All Forum Posts by: Eric Fernwood

Hello,

Great thread! Most of the posts seem to center around two topics:

1. Can you still buy good investment properties in Las Vegas?
2. What is the current state of the Las Vegas market and what is likely to happen in the foreseeable future?

I will address both topics starting with buying good investment properties.

Good Properties

Yes, we find them every day. However, they are not easy to find. Currently, good properties are about 1 in every 2000 available properties. You have to have the right tools and processes to find them. What real return (including all recurring costs and not including unrealized gain like principal pay down, etc.) can you expect with 25% down, 30 year fixed? Between 2% and 4%. Higher if you buy with cash.

Current Market Condition

The value of anything is determined by demand. For example, would you pay $100 for a half consumed bottle of water? No? Suppose you are lost in the Mohave desert and dying of thirst. You would be willing to pay $100, $1,000 or any amount of money for the same half consumed bottle of water. Such is the difference demand makes. The same is true with real estate. I look in some cities and a 1,500 SqFt single family home is selling for $15,000. The same house in some coastal cities in California would sell for $2,000,000 or more. Like the previous example, it’s the same house but different demand. So, let’s start by looking at the current Las Vegas real estate and rental demand situation today.

Current Demand

I will subdivide the demand question into sales and rentals.

Sales

The best demand barometers I know of for the current market is the trend of: days on market, $/SqFt and inventory.

Days on market is the number of days between when a property is listed and the date when the property is placed under contract. As you can see below, the days on market is currently about 15 days. This includes over priced properties that may well sit on the market for months or longer so 15 days is a very short period of time for real estate. The short days on market indicates a high level of demand.

Price per SqFt ($/SqFt) is another indicator of demand. The chart below shows $/SqFt since 2008.

Note that while prices have increased since the bottom in 2011, we are still at about 80% of the 2007 peak prices. Also, Las Vegas has the further to go to reach pre-crash peak prices than any other major city.

Inventory is measured in months of supply. A six month supply is considered balanced. As you can see below, current inventory levels are about 1.8 months of supply, which indicates a high level of demand.

Rentals

The following data is for the entire MLS, not just the narrow property profile we target. As you can see, rents have steadily risen since 2013.

Over the last few months, total available rental properties has fallen. Below is the total number of rental properties available on the 18th of the month, by month, by type.

As you can see, rental inventory has decreased drastically since January. Note that we have not even entered the peak rental demand period of June through September.

Typically, time-to-rent is 2 to 3 weeks. Today, we are closer to 2-3 days.

Current Demand Summary

The numbers clearly indicate there is significant demand for both properties to purchase and properties to rent. Declining inventories in both sales and rentals indicate that property prices and rents will continue to increase, at least in the remainder of 2018. How about in the foreseeable future?

Future Demand

While no one can accurately predict the future, you can infer what a market is likely to do by looking at current and recent trends. Stock investors do this all the time. Fortunately, while stock prices can change almost instantaneously (sometimes due to seemingly unrelated events), real estate markets generally change very slowly, which makes trends easy to spot.

Purchase and rental demand is largely driven by:

• Jobs - Real estate is no better than the jobs around them.
• Population growth - More buyers means increasing demand.
• Urban sprawl - If people are leaving an area, demand in that area will fall. This is true even if the population of the metro area is unchanged or growing.

Population growth

Las Vegas’ population grew by 2.2% in 2017. This is a healthy and sustainable growth rate. Nevada ranked 3rd in Atlas Van Lines annual migration report in terms of most popular states to move into. See the graph below. The numbers show what percentage of moves are inbound vs. outbound from the state. Greater than 50% indicates more people moved into the state than out of the state.

Below is a 2015 graphic (I was not able to find a more recent similar graphic) showing the top states from which people are moving to Nevada. Note that the population of Las Vegas is about 80% of the population of the state of Nevada so the majority of the new population is likely moving to Las Vegas. Note that while the numbers shown below may seem small if you compare them to the population of California, the total population of Las Vegas is approximately 2.3M so the number of people moving in has a big impact.

Jobs

Rental properties are no better than the jobs around it and Las Vegas is experiencing a lot of job growth. However, the quantity of jobs is only half of the story.

Job quality is almost as important as job quantity. For example, in many parts of the US high paying manufacturing jobs have gone away, such as the automotive manufacturing jobs for which the average pay was about $40/Hr plus benefits. Today, these same people are most likely working in the service sector. Services sector jobs typically pay between $11/Hr and $13/Hr. So, while the overall job quantity did not change, the quality did. If people are earning less, what they can afford to pay for rent will fall over time as well. What does this mean to you as a landlord?

The best metric I know of for determining overall job quality for an area is inflation adjusted per-capita income. See the chart below from the St Louis Federal reserve.

As you can see, per capita income continues to rise in Las Vegas which means quality is increasing.

A good measurement is the rate of unemployment. As you can see below, unemployment is around 5%, which is great compared to what it was in 2010. How do the current number of jobs compare to pre-crash job numbers? In 2016, Nevada surpassed pre-recession employment levels with 70,000 fewer construction jobs. (Note: Las Vegas metro area is about 80% of the total state population.) Here is a report by the Federal Bureau of Labor Statistics on Las Vegas employment.

As the population of Las Vegas continues to grow, unless the number of jobs increases as well, unemployment will rise. Below is a chart showing the rate of unemployment for the metro area from the St Louis Federal reserve.

As you can see, despite the increase in population, unemployment continues to decline and per-capita income continues to increase. A very good combination for the future.

While it is hard to quantify the number of jobs generated by small to medium businesses, it is easy to quantify for large projects.

Major Projects

Below are some of the top projects under construction in Las Vegas. These projects create large numbers of both short term (mostly construction) jobs and long term employment once the projects are complete. And, every worker will need a place to live.

• Resorts World Las Vegas - $7.2B
• Drew Las Vegas (formally the Fontainebleau) - $3B
• Raider’s Stadium - $2B
• Wynn Resorts World - $1.9B

Other Sources Of Growth

Blue State Refugees

Since Nevada is adjacent to California, I will focus my remarks specifically on California. However, people who leave blue states due to the high cost of living will look at places like Las Vegas.

