All Forum Posts by: Eric Fernwood

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.

Hello @Joseph,

Good questions. I will try to answer your questions but if I do not cover everything, please drop me an email or post a followup message.

For the last year or so Las Vegas has been a seller's market. And, unless something significant happens, we expect this trend to continue. There is another trend overlaid on this trend and that is seasonal home buyers. This "wave" of home buying is an annual occurrence and starts about early March and tapers off about now. So, in answer to two of your questions:

• Las Vegas is experiencing long term sustained growth.
• There is a high volume of sales due to the sustained growth and seasonal trends.
• We do not expect to see much of a reduction in sales volume until the end of the year.

On finding good investments in Las Vegas, we consistently find balanced appreciation and return properties that generate returns between 4% and 8%. Our return calculations include all significant recurring costs (taxes, insurance, management, closing costs, debt services, etc.) with a 20% down 30 year loan. However, these properties represent less than 0.1% of available properties. We are only able to find these "needles in a haystack" because of the software we developed, our investment approval process and our investment team. So, in answer to your other questions:

• We consistently find good deals which generate a real return of between 4% and 8%.
• In my opinion, there is not a good or bad time to buy. There are good deals and ones you should never consider. If you would like to see sample properties and learn more about the Las Vegas investment market, go to my profile page (Eric Fernwood profile page) and click the top link titled, "Click here to see our recent investor newsletters." In each of our newsletters we include sample properties.

Joseph, I hope I answered your questions.

Thank you for the kind words @Clint W.. Before I continue I want to state that the properties I owned in Texas and Georgia were quads and they did well. So, I have no issues with quads or any other type of property. I have issues with the majority of quads I have seen in Las Vegas for the reasons that Clint stated and a couple more:

Investors rarely sell performing assets. There are exceptions and we closed on a 20 unit apartment a few months ago that was performing well and in excellent condition. So, there are exceptions, but not many. I looked at apartments for about 8 months before I found one in good condition and profitable. My observations when it comes to the quads I have seen in Las Vegas is that they all were being sold because they were not performing. Frequently it was due to (massive) deferred maintenance but other times due to location.

Before I continue I want to define what I consider to be a good tenant. I define a good tenant as someone one 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 on the property
• Stays for multiple years

The quads I have seen in Las Vegas typically rent for between $450/Mo. and $600/Mo. and the tenant pool is typically cash based. Good tenants are the result of effective screening by a skilled property manager. Cash based tenants are extremely hard to screen because they have no "financial history". Screening of cash based tenants usually consists of "a heart beat and first and last months rent." So you cannot screen out the "bad ones" like you can with credit based tenants. In my experience, skips, damage and evictions are much more common with cash based tenants than credit based tenants because cash based tenants have nothing to fear.

Another factor with the quads I have seen in Las Vegas concerns the physical layout. Most are two up and two down, putting all the tenants in very close proximity. The result can be that if you get one bad tenant in a unit their behavior can run off the three good tenants that reside in the other units.

The last issue I have with Las Vegas cash based tenants is the type of jobs they have. Whenever there is an economic downturn, the first people to lose their jobs and the last people to be rehired are the lower end hourly wage workers. The tenant pool for properties renting between $450/Mo. and $600/Mo are hourly workers. During the crash of 2008 the vacancy rate for C class properties was very high. We only deal in selected A and B class properties and our clients did not have any reduction in rent or increase in time-to-rent. So, in times of economic stress, when you probably need the rental income the most, you are least likely to receive income from C class properties.

Hello Michael,

Please call or email me. My details are below. 

Hello @Jeremy Schreiber,

Before you start considering a location it is important to define what you are looking for. I believe that every property/location must meet three criteria:

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
• Likely to appreciate over time - You would never buy a property just for appreciation but appreciation is very desirable. Especially when using a 1031 to reinvest equity or adapting to market changes.
• Located in an area where you can make money and risks are low. Key factors include state income tax, property tax, insurance cost and landlord favorable regulations. Regulations include property related laws like the time and cost of evictions, rent control, code compliance requirements, etc. For example, evictions almost always take less than 30 days and cost less than $500 in Las Vegas. In other locations, it can take up to one year. I view eviction problems like I view cancer. If it happens to someone else, it's a statistic. If it happens to you, it is a disaster.

Basic Location Requirements

Here are three basic location requirements.

• Locations with a population of at least 1 million. Wikipedia - List of Metropolitan Statistical Areas You want a stable economic environment; small towns may be too dependent on a single company or commodity.
• Choose a location you would like to visit because (check with your accountant) trips to check on your properties may be tax deductible. For example, my clients trips to Las Vegas to check on their investment properties are (partially) tax deductible.
• Locations with property prices you can reasonably afford. For example, if your maximum is $150,000, it would be a waste of time to consider properties in San Francisco. Trulia - National Home Prices

Profit Limiters

Three factors that directly impact profitability:

• State income taxes - Bankrate
• Property taxes - Tax Foundation
• Insurance 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 with is reasonable for comparison purposes. Landlord insurance is typically 10% to 20% more than home owner's insurance.

To see the effect of just property tax and insurance on ROI for an identical property in three different locations, click on the link titled "Comparing Properties in Different Locations" on my profile page . Below is a summary from the referenced article showing the impact of property tax and insurance on profitability.

Longer Term Profitability Factors

Too often new investors only consider the location as it is today. If you only look at the current return, you could be purchasing a future financial nightmare. For more information on buying properties in locations that are transitioning down, see the link titled, "Investing in Declining Markets" on my profile page.

Business Risk

Investing, like everything else, involves risk. Some risks can be avoided and others can be minimized by careful research before you buy. The only way to avoid some risks is to not buy in that location. The most common business risk is eviction. For example, in California an eviction can take one year and cost thousands. In Las Vegas, evictions require 28 days and usually cost less than $500. If you own a property in California and the tenant stops paying you could be out thousands of dollars in eviction costs, lose a years rent and still have to pay the mortgage and other related costs. I could not afford this risk and I doubt that many can. However, just because you own investment real estate in California does not necessarily mean it will happen to you. You might own 50 properties in California and never have to evict anyone. It is sort of like cancer. The odds of you getting cancer are relatively small. But if you do get cancer it is devastating and "odds" mean nothing.

Population Trend

Population stability is critical. Only buy properties in a location where the population is stable or is growing at a sustainable rate. (Do not buy in boom towns, they tend to go down as fast as they go up.) Why is population stability so important? If people are moving out of an area, housing prices and rental rates are likely to fall due to decreasing demand. If people are moving into an area, housing prices and rental rates are likely to rise due to increasing demand.

However, you cannot simply look at metro area numbers and feel you have the entire picture. In every large city there are good locations, bad locations and most that are in-between. There may be good deals in any of these locations but you need to know the type of area in which you are buying and the return must be consistent with the location risk. Below are data sources for population trends:

• US Census Data - The most information but not the easiest to access.
• City Data - My favorite source of city data

Job Quantity and Quality

In many parts of the US, manufacturing and similar jobs are going away and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing jobs so the families of these workers have less disposable income. Less disposable income means that they cannot afford to pay the level of rent they did in the past. A key indicator is inflation adjusted per capita income for the location over the past few years. If you see a declining per capita income adjusted for inflation, you need to carefully consider the long term value of the property. If you buy a property in such an area you will likely have increasing time-to-rent, declining rental rates and declining asset value over time.

Urban Sprawl

In every major city there are areas which were once the best and over time 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 they have the income, they will move to such areas. As people with money move out of an area those left behind will, on average, have lower incomes. Property prices will then start to fall because the remaining residents have less disposable income. As property prices fall, property tax revenues will fall. City services are largely dependent on property tax and sales tax revenues. As revenues fall, cities have no choice but to cut services. This starts a downward trend from which few locations have ever recovered. There are exceptions but not many.

Below is a diagram showing what can happen to rental income over time due to urban sprawl. The colors represent monthly rent. Green represents a high rent and red represents a low rent. The diagram is overly simplistic but I hope it conveys the risk urban sprawl represents.

Not every city is subject to urban sprawl. For example, San Francisco is almost completely surrounded by water and what land there is has already been completely developed. (In 1912 San Francisco even passed an ordinance evicting all existing cemeteries from city limits due to the shortage of land). Another example is Las Vegas, which is completely surrounded by federal land and has very limited ability to expand. Landlocked cities have little urban sprawl risk. For more information on landlocked Las Vegas, see my profile page and click the link titled, "Is Las Vegas for You?"

I've read several articles on urban sprawl but none offered a concise way to detect it. Below are some of the better articles:

• An Economic Perspective On Urban Sprawl
• Wikipedia - Urban sprawl

Unfortunately, the best way I know to assess urban sprawl potential is to look at a map and see if there are physical, political or other barriers to metro expansion. If there is no such limitation, there will be urban sprawl. Be very careful buying properties were urban sprawl potential is high.

Ongoing Maintenance

Maintenance costs have a major impact on profitability. Here are some generalizations about locations and ongoing maintenance costs:

• Older properties require more maintenance than newer properties.
• 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.

Crime

Stable or increasing property values and rents rarely occur in areas with high or increasing crime rates. When crime increases, people with sufficient income move to areas with lower crime. The people who cannot afford to move tend to have lower incomes thus resulting in falling rents and property values. What you need to consider is the types and frequency of crimes in the area and how it is changing over time. There are multiple online crime databases you can check.

Jeremy, I hope this post helps to get you started on your search for the best investment locations.