• Properties with excessive drive times
• Master bedroom too small
• Ratio of lot size to the home's foot print
• Tandem garages
• Close to nuisances

For high cash flow properties (usually class B or C) the requirements are quite different and these are usually town homes, condos and occasionally older small single family homes. These generate a 9%+ real return and cash flow greater than $400/Mo. and average time-to-rent of less than 20 days. 

Real return - I see a lot of people assuming a 5% return in Austin is the same as a 5% return any where else. This is absolutely not the case. I'm repeating below some of the materials I posted earlier in this thread:

The formula we use for calculating return is:

ROI = ((Rent - Debt Service - Management Fee - Insurance - Real Estate Tax - Periodic Fees) x (1 - State Income Tax))/(Down Payment + Closing Costs + Estimated Rehab Cost)

For cash flow:

Cash Flow = (Rent - Debt Service - Management Fee - Insurance - Property Taxes - Periodic Fees) x (1 - State Tax Rate)

Below is a contrived example of the exact same property renting for the exact same rent in three different locations. This is of course impossible but the point is to show the impact of landlord insurance and property taxes on return.

Here is a summary of the 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 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 three cities with tax rates and landlord insurance costs:

Note: the data from the above comes from the following sources:

• State income tax source
• Insurance rate source. Note that this site contains national average homeowners insurance rates. I could not find a similar site for landlord insurance. Landlord insurance is typically 10% to 20% more expensive than homeowners insurance. The $710 rate shown here for Las Vegas is higher than what our clients pay, but I will keep it here just for comparison reason.
• Property tax source

Calculating ROI for each of the three cities:

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%

Calculating cash flow for each of the three cities:

Austin: Cash Flow = ($12,000 - $7,296 - $960 - $1,625 - 1.9% x $150,000 - $0) x (1 - 0%) => -731/Yr or -60/Mo.

Indianapolis: Cash Flow = ($12,000 - $7,296 - $960 - $802 - 1.07% x $150,000 - $0) x (1 - 3.4%) or = $1,291/Yr or $107/Mo.

Las Vegas: Cash Flow = $1000 - ($600 + 8% x $1,000 + .086% x $150,000 / 12 + $710 / 12 + $0) x (1 - 0%) or = $1,744/Yr. or $145/Mo.

As you can see from the above examples, property taxes, state income taxes, insurance and other factors can make a huge impact on profitability. You need to take all these factors into account when you are considering purchasing a property and especially when you are comparing properties. 

In summary, there are good properties in Las Vegas, the problem is finding them. Also, when you are comparing returns between two properties in different locations you have to take into account all the significant recurring cost factors. Don't just assume that x% in one location is the same as x% in another location.

@Craig Hanlon

@Jay Hinrichs

I agree with Jay, equity is at best, unrealized gain. Plus, if you were to sell a property, the transaction cost is likely to be in the 6% to 8% range.

On buying a property for $150,000 which needs $20,000 in materials + labor, it may not be as good a deal as you might think. Below is a comparison between buying a property for $150,000 + $20,000 in materials if all your labor is "free" and it takes you 3 months to get it market ready. Also, I will assume that you can rent the property immediately (zero days) once the work is complete. I will also assume a 2% property tax rate and $1,000/Yr. landlord insurance and $150/Mo. in utilities (I needed some numbers so I pulled these out of thin air).

Scenario 1: $150,000 plus $20,000 and three months to make it market ready assuming 20% down, 4% interest rate, 30 year fixed.

Remember that it will take you 3 months to make it market ready so you will lose 3 months of rent in this scenario.

Scenario 2: $200,000 and ready to rent immediately with financing terms as shown above.

The above is an over simplification in many ways but I believe the basic concept is correct. From the above numbers, you may be better off buying a property in better condition for more. You will have some advantage in that your monthly debt service will be lower in Scenario 1 but the time to recover the difference is estimated as follows:

Payment Savings

Cost to Market Ready

Rent loss while making the property market ready: $1000x3=$3000

Rental Period to recover additional cost if the rent is $1000/Mo.:

Recovery Period (Mo.) = (10000+3000) / 191 = 68 Mo. or 5.6 Yrs.

In summary, when you are comparing buying a property that needs a lot of rehab, you have to consider the total costs involved when compared to buying a property in better condition. In Las Vegas, we typically reject any property that requires more than $5,000 in rehab unless there are special circumstances.

On buying properties for future gain (equity), I created a cartoon that I send to clients considering this path.

Hello @Mike Migliaccio

A very interesting question but I think it is a lot more complex that just term and rates. I don't have the answer but I can tell you our thoughts on a similar type of property. We are currently working on a $2.4M purchase of an apartment complex and we've spent far more time on what the local (sub-metro) economy is likely to do in the foreseeable future than on return rates and financing. I am not saying return rates and financing aren't important, they are. But what is likely to happen in the area is more important because it can change a performing investment into a nightmare.

For the apartment complex we are considering we've done a lot of research into how the 4 block area surrounding the property is likely to change in the foreseeable future. We've looked at all the on-line data available and spent a lot of time with city officials including planning, building, zoning and other relevant city departments. We talked to the current tenants to understand what they value and where they think the location is going. We also talked to representatives for all the major landholders in the area to understand their plans and directions. We now feel we have a reasonable idea of how the 4 block area is likely to change in the foreseeable future. We are now investigating job quality and quantity for the businesses where current and future tenants are likely to be employed. After all, rental properties are no better than the available jobs.

Based on our research to date we believe that with reasonable rehab costs we can increase profitability to a very acceptable level. And, based on our discussions with all the major area stake holders, we believe that in 5 to 7 years the property will likely be re-purposed and become much more valuable in it's new role. Based on what we know today and can foresee, we believe that our client is likely to own the property for at most 15 years. So, we are probably going for 20 year financing. 

In Summary we spent a lot of time to get a handle on the following:

Short term:

• Local population trend
• Local job quality and quantity trend
• Local crime trend
• Rehab vs. rental rates
• Maintenance costs

Longer term:

• Local area direction
• Infrastructure
• City planning directions
• Future uses
• Re-purpose costs

I think you should let your research along similar lines dictate your financing decisions.

I hope this helped.

@Bud Leiser

Bud, you are correct, my partner and I are(were) both engineers. You are the first to guess that!

@Jay Hinrichs

@Bud LeiserJay, as always your comments are insightful and reflect your deep experience. Always enjoy reading your posts.

My partner is a Las Vegas Realtor but lives in Austin TX so we have some familiarity with how the Austin property taxes work. And, I assume that DFW is about the same. Her property tax rate is 2.2%. The way her taxes are initially determined (at time of sale) is the local tax district rate x the purchase price. So, for a $100,000 property (if such a thing existed in Austin!) the calculation would be $100,000 x 2.2% or $2,200/Yr. It is then recalculated each year based on the county's assessment of current market value.

In Las Vegas, the process for calculating the tax rate is at best arcane (being kind here). The tax rate is recalculated in December of each year based on industry standard replacements minus depreciation x some magical factor plus the land value. To avoid all the mystical calculations, we determine the effective rate by calculating the actual percentage based on a few thousand recent sales. We find it ranges between 0.72% to 0.86%, depending on the tax district. If you want to really get the details, here is the place to start.

On expansive soil, there is some in Las Vegas but it is in a relatively small area. I have not personally had any foundation issues. I suspect that the lack of foundation issues is largely due to the hard as concrete "soil" we have and the level of the water table. I read that at the airport, the water table is 90 feet down and the airport is one of the lower areas in the city.

Hello @Anderson Schulle,

Based on what I know about the cost of single family homes in DFW you are looking at class C properties. With class C properties in Las Vegas you can buy a property for between $100,000 to $120,000 and generate $1,000 to $1,100/Mo. in rent. So, on the surface, I think Las Vegas is about 10% more expensive than DFW when considering class C. I will compare your property to an equivalent property in Las Vegas later but first I want to emphasize that there are other factors to consider.

All typical return measurements (ROI and Cash Flow for example) are only snapshots in time; how the property is likely to perform today. Hold times for investment real estate is typically 7+ years so what is likely to happen in the local area in the foreseeable future is very important. Many factors can alter a property's market value and rental rate over a 7+ year period. Two such factors are local job quality/quantity and urban sprawl. I can not comment on local job quality/quantity since I do not have your local market knowledge. I can say that if the per capita household income (adjusted for actual inflation) is decreasing in a location, over time property values and rents will tend to decrease.

In an unbounded metro area like DFW urban sprawl is likely to be a major factor. Over time, urban sprawl can turn a once good investment into a money pit. In every major city I’ve seen there are areas which were once good areas and, due to urban sprawl, have become distressed areas, which is where most class C properties are located. Some major sources of urban sprawl include: rising crime, changing employer/job locations, people wanting newer floor plans, newer homes, larger lots, etc. If people have the income, they will tend to move to areas where they can buy properties that better match their desires. And, as people with higher incomes move out of an area, those left behind will likely have lower incomes (less real purchasing power) so over time property prices will tend to fall as will rents. Know that urban sprawl is a localized factor. A metro area’s population may be stable or increasing while areas within the metro area can be decreasing. In fact, properties with the highest returns are most likely to be in declining areas since rents lag population migration and actual buying power. Over a 10 year period this can be a serious problem for investors who own properties in such areas. This is where your local knowledge is critical to investors.

Las Vegas is one of the few cities in the US which has virtually no urban sprawl because it is totally land locked by federal land (which is unlikely to come into private hands). In fact, only about 11% of the entire state of Nevada is in private hands. See the Las Vegas metro map below and you can see how little residential land is available for development.

If I look at real return, the property you mentioned vs. an equivalent property in Las Vegas, the returns are quite different. Below are some of the major costs for DFW and Las Vegas which I will use to compare returns.

Data sources:

• Landlord insurance for DFW: https://goo.gl/LhiJMt
• Property taxes: Fort Worth is located in four counties: Tarrant, Denton, Parker and Wise. According to the Tax Foundation the three year average property tax for Tarrent is 1.88%, Denton is 2.07%, Parker is 1.88% and Wise is 1.88% so I used 1.88% in my estimate.
• Actual property taxes in Las Vegas range from 0.72% to 0.86% depending on the local tax district so I used 0.86% in my calculations.
• Actual landlord insurance in Las Vegas for a $110,000 property is approximately $500/Yr.

Using the following formula I will compare returns:

ROI = ((Rent - Debt Service - Management Fee - Insurance - Real Estate Tax - Periodic Fees) x (1 - State Income Tax))/(Down Payment + Closing Costs + Estimated Rehab Cost)

For the property you mentioned:

• Purchase price: $100,000
• Monthly rent: $1,000/Mo.
• I will assume zero rehab, zero closing costs for simplicity.
• Debt service: assuming 4%, 20% down and 30 year fixed, the debt service on a $100,000 property would be approximately $382/Mo.
• Management fee: 8%
• I assumed 100% occupancy for simplicity.
• Neither Texas nor Nevada have state income taxes so I used zero for both.

ROI = ((1000 x 12 - 382 x 12 - 1000 x 12 x .08 - 1580 - 100000 x 0.0188 - 0) x (1 - 0%))/(100000 x .20 + 0 + 0)

ROI = 15%

For the Las Vegas property:

• Purchase price: $110,000
• Monthly rent: $1,000/Mo.
• Landlord insurance: $500/Yr.
• Debt service: assuming 4%, 20% down and 30 year fixed, the debt service on a $110,000 property would be approximately $421/Mo.
• C class properties in Las Vegas rarely have any HOA fees so I assumed zero.
• I will assume zero rehab, zero closing costs for simplicity.
• Management fee: 8%
• I assumed 100% occupancy for simplicity.
• Neither Texas nor Nevada have state income taxes so I used zero for both.

ROI = ((1000 x 12 - 421 x 12 - 1000 x 12 x .08 - 500 - 110000 x 0.0086 - 0) x (1 - 0))/(110000 x .20 + 0 + 0)

ROI = 21%

So, if you look at real return, a 10% more expensive property in Las Vegas actually generates a 40% higher real return.

If I look at cash flow using the following formula, the differences become more pronounced.

Cash Flow = (Rent - Debt Service - Management Fee - Insurance - Property Taxes - Periodic Fees) x (1 - State Tax Rate)

For the DFW property you mentioned:

Cash Flow = (12000 - 4582 - 960 - 1580 - 1888 - 0) x (1 - 0)

Cash Flow = 2,990/Yr.

For the similar Las Vegas property:

Cash Flow = (12000 - 5041 - 960 - 500 - 946 - 0) x (1 - 0)

Cash Flow = 4,553/Yr.

So a 10% more expensive property in Las Vegas generates approximately 50% more cash due to cost factors like landlord insurance and property tax rates.

I next estimated the maximum amount you could pay for a property in Las Vegas, renting for $1,000/Mo. which would generate a 15% return. The answer is $123,200. The math to do the calculation is beyond the scope of this response but the result is below. (Note the increased debt service, landlord insurance and taxes due to the increased purchase price). 

ROI = ((1000 x 12 - 471 x 12 - 1000 x 12 x .08 - 525 - 123200 x 0.0086 - 0) x (1 - 0))/(123200 x .20 + 0 + 0)

ROI = 15%

However, $123,000 properties are more likely to rent for $1,050/Mo. So, if I use $1,050/Mo. rent, the maximum price you can pay for a property renting for $1,050/Mo. and generate a 15% return would be $129,700 or about 30% more than the same property in DFW due to higher property taxes and landlord insurance costs in DFW. In states where there are income taxes, the difference is even greater.

In summary, just looking at ROI or Cash Flow without considering all the costs can be very misleading. At the end of the day, what matters is what actually goes into your pocket today and what is likely to go into your pocket for the foreseeable future.

Anderson , I hope this answered your question. Please post another message if I missed anything.

There are a lot of seminars, books and podcasts about how you can get rich flipping properties. Sadly a lot of people believe what they hear and "go for it". I see one or two flips a month where I know the owner is going to lose a lot of money. Unless you really know what you are doing you can lose a lot of money flipping. But, if you are inclined to try, below is a process that I have used and worked for me and I believe will work for anybody.

Once you find a property that you believe has flip potential, take the time to really think the entire process through with a spread sheet. Start with what you conservatively believe the property will sell for if it is brought to market standards (more on market standards later). Do not be optimistic on the eventual sale price or time to sell; be very conservative. Once you are reasonably confident about the sale price and how long it will take to close once the rehab is complete you are ready to work backwards to the maximum you can offer for the property.

Work backwards to make money

As an example, suppose you find a property that looks like a good flip. You carefully study recent sales comps and decide that, remodeled to market standards, the property should go under contract for $200,000 within 60 days after the rehab is complete and it is placed on the market. And, your trusted contractor conservatively estimates it will cost $40,000 and take 2 months to bring it to market standards. Since profitable flippers are pessimists, estimate the total rehab will cost $50,000. Your hold time will be:

As to profit, suppose you will be happy with a 10% return. So, your goals are:

Also during your due diligence you learned that the real estate tax rate is 1%, property insurance is $450/year, purchase (closing) costs are 3% and cost of sales (commissions, closing costs, etc.) will be 8%. I put these numbers in the table below:

Now that we have an (over simplified) estimate of the total cost, we can work backwards from the probable sales price to determine the maximum price we can offer.

Based on the above, you cannot pay more than about $110,000 for this property if you are going to make money. Yes, you can probably reduce cost of sales and perhaps other numbers but you cannot significantly reduce rehab costs and there will always be surprises which will burn you if you do not have sufficient funds set aside.

Flip considerations

• Typically, lenders will only finance properties that are already livable so financing damaged properties can be a challenge. Talk to a knowledgeable lender about 203k loans. Contact me if you need a recommendation. You need to get this nailed down before you even start looking.
• You may have noticed that I used the phrase "market standard" multiple times. There is a common erroneous belief that if a property is "really improved" it will sell for more than what similar homes have sold for. This is never true. If similar homes are selling for $200,000, even if you put $100,000 of "improvements" into the property, it will not significantly increase the sales price. One of the biggest challenges for new flippers is the tendency to remodel the property to their taste as opposed to rehabbing to market standards. If similar homes are selling for $200,000 with vinyl floors, travertine tile will not significantly increase the sales price. You need to really know what characteristics made similar properties sell and not go much beyond that. Cost control during the rehab is critical. Of course, there are small things that can make the property much more desirable to potential buyers without spending a fortune. For example, ceiling fans in the master bedroom and family room, improving the curb appeal and the front entrance area, fresh paint, etc. 

I hope the above helps. Flipping can be a profitable business but only if:

• You purchase the right property at the right price.
• The market makes flipping viable.
• You really know what you are doing in terms of the market, construction and you have the needed financial resources.
• You have a well thought out plan.

If you can not say "yes" to all the above, don't do it.

@Sutton Zolner @George Chang

Some very interesting discussions have come up in this thread. There are a few points that I will comment on:

• Las Vegas returns
• Maintenance and rehab costs
• HOA fees

Las Vegas Returns

I see a lot of people talking about rate of return but not taking into account all the cost factors for each location. For example, property taxes in Dallas Fort Worth are about 2.5%. In Las Vegas typical property taxes are .86%. There are no state income tax in Nevada or Texas, but in California you could pay 9% or more state income tax. The formula we use for comparing returns is:

ROI = ((Rent - Debt Service - Management Fee - Insurance - Real Estate Tax - Periodic Fees) x (1 - State Income Tax))/(Down Payment + Closing Costs + Estimated Rehab Cost)

As an example, suppose you found the identical property (not realistic, I know) in Austin, Indianapolis and Las Vegas. And, assume that you get the same rent for each and had no rehab costs. Below is a summary of the property specifics:

• 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)
• Closing cost: 0% (for simplicity)

Below are three cities with tax rates and landlord insurance costs:

Note:
• State income tax source
• Insurance rate source. Note that this site contains national average homeowners insurance rates. I could not find a similar site for landlord insurance. Landlord insurance is typically 10% to 20% more expensive than homeowners insurance. The $710 rate shown here for Las Vegas is higher than what our clients pay, but I will keep it here just for comparison reason.
• Property tax source

Calculating ROI for each of the three cities:

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%

The point of the above is that differences in state income tax, property taxes and landlord insurance can have a huge impact on return. 

Another huge difference are the applicable laws and regulations concerning rental real estate. For example, clients tell me that in California if a tenant knows how to play the legal system it can take up to one year to evict them. In some eastern states you can not evict tenants during the winter, period. In Las Vegas, typical evictions take less than 30 days and cost about $500 if you use a full service agency. While I know of no way to include eviction cost risk in an equation, the cost of eviction will become all too real if it happens to your property.

Remember, all calculations such as ROI or cash flow are really only snapshots of the market at one moment in time. Typical hold times for real estate is 7 plus years so what is happening in the foreseeable future can have a huge impact. Some examples:

• Population - If people are moving out of an area, housing prices and rental rates are likely to fall. If people are moving into an area, then property prices and rents are likely to rise. Also, don’t forget about urban sprawl. You could have a stable metro population while a location within the metro area has a falling population.

• Job Quantity and Quality - For example, 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.

There are other factors I could mention but these are two of the largest factors to consider. Las Vegas is landlocked by federal land and has limited expansion space so urban sprawl is not a significant issue. In other cities it is an ever present factor to consider.

Las Vegas is projected to have about 1.5% annual population growth for the foreseeable future. 

Maintenance and Rehab Costs

Due to the climate, the predominate construction in Las Vegas consists of:

• Stucco exterior
• Desert landscaping (rocks)
• Metal windows and doors
• Concrete block fences
• Tile roofs
• Concrete slab foundations

The result is a low cost of ownership. Typically our clients budget $1,000/Yr in maintenance but average closer to $600/Yr.

On rehab costs, it is impossible to give a “fits all” guess. Typically, we are seeing between $4,000 to $5,000 rehab on $200,000 properties here in Las Vegas. These properties average about 1,800 SqFt so you could say that the cost/SqFT for rehab is $4,500/1,800SqFt = $2.5/SqFt. In a recent article on buying properties in Detroit, the estimate was between $75/SqFt to $100/SqFt “and that’s just for bare-bones repairs, and it doesn’t include anything structural like a roof or foundation.” (What It’s Actually Like To Buy A $500 House In Detroit ) 

HOA Fees

Most class A properties in Las Vegas are in an association. While association fees vary all over the place depending on the area and amenities (guard gated, community pools, etc.), most of the properties our clients buy are in the $25/Mo. to $45/Mo. range. While you will get some benefits from the HOA, we view the HOA fees as asset value preservation fees. One bad house in a subdivision can hurt property prices and rental rates. For example, I was looking at a house a couple of weeks ago in a subdivision with no HOA and saw that the residents at one property were essentially operating an auto repair service out of their garage. Cars (some obviously derelict) were parked all around the area. Is this always the case with subdivisions without HOA's? No. We developed analytics for estimating how likely such a subdivision is to remain as it is. We have no problems with stable subdivisions without HOA fees but subdivision stability has to be considered.

I hope I addressed some of the concerns expressed in this thread.

Hello @Kevin Samuels ,

Reliably estimating rehab costs is very important. I am a Realtor in Las Vegas and about all we do is investment properties for remote investors so my ability to estimate rehab costs is very important. Because I do this all the time I have developed a process for estimating rehab costs that has proven to be very effective, which I describe below.

You might think each property will be totally different and there is no way to quickly estimate rehab costs. It is actually fairly easy if you view the property as a number of separate standard components. Once you do this, you can develop standardized costs for the most frequent rehab items. Below is a small sample of the standardized costs I use.

• Window treatments: $60/window. If I have a large window then I count it as 2 windows.
• Bathroom sink and faucet: $150.
• Carpet: $1.80/SqFt.
• Replace a broken window: $150/pane.
• Remove an oil stain from a concrete surface: $75/stain.
• Repaint interior of property: $1/SqFt of living space (assuming the walls are not a dark color which might require two coats of paint).

How did I obtain these costs? Initially I got these from property managers, contractors, flooring sales people, etc. Over time I revised the unit costs based on my own experience. And, when I come across a rehab item I do not know, I take a video of the problem and sent it to the appropriate contractor. Below are the most frequent rehab items for which I have standardized costs:

Notice that I have no costs for roofing, siding and landscaping. That’s because most of the properties in Las Vegas have tile roofs and rarely need work. There is no siding, only stucco. There is also little or no “landscaping” in the traditional sense because most yards are desert landscaped (rock).

Also, I include all associated costs for each rehab item. For example, the $1.80/SqFt for carpet includes removing the existing carpet, minor repair work on the sub-floor and a new pad and carpet installed. For appliances, I include the cost of disposing of the old ones.

How accurate is this approach? It has proven to be sufficiently accurate for determining whether to eliminate a property. The “real” estimate of the total rehab cost occurs during the due-diligence period.

Another important rehab consideration is risk. Items like paint, carpets, tile, appliances are low risk. I don’t mind having a fairly high rehab cost if there are no high risk items. What do I consider as high risk items? Mold, Chinese dry wall, structural damage, foundation issues, non-permitted additions, flood issues, etc.

I hope this helps.