I’ve researched one segment off California population that will be greatly impacted by the 2018 Tax Act and rising prices and taxes and that is people living on a fixed income.

California has about 6M retired people. Due to the 2018 Tax Act, an unknown percentage will choose (or be forced) to leave the state and look for a lower cost of living. Las Vegas is a known location to the people of Los Angles and San Diego. The fact that it is only 4 hour drive away from friends and family is a major plus. Lets look at the numbers.

If 0.25% of the 6M retired people in California decide to move to Las Vegas and we assume that all are couples, the number of residences needed will be:

6M x 0.25% / 2 = 7,500

To put this in perspective, the total number of single-family homes sold in Las Vegas in 2017 was 34,659. If an incremental demand for an additional 7,500 residences occurs over the next coupled of years, demand will further increase sales and rental prices.

You might question whether this is only a short term situation because developers could just add thousands of new homes to meet the demand. The short answer is, “No.” The reason is a lack of available and desirable land.

Limited Land

Las Vegas is an island surrounded by federal land. See the map below. The areas in red are federal land.

See the gif below to see how the metro area has consumed the available land between 1984 and 2016.

Las Vegas is in a situation where:

• Population is growing
• Job quality and quantity is increasing
• Unemployment is decreasing
• Due to the low cost of living and no state income taxes, is very likely to attract a percentage of people seeking a lower cost of living

However, there is more to the story.

Corporate Expansion

The 2018 Tax Law reduced tax rates and encourages US corporations to expand operations within the US as opposed to overseas. Below is a small example of the factors that make Las Vegas a desirable location for businesses.

• The fiber optic lines connecting the West and East coast run under Las Vegas Blvd.
• Within 2 days driving distance to 20% of the population of the US, which is desirable for distribution centers.
• Las Vegas is one of the few large metro areas with dual sources of electric power: Hoover Dam and California. This is a huge advantage for server farms, manufacturers and others who cannot afford to lose electrical power.
• Relatively low energy cost. For example, below is a comparison between the statewide energy cost in California vs. Nevada.

• No state income tax.
• Nevada’s proximity to California is important for companies looking for new locations.
• Nevada is a Right to Work state, along with 27 other states. For information on the benefits to employers, see this Wikipedia page.
• Nevada is a business-friendly environment.

While Las Vegas is a desirable location for business expansion, what will drive large expansions? The reduced tax on repatriating funds that have been sitting in offshore accounts for years. Apple just made a $38B tax payment in order to repatriate their cash held overseas. Apple also announced plans to add 20,000 US jobs. Apple is only one of many companies who hold money overseas due to high US taxes (35%). With the 2018 tax changes, I believe more will follow Apple’s lead. Below is a list of the top 10 US companies that have funds stashed overseas.

The above are the biggest but only a small subset of the total number of US companies with overseas deposits. One article I read placed the total dollars sitting in offshore accounts at $3.1T!

If you suddenly inject close to $1T into the US economy and it is done efficiently (not by the government) this will have a huge impact on US growth. Companies will be looking to expand in the US and will be looking for new US locations. Las Vegas has enough advantages that a percentage of the expansions will be in Las Vegas, which will bring more people to the city, who will all need places to live.

Summary

Las Vegas continues to be an outstanding place to invest. However, good properties are difficult to find using traditional methods. As to the foreseeable future, if just a few of the opportunities I described above occur, Las Vegas should continue to expand for the foreseeable future.

Hello All,

As several people in the thread pointed out, this is not “2012”. However, it is not “2012” anywhere. The days of 10% real (not paper) return is past. I believe we are in a market stage where it is time to buy class A properties in areas that are very likely to perform well for the foreseeable future. I believe that Las Vegas is a great investment location today and will remain so for the foreseeable future.

Below is a short FAQ on Las Vegas investments.

• How much do class A properties cost today? Between $240,000 and $310,000.
• With 25% down, 30 year fixed, you can expect between 2% to 4% real return (including management, taxes, insurance, etc.).
• How common are good investment properties? About 1/2000.
• Typical time & cost to evict a non paying tenant: <30 days and $500. We have only had 3 evictions in 3 class As in the last 10 years. With class C, a lot.

Below are charts showing median $/SqFt sales and rental rate trends for the properties that we monitor. (Click on the images to see full sized.)

Another interesting chart compares current Las Vegas prices to 2007 peak prices:

This is an interesting article: Nevada home prices furthest from pre-recession peaks, report says

In short, rents and prices are rising and Las Vegas prices still have the furtherest to climb of any major metro area. Current prices are still only at about 70% of peak prices.

Now that you have a (very) brief view of the Las Vegas market as it is today. What do I see happening in the future? Below is a summary of our 2018 Investor Outlook. If you want to read the full report, see my Biggerpockets’ profile for the link to our 2018 Investor Outlook.

Demand

Rent and property prices are driven by demand. Low demand, prices go down. High demand, prices go up. Below are some of the factors that I believe will continue to drive demand in Las Vegas.

Population growth

Las Vegas’ population grew by 2.2% in 2017. This is a healthy and sustainable growth rate. Nevada ranked 3rd in Atlas Van Lines annual migration report in terms of most popular states to move into. See the graph below. The numbers show what percentage of moves are inbound vs. outbound from the state. Greater than 50% indicates more people moved into the state than out of the state.

Below is a 2015 graphic (I was not able to find a more recent similar graphic) showing the top states from which people are moving to Las Vegas.

The numbers shown above may seem small, but the total population of Las Vegas is approximately 2.3M so the number of people moving in has a big impact. Also, Las Vegas is about 80% of the population of Nevada. As a side note, only about 11% of land is in private hands, the rest is federal land. More on this later.

Major Projects

Below are some of the top projects currently under construction in Las Vegas. These projects alone will drive up sales and rental prices. Each project will require a large number of people, who will require housing. But this is just the tip of the iceberg.

• Resorts World Las Vegas - $7.2B
• Drew Las Vegas (formally the Fontainebleau) - $3B
• Raider’s Stadium - $2B
• Wynn Resorts - $1.9B

Significant Potential Sources Of Growth

California Retirees

Of the 6M retired people in California, an unknown percentage will choose (or be forced) to leave the state. If 0.25% of the 6M people decide to buy a home in Las Vegas, you are looking at approximately 15,000 incremental home purchases or rentals. To put this in perspective, the total number of single-family homes sold in Las Vegas in 2017 was 34,659. If an additional 15,000 people chose to relocate to Las Vegas, rents and property prices will rise significantly.

Corporate Expansion

The 2018 Tax Law will encourage US corporations to expand operations within the US as opposed to overseas. Some factors that make Las Vegas a desirable location.

• As the world becomes more dependent on high speed information access, direct access to major fiber optic bundles becomes critical. The fiber optic lines connecting the West and East coast run under Las Vegas Blvd. The combination of easy access to this major information artery plus low energy costs make Las Vegas a very attractive location for energy intensive businesses such as cloud services. Switch, one of the world’s largest internet switchers and server facilities is located in Las Vegas. Among Switch’s clients are Amazon, eBay, JP Morgan and many others. Other information providers are likely to take advantage of the unique location and low operating costs that Las Vegas offers.
• No state income tax. This is a huge incentive to locate operations in tax free states like Nevada, Alaska, Florida, South Dakota, Texas, Washington and Wyoming. Plus, Nevada has a constitutional requirement that all tax increases must be approved by a legislative “super-majority”.
• Nevada’s proximity to California is important for companies looking for new locations.
• Nevada is a business-friendly environment. For example, there is no such thing as rent control and evictions typically take less than 30 days and cost less then $500. Tenants know this so we actually experience very few evictions compared to locations where it is hard to evict.
• Right to work state - Right to Work laws enable employees to decide for themselves whether or not to join or financially support a union. Whether you personally support unionization or not, businesses want the maximum ability to generate profit. I believe that companies selecting new locations for people-intensive businesses will seek “right to work” states as Boeing and other companies already have. Currently, 28 states have enacted “right to work” legislation, including Nevada. California is not a right to work state.
• Las Vegas is one of the few large metro areas with dual sources of electric power: Hoover Dam and California. This is a huge advantage for server farms, manufacturers and others who cannot afford to lose electrical power.
• Relatively low energy cost. For example, below is a comparison between the statewide energy cost in California vs. Nevada.

The above is not a comprehensive list but it will give you an idea of what will drive Las Vegas’ growth in the foreseeable future.

Limited Supply

Las Vegas is running out of land for expansion. Las Vegas is an island surrounded by federal land. See the map below. The areas in red are federal land.

Most of the desirable land in the Las Vegas valley is already built out. See the gif below showing growth between 1984 and 2016. Also, 2017 was a great year for growth in Las Vegas so there is significantly less land than shown in the gif below.

What this means to investors:

• Unlike cities with no limit to expansion, Las Vegas’ only long term growth path is redevelopment. What this means is that class A properties are very likely to remain class A.
• With people and businesses moving to Las Vegas and needing places to live, prices and rents will increase.
• As the full impact of the tax law changes on blue states comes into effect, we expect many more people to move to Las Vegas. Many/most people in Southern California like to spend time in Las Vegas. So, if they are forced to leave California, Las Vegas is not only the closest major city, it’s a place they already know.

Summary

With limited supply and projected sustainable long term growth, Las Vegas real estate prices and rents will increase. Like stocks, you buy quality and let market forces increase your equity and return. And, since your major cost (debt service) is fixed, the longer you hold them the higher your return.

Hello @Tom J. and others on this thread, 

Good points all. My $0.02’s.

Today and the Forceable Future

ROI, cash flow and other such metrics are snapshot's in time. They only predict how the property is likely to perform today, not how it will perform over time. Especially in the down times, with typical hold times in the 10 to 20 year range, you need to consider how the location is likely to perform over time. It took me a good bit of time to develop a criteria for evaluating whether a location/property will continue to perform over time. Below are the three criteria I feel every property must meet.

• 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 business risks are low. Key factors include state income tax, property tax, insurance cost and landlord favorable regulations. Regulations include property related laws like the time and cost of evictions, rent control, code compliance requirements, etc.

I created a graphic that illustrates the process I would follow for selecting a location/property that meet the above criteria. (click image below for full size.)

I would evaluate each location on at least the following factors:

• Job Quantity and Quality - Rental properties are no better than the jobs around them. Declining job quality or quantity results in declining property prices and rent.
• Business Risk - Investing, like everything else, involves risk. You want to select locations with the lowest business risk. Some risks can only be avoided by not buying in that location.
• Cost of doing business - Your net is what matters, not your gross.
• Population Trend - Population stability is critical.
• Urban Sprawl - Since investment properties are held for long periods of time, understanding the potential impact of urban sprawl is critical.
• Maintenance Cost - It’s not how much money you make, its how much money you keep. Maintenance costs have a huge impact on profitability.

I will expand on each of the five factors below.

Job Quantity and Quality

As I stated, rental properties are no better than the jobs around them. If your tenants do not have jobs, they are not paying rent. Also, if their income is decreasing over time, your rents will decrease. Before you choose a location you need to take a dispassionate look at each location under consideration in terms of present and future desirability to businesses.

I would start by looking at the major employers in the immediate area where you are considering investing. Do the companies look like they will continue to grow over the next 10 to 20 years? Few will so you need to consider whether the location will attract national corporations to set up new operations in that location to replace the current businesses that did out. How can you determine if an area is likely to attract new businesses? I believe that when senior management is looking for a new location they will reject cities that:

• Unsafe - Are ranked among the top 100 most dangerous places to live in the US. A business will need to relocate a core team to the new location and most people will not consider living in what is perceived as a dangerous location.
• Reduced Control - Businesses compete on a world wide scale so they need maximum control of their businesses so I believe they are far more likely to select locations in states with Right to Work Laws. So far, 28 states have implemented right to work laws. According to multiple studies I have read, all right to work states experienced significantly higher business growth than states without right to work laws.
• High Taxes and Regulations. I think it is unlikely corporations will open new facilities in high taxes and high regulations states. Why would they choose a location where taxes and regulations will make them less competitive?

Business Risk

The most common business risk is eviction. For example, in California an eviction can take up to one year and cost thousands. In Las Vegas, evictions usually take less than 30 days and cost less than $500. However, just because you own investment properties in a tenant rights focused state like California does not necessarily mean a nightmare eviction will happen to you. You might own 50 properties in California and never have to evict anyone. I view eviction nightmares like I view getting cancer. The odds of your getting cancer are relatively small. But if you do get cancer it is devastating and “odds” mean nothing.

Cost Of Doing Business

There are three easy to determine factors that have a direct impact on profitability.

• State income taxes
• Property taxes
• 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 which is reasonable for comparison purposes. Landlord insurance is typically 10% to 20% more than home owner’s insurance.

The following table shows the effect of just property tax and insurance on cash flow for an “identical” property in three different locations.

[If you would like the details on the above table, drop me an email.]

Population Trend

Population stability is critical. Only buy properties in a location where the population 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 will 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.

Urban Sprawl

Since investment properties are held for long periods of time, understanding the potential impact of urban sprawl is critical.

In every major city I’ve seen there are areas which were once the best location to live and over time became 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 move to newer areas. As people with money move out of an area those left behind will, on average, have lower incomes. Property prices will then fall because the remaining residents have less disposable income and landlords will price their properties to keep them rented. As property prices fall, property tax revenues will fall. City services are largely dependent on property tax and sales tax revenue. 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 a property over time due to urban sprawl. The colors represent monthly rent. Green represents a high rent and red represents a low rent. The important factor here is understanding that property prices lead rental rates. Depending on the study, 2 to 10 years lag between property prices and rental rates is typical. So the rents you receive today may actually reflect property prices 5 or 7 years ago. A good barometer indicating this is happening is relatively high rents with low purchase prices.

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 developed. Another example is Las Vegas, which is completely surrounded by federal land and has built out almost all desirable land. See the animated map below. The green areas are federal land. Very soon, Las Vegas only growth path will be redevelopment. This virtually ensures that today’s class A properties remain A class properties into the foreseeable future.

To see how cities with no barriers to expansion are impacted by urban sprawl, click on the various cities below (you will need to zoom out). Think about investors who purchased properties in the suburbs in 1984 (the starting year of the time lapse aerial views) and where the suburbs are now. As an investor in such a city, you virtually have to chase the suburbs as they move further from the city center. If you don’t, you are likely to see your property’s market value and rent decline over time. With your overhead fixed (debt service), it can become a very difficult situation.

• Indianapolis, IN
• Cleveland
• Detroit, MI
• Memphis, TN
• New Orleans, LA
• Atlanta, GA

Maintenance Cost

It’s not how much money you make, its how much money you keep. Maintenance costs have a huge impact on profitability. When I owned properties in Houston, Atlanta and other places, I was always replacing roofs, siding, aging plumbing, faulty electrical systems and dealing with vegetation and termites. Below are some generalizations about locations and 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.

Summary

With hold times in the 10+ year range, you need to think of the location long term. It would be a nightmare to buy a property and watch rents and property value decline over time, while your major operating cost (debt service) is fixed.

Hello @Nathan Wiebe,

You brought up a great topic, but one without an easy answer. No one can tell you the best investment location. However, I can tell you the process I used for selecting my investment location.

The first step is having a clear definition of what you are seeking. I think Yogi Berra stated it best:

It took me a long time but I developed the three criteria that I feel every investment property must meet.

• 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 business risks are low. Key factors include state income tax, property tax, insurance cost and landlord favorable regulations. Regulations include property related laws like the time and cost of evictions, rent control, code compliance requirements, etc.

I created a graphic that illustrates the process I would follow (click on the image to see full size):

Potential Locations

The following is a reasonable set of location criteria to start with.

• Locations with a stable or growing population.
• Locations with a population of at least 1 million. You want a stable economic environment; small towns may be too dependent on a single company or commodity. Also, I would choose a place you would like to visit because (check with your accountant) trips to check on your properties may be 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 single family homes in San Francisco.
• Locations with a reasonable level of risk. There is no risk-free location. However, there are areas with much higher risk than others. What is an example of risk? The ability to evict non-paying tenants in a reasonable time and for a reasonable cost. If you don’t think this is important, watch the movie Pacific Heights. More about this later.
• Locations with reasonable landlord insurance and property taxes.

Location Validation

Now that you have a small number of candidate locations, we need a way to valid each location. Remember that there is no perfect location so use the following only as guidelines.

Short Term Factors

There are three easy to determine factors that have a direct impact on profitability.

• State income taxes
• Property taxes
• 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 which is reasonable for comparison purposes. Landlord insurance is typically 10% to 20% more than home owner’s insurance.

The following table shows the effect of just property tax and insurance on cash flow for an “identical” property in three different locations.

[If you would like the details on the above table, drop me an email.]

You should be able to quickly eliminate some of the locations using the above factors. Longer term factors are critical as well. Remember that ROI and cash flow are just a snapshot, how the property is likely to perform today. ROI and cash flow tell you nothing about how the property is likely to perform in the future. You will hold the property for a long time so what will happen in the foreseeable future has a greater impact than what is happening today.

Longer Term Factors

Longer term factors can slowly change a high performing asset into a financial nightmare. Below are the primary factors I would consider but each location might have others.

Investing, like everything else, involves risk. Some risks can be minimized by careful research before you buy. The most common business risk is eviction. For example, in California an eviction can take up to one year and cost thousands. In Las Vegas, evictions usually take less than 30 days and cost less than $500. However, just because you own investment properties in a tenant rights focused state like California does not necessarily mean a nightmare eviction will happen to you. You might own 50 properties in California and never have to evict anyone. I view eviction nightmares like I view getting cancer. The odds of your getting cancer are relatively small. But if you do get cancer it is devastating and “odds” mean nothing.

Population stability is critical. Only buy properties in a location where the population 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 will 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.

Since investment properties are held for long periods of time, understanding the potential impact of urban sprawl is critical.

In every major city I’ve seen there are areas which were once the best location to live and over time became 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 move to newer areas. As people with money move out of an area those left behind will, on average, have lower incomes. Property prices will then fall because the remaining residents have less disposable income and landlords will price their properties to keep them rented. As property prices fall, property tax revenues will fall. City services are largely dependent on property tax and sales tax revenue. 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 a property over time due to urban sprawl. The colors represent monthly rent. Green represents a high rent and red represents a low rent. The important factor here is understanding that property prices lead rental rates. Depending on the study, 2 to 10 years lag between property prices and rental rates is typical. So the rents you receive today may actually reflect property prices 5 or 7 years ago. A good barometer indicating this is happening is relatively high rents with low purchase prices.

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 developed. Another example is Las Vegas, which is completely surrounded by federal land and has built out almost all desirable land. See the animated map below. The green areas are federal land. Very soon, Las Vegas only growth path will be redevelopment. This virtually ensures that today’s class A properties remain A class properties into the foreseeable future.

To see how cities with no barriers to expansion are impacted by urban sprawl, click on the various cities below (you will need to zoom out). Think about investors who purchased properties in the suburbs in 1984 (the starting year of the time lapse aerial views) and where the suburbs are now. As an investor in such a city, you virtually have to chase the suburbs as they move further from the city center. If you don’t, you are likely to see your property’s market value and rent decline over time. With your overhead fixed (debt service), it can become a very difficult situation.

• Indianapolis, IN
• Cleveland
• Detroit, MI
• Memphis, TN
• New Orleans, LA
• Atlanta, GA

Rental properties are no better than the jobs around them. Declining job quality or quantity results in declining property prices and rent.

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. In such situations, declining rents and property prices are inevitable. One factor that can change this trend is new businesses relocating into the area. New businesses are critical because sooner or later, all the current businesses will fail or leave. If you doubt this, check out Detroit or most of the former manufacturing cities in the “Rust Belt”.

The 2018 Tax Act will result in companies bring manufacturing back to the US. However, only some cities will benefit. Which cities are more likely to get the new businesses? I believe that when senior management is looking for a new location they will reject cities that:

• Safety - Are ranked among the top 100 most dangerous places to live in the US. A business will need to relocate a core team to the new location and most people will not consider living in what is perceived as a dangerous location.
• Control - Businesses compete on a world wide scale so they need maximum control of their businesses so I believe they are far more likely to select locations in states with Right to Work Laws. So far, 28 states have implemented right to work laws. According to multiple studies I have read, all right to work states experienced significantly higher business growth than states without right to work laws.
• Taxes and regulations are a direct impact to a company’s bottom line. I think it is unlikely corporations will open new facilities in high taxes and high regulations states. Why would they choose a location where taxes and regulations will make them less competitive?

You need to take a dispassionate look at each location under consideration in terms of present and future desirability to new businesses. Will the location you are considering be among the top locations in the US where businesses will want to locate operations in the future? If not, look at another location.

Ongoing Maintenance

It’s not how much money you make, its how much money you keep. Maintenance costs have a huge impact on profitability. When I owned properties in Houston, Atlanta and other places, I was always replacing roofs, siding, aging plumbing, faulty electrical systems and dealing with vegetation and termites. Below are some generalizations about locations and 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.

Summary

Using the above criteria and considerations, I believe you will be able to narrow your focus to a small set of cities. Once you do, the next step will be determining the best tenant pool to target and determining whether you can profitably operate conforming rental properties today and into the forceable future.

Fortunately, real estate is very forgiving. As long as you buy properties in a good location, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases. I hope this post will increase your odds of selecting a good location.

Nathan, I wish you success.

Hello Ray,

There are not a lot of foreclosures on the market these days. The few that are, are not heavily discounted. If you are looking for distressed properties, check the auctions. These are relatively low cost but can be high risk and cash only purchases. 

Eric Fernwood

@Lane Kawaoka, @Alik Levin

Hello Lane & Alik,

You are correct that there is not enough margin for turnkey. However, there are still good properties to be found. Note that there are not many, about 1 in 2000 properties is a good investment. The days are gone when you could find these by cruising real estate sites. However, Las Vegas is poised to grow significantly for the next 2-3 years so a lot of our clients are getting in at this time. PM me if you would like specifics.

There are several posts concerning problems like leaks under the slab, replacing roofs, etc. Where you are most likely to have such problems is in older properties, which we do not buy. The very few we've purchased in the past (2009 and 2010) experienced such problems. Out of the current 150+ A class properties our clients own our experience is as follows:

• Major roof repairs - None. During the due diligence we have discovered damaged roofs on several properties but on all occasions, either the seller made the repairs before close of escrow or we walked from the property. A factor that greatly increases roof costs is composition or flat roofs. We do not buy properties that do not have tile roofs. We can't afford the high cost of maintenance of composition or flat roofs.

• Slab leaks - None. During the due diligence we have twice discovered slab leaks but on both occasions, the seller made the repairs or we would have walked from the property.

• AC Units - None. During the due diligence we have discovered defective AC units and on all occasions either the seller made the repairs or we walked from the property. We do not buy properties with questionable AC units.

• Water heaters - Two or 3 replacements. Replacement cost < $800.

The best way to avoid major repairs is to never buy properties that are likely to require major repairs. Some of the critical factors are the age of the property, type of plumbing, roof type and the property inspector. The inspector we use has performed over 200 inspections for us. And, at least one or two properties a year are found to have major defects and we terminate the purchase.

However, all properties will at some point need the kinds of repairs you mentioned. We do not purchase properties that are likely to need such repairs in the foreseeable future. For example, if we look at a property and it has Kytec plumbing we do not buy the property. We also know the areas where settlement is common, we do not buy in these areas.

Another way to keep your costs down is standardized components. For example, if you buy carpeting at Home Depot (et. al.) it is unlikely you will be able to buy the exact same carpet in the future. We use an office grade carpet. We've been using the same carpet for many years. This approach means we can just replace an entryway or a small section and not the entire house. The same is true with the paint and every thing else.

We do not buy properties that are in communities with a time-to-rent greater than 30 days. Usually not more than 20 days. Plus, you need the historical data on individual floor plans because you can have one floor plan that takes a long time to rent in a subdivision where the average time-to-rent is days. We have accumulated this type of historical data. Except for larger properties (>3,000 SqFt) our time-to-rent is typically less than 2 weeks.

To further lower your time-to-rent, add low cost enhancements like ceiling fans. And, always have high quality photos. Typical time for most people to take photographs is 15 minutes. It takes us 6 to 8 hours by the time we bring in lights and post process all the photos.

A critical element is the skill of the property manager. The property manager is an active part of the team that selects properties, they do not just collect the rent after we buy a property. We only buy properties that they know will rent well for an extended period and have low maintenance costs. For example, we know of a town house complex with potentially great returns and the time-to-rent is low, but the property is older and the maintenance costs are too high so we do not buy properties in the complex. The property manager we work with is also extremely good at screening prospective tenants. Most of the property managers I've met check credit and little more. Credit is a small part of the screening. You want tenants that take care of the property and have a proven record of staying for years. Unless you have such a skillful property manager and the right property, turn costs will kill you.

Turn costs - The best way to keep your turn cost down is to only have tenants who do not move frequently and take care of the property. Also, with the lease agreement our property manager uses, the tenant has to do a good job of cleaning the property before they vacate or the cost is deducted from their security deposit. This keeps our turn costs very low. Plus, to minimize the ongoing cost of repairs, the tenant is responsible for the first $50 of each call out. This eliminates a lot of the calls.

Rehab options - You determine what and how to rehab properties based on the target tenant. For example, if you have a property likely to attract middle aged empty nesters, then carpet will be fine even in high traffic areas. But, if the target is larger young families, then tile in some areas is the lowest cost option.

There is no single big thing you can do to keep your maintenance and vacancy costs low. It is an accumulation of things including:

• Do not buy properties likely to have problems

• You need an exceptional property inspector and property manager

• Your property manager must be an integral part of the property selection team. Only buy properties that will rent to your tenant pool and are unlikely to have significant problems.

• Standardized components

• The right leases

• Excellent screening by the property manager

• The right tenant pool

• Excellent photography

• Etc.

Low maintenance costs and low vacancy rates are not an afterthought. You must make these fundamental to your investment team and property selection.

I hope this answers some of the questions.

This is an outstanding thread with great comments and questions. I will try to address comments by:

• @Terry Lao  concerning vacancy and maintenance factor

• @Dan H. @Dan H.concerning including maintenance and vacancy

• @David Hodge on where we find properties.

Vacancy and Maintenance Factors

In the post where I specified the formulas we use, the key sentence was, "Note that we do not include a (arbitrary) constant for vacancy rate or maintenance when we compare properties." I will first explain mathematically why we do not include vacancy or maintenance factors in property comparisons. Below is the formula we use for comparing the cash flow of properties. The same will apply to ROI but the math is a little messer so I will just do cash flow:

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

Suppose I developed a universal constant for maintenance, which I will call M and a universal vacancy constant I will call V. I would then include them in the ROI formula as follows:

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

Simplifying further:

Cash Flow = (Income - Recurring Expenses - V - M) or

Cash Flow = (NOI - V - M)

Suppose I have two properties and the cash flow for each is CFa and CFb. When I compare the two properties the difference is CFa - CFb. Also, I will call the NOI for property A NOIa and the same for property B.

CFa - CFb = (NOIa - V - M) - (NIOb - V - M)

Or:

CFa - CFb = NOIa - V - M - NIOb + V + M = NOIa - NIOb

So, when the formulas are used to compare properties, adding or subtracting a constant for vacancy or maintenance makes no difference.

Universal Constants

There is a common belief that you can create a universal constant for vacancy rate, maintenance, rehab, etc. This is not true and I will explain why.

Can you provide a realistic annual maintenance cost that applies equally well to the two vehicles below:

One is a new economy car and the other is a wrecked Humvee. So even with something as simplistic (by comparison) as two vehicles, there is no way to use a single maintenance constant that applies equally well to both vehicles. The same is true with properties.

Universal constants for vacancy rate or maintenance are usually arrived at by averaging a population of properties. Where it all falls down is believing that the average of a population can be applied to an individual within that population. For example, suppose you have 10 "identical" properties. Let's look at two examples where the average maintenance per unit is $500. The rows are the unit numbers and the columns are annual maintenance costs per unit.

If you owned unit #6 in this example, you would not be happy with a $4,500/Yr. maintenance cost. This is another example where the population (10 units) average ($500/unit) does not equate to the individual unit cost.

Am I suggesting that you should not set aside reserve funds for maintenance or vacancy? No! You do need to have a reserve. I am only stating that you can't assume that there is a universal constant that approximates what you will experience.

Let's look at how I recommend handling maintenance. In Las Vegas, the most expensive (typical) repair item is an air conditioner compressor, costs about $2,500. I would set aside some amount each month until I reached $2,500. If I spent a portion of that on anther repair, I would rebuild the reserve.

A vacancy factor is sort of the same situation. If the time-to-rent of similar properties is < 2 weeks, I would likely build up a reserve for 1 months recurring costs (debt service + taxes + etc.).

If you owned 20 properties, would you want to build up a maintenance reserve of 20 x $2,500? The odds of all 20 units have an air conditioner failure in the same year is very small. Depending on my experience, I might want to have a reserve of $5,000. So, even the number of units you own impacts what maintenance reserve you would want to maintain. 

Estimated vs. Actual Return

Calculated ROI is not necessarily the return you will experience. Return is heavily impacted by your tax situation. Plus, you can have positive cash flow but a negative taxable income. The only way I know to estimate your actual return would be to create a spreadsheet that accurately represents your total income and tax situation. You could then add the property (deductible expenses, depreciation, etc.) to the model and the difference it creates to the bottom would be a good estimate of your actual return. Below is an example property which shows the impact of taxes on return.

Assumptions

Recurring Expenses (Mo)

Income (Mo)

Return at 220000 and 1300/Mo.

Return with Depreciation (Mo.)

My point is that taxes have a huge impact on effective return. 

Value of Estimated ROI

What estimated ROI can tell you is that one property is likely to do better than another. For example, suppose the estimated return for two properties are as follows: Property A: 4% and property B: 6%. Assuming all other things being equal, property B will generate a higher actual return than property A.

Summary on Maintenance and Vacancy Factors

There is no universal constant that can be applied to all properties. If you include a universal constant in comparison calculations, mathematically they cancel out. The required reserve will depend on property specific factors like the condition of the property, time-to-rent, etc.

Finding Good Properties in Las Vegas

David, finding good properties is not easy without the right tools. Today, only about 0.05% are good candidates to be investment properties. To put this in perspective about 1/2000 properties will we buy. The only way we can find such "needles in haystacks" is through the software we developed. My partner and I are both engineers. We approached finding properties like any other engineering problem to be solved. It took a few years to develop but we now have the software, processes and the team to consistently find good properties, rehab them and market them. A little more background.

About 80% of the properties we buy are located in the area marked in green below.

Note that this area changes over time due to the market slowly changing. Almost all are class A with only a few class B properties. We do not touch class C. Back in 2009 and 2010 we were able to get class C properties at very low prices but that is not the case now.

Even within the marked area we only consider a subset of the available properties. The general characteristics of properties we consider include:

• Single family

• Two+ garage

• Three+ bedrooms

• Room dimensions

• Distance from the Strip

• Two+ baths

• Within a minimum and maximum lot size

• Built after specific year

• Average time to rent below a specific number of days

• Association fees below a specific amount

• And many other factors

However, just meeting all the above does not make the properties investment candidates. There are a number of "filters" which will eliminate properties including:

• Known bad floor plans

• Subdivisions with rent restrictions

• Known undesirable subdivisions

• Properties with traffic or access issues

• Properties with excessive drive times

• Ratio of lot size to the home's footprint

• Tandem garages

• Close to nuisances

We also like a (very) few town home communities. These communities have performed extremely well.

Another factor to consider is that good investment properties only stay on the market for a few days so there is not a lot of time to manually sort through them. Like every other market, software and data is king.

David, you mentioned 5% vacancy, 5% repairs and 10% capex. We would never recommend any property with such poor characteristics. First, vacancy rates. Except for larger (+3,000SqFt) properties, about two weeks is the max time-to-rent. Typical tenant stay, 5+ years. Repairs, we did a study of about 60 properties a few years ago and came up with about $475/Yr average. As stated previously, averages simply do not apply to individuals. Capex, do not see 10%. Below is typical construction.

Not a lot to maintain so maintenance costs are very low here compared to properties I owned in Houston and Atlanta.

All the above said, if I had to provide a vacancy rate provision for the A class properties we deal with, it would be between 1.6% and 2%. For combined maintenance and capex, between 2% and 3%. Maintenance is so low here due to the dry climate, the construction and that we deal with newer properties. In Houston, my vacancy rate was about 8% and maintenance was over 11%. On C class properties, between 11% and 13% vacancy. Maintenance, above 15%.

Hello @Jody Newman,

I do not agree with your statement on "no cash flow". Perhaps if you could share the data that is the basis of your statement I could better understand. All of our clients properties are generating good cash flow, none are just breaking even. If you are stating that good cash flow properties are hard to find, I would agree with you. But good properties are always scarce.

Before I give specifics why I do not agree, it is important that we have the same definition of cash flow and ROI. 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 and include all recurring costs. Note that we do not include a (arbitrary) 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, like depreciation, which generally increases 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 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.

Based on the above formulas, we are seeing between 3% and 4% ROI with 20% down, 4.75% interest rate, 30 year fixed financing. In cash purchases, 5% to 6% are typical. Cash flow is of course dependent on the property but we are not getting any complaints from our clients.

The reality is good cash flow and good appreciation so I see a very different story than what you expressed. Another factor to consider is that Las Vegas has a growing economy, increasing population (2% to 3% annually), increasing per-capita income, more jobs now than before the crash with ~50,000 less construction jobs, affordable class A properties, pro business legislation, no state income tax, more companies and individuals moving from California and very little remaining buildable land. To me, these are all indicators that Las Vegas is very likely to continue to do well in the future.

This is an excellent thread with a lot of great points and I wanted to add a few of my own. Before I continue know that I am a Las Vegas Realtor and our team only sells investment real estate. Also, we are engineers and thus our approach to things is usually a bit different than most.

Before I start I want to explain my view on investment real estate. I believe that every investment property must meet three criteria:

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.

• Likely to appreciate over time - You would never buy a property just for appreciation but appreciation is very desirable. Especially when using a 1031 Exchange to reinvest equity or adapting to market changes.

• Located in an area where you can make money and business 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.

Notice that nothing in the previous criteria indicates any specific type of property. What drives the property type, location, configuration and rental price range is the target tenant pool. I do not recommend selecting a property and hoping you get good tenants. See the image below for the process I recommend (double click the image for full size).

The critical success factor is the right tenant. Without good tenants, you are not going to maximize your investment dollar. I define a good tenant as someone who:

• Is employed by a company or industry that is stable or growing and highly likely to continue to be so into the foreseeable future. A property is no better than the jobs of your tenant pool.

• 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

Now that you know my view of investment properties and tenants, I will comment on the following topics in the remainder of this post:

• Las Vegas investment characteristics

• Multi-family concerns

• Condo concerns

• What we recommend for Las Vegas

Las Vegas Investment Characteristics

Below are just a few of the reasons why I believe Las Vegas is one of the best investment locations in the country. Remember, that it is not how much money you make, it's how much money you get to keep. You get to keep more of the money you make in Las Vegas due to the following and other factors.

• Investor friendly - The time to evict is usually less than 28 days and costs less than $500. This "guaranteed eviction reality" changes tenant behavior. A California client made the following observation to me based on his experience in the California investment market. "In California, tenants pay bills in the following order: car, credit cards and if they have money left over, the rent. Tenants know that it can take months and thousands of dollars to evict them. In Las Vegas, tenants pay bills in the following order: car, rent and if they have money left over, credit cards." This behavior modification is the result of the virtual guarantee that if they do not pay the rent, they will be out on the street in less than 28 days. Period, no excuse works. Consequently, I believe we have much fewer evictions than in locations where the laws favor the tenant. Note that nightmare evictions are rare but I view nightmare evictions like I view cancer. The odds of your getting cancer are relatively small but if you do get cancer, it is devastating and "odds" mean nothing.

• Low Property taxes - A friend in Austin, TX is paying 2.5% property taxes. Here the average is about 0.55%. Property taxes are a direct hit on your bottom line.

• Low Insurance cost - landlord insurance in Austin is close to $2,000/Yr for a typical 2,000SqFt single family home ($350,000+) vs. about $450/Yr. for a typical 2,000 single family home (<$250,000). This is another direct hit on the bottom line.

• There is no such thing as rent control in Nevada.

• Limited or no urban sprawl. Urban sprawl is a major factor to consider. In every major city I've seen there are areas that were once the best places to live and over time have become distressed areas. The major cause of such declines 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 higher income move out of an area, 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 map of the Las Vegas valley and here is a aerial time lapse view. As you can see, the Las Vegas valley is almost entirely built out. Las Vegas' only growth path is redevelopment. This means that A class properties are very likely to stay as A class properties in the long term simply because there is no place else to develop.

• Effects of urban sprawl in cities with no limitations to expansion - Click on the various cities below and see the effects of urban sprawl where there are no limits to expansion. (Note that you will likely have to zoom out to see the sprawl.) Think about investors who purchased properties in the suburbs in 1984 (the starting year of the time lapse aerial views) and where the suburbs are now. As an investor, you virtually have to chase the suburbs as they move further from the city center.

• Indianapolis, IN
• Detroit, MI
• Memphis, TN
• New Orleans, LA
• Atlanta, GA

• Las Vegas property prices are still well below peak 2008 prices. See Current price vs. the price before the crash. Depending on which study you believe, current prices are still 20% to 30% below pre-crash peak prices.

• Resale prices are still below replacement cost.

• In 2016, Nevada surpassed pre-recession employment with 70,000 fewer construction jobs. Note: Las Vegas metro area is about 80% of the total state population.

Before I get into the next two topics, remember that we are Realtors. We are property type agnostic. We make just as much money selling condos, multi-family, single family, town houses. etc. We have no preference other than we want repeat business and that means our clients make money today and in the future. Note that our clients buy long term, tax advantaged, inflation friendly income streams. They do not care if they buy multi-family, condos, single family, etc.

Multi-Family Concerns

Note that the following concerns only apply to Las Vegas. I've owned 4-plexes in other cities in the past and they were A class properties and suffered none of the problems I will describe below.

Cash based tenant pool - 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 live cash based lives and have no "financial history". About the only screening you have with cash based applicants is whether they can show two months rent and have a heart beat. Because of this lack of a "financial history" there is very limited ability to screen out bad actors. Few have a habit of paying bills on schedule. And, if they do, you will likely be receiving payment through the local 7-11 type convenience store, which significantly eats into your income. And, with a significant percentage, you will have to knock on the door and ask for the rent. Property managers that have to send people out to collect the rent charge more, another hit on your income. Lastly, skips, evictions, property damage, financial judgments, etc. mean little to cash based tenants because such events are almost invisible to future landlords.

A few years ago I did a study on length of tenant stays in 4-plexes. The population was only about 60 units. What I did was to determine how many times 4-plex units came back on the market. Leases here are for 1 year so if the tenants stayed on average the full year, you would expect that the worse case would be about four turns per year per 4-plex. What I found was closer to 6 turns per 4-plex. This is a very expensive turn rate.

Other problems I have with 4-plexes in Las Vegas:

• Cash based tenants tend to have relatively few possessions so they can "load and go", nothing is anchoring them to the unit. Remember that every tenant turn is expensive both in rehab cost and loss of rent due to vacancies. The property manager we work with estimates that a typical tenant turn in a 4-plex will cost about $1,500.

• During the 2008 crash, hourly (cash based) workers were the first to be let go and the last to be rehired. This is the tenant pool for low end multi-family properties.

• Property age - Below is a graph showing number of 4-plexes built by year (double click the image for full size). As you can see, they are all older. At about 30+ years, the sewer pipe from the property to the street needs to be replaced. The cost depends on the distance from the property to the sewer main. I've only had two replaced for single family homes and one cost $4,500 and the other cost $8,500. We are looking at replacing a sewer line on a 20 unit apartment building and the estimated cost will be between $20,000 and $40,000. Do not ignore this potential expense with older properties!

• Crime - All the multi-family properties I know of are in high crime areas. High crime and long term profitability are incompatible.

• Ownership - Such properties are exclusively owned by investors. In my experience, investors do not sell performing assets. Every time I've investigated such proprieties I've discovered that the property was losing money, usually due to deferred maintenance or tenant issues. When you are doing your due-diligence on such a property, start with the position that the property is losing money. You job is to discover why and determine whether you can turn it around.

• Each unit has a full set of appliances and systems, just like a single family home. The difference is that a 4-plex has 4 times as many such appliances and systems as a single family property.

• In most cases, there is an association fee for the 4-plex. These typically range between $350/Mo. to $650/Mo. per 4-plex. It is very important that you find out precisely what this covers. Some may cover only the parking lot and common facilities. Others may also cover the exterior and the roof. You need to have a very clear understanding of what you are paying for. And, do not believe what you are told. Walk the property and talk to existing tenants. Find out what is really happening.

Condo Concerns

My concerns with condos are long term profitability:

• Condos compete head-on with apartments. A large number of new mega-apartment complexes are being built around the metro area and they are offering significant incentives/discounts to acquire tenants. Also, they may offer discounts on rent, welcome large dogs, have multiple pools, extensive exercise facilities, etc. It is difficult for older condos to compete with these new apartment complexes.

• The tenant pool for condos are usually singles or couples without children. They tend to be mobile and move regularly. Every tenant turn is expensive in terms of rehab and loss of income.

• Most condos cannot be financed. While this may not seem important if you are buying with cash, it is likely to have a large impact to you when you decide to sell in the future. Since condos cannot be financed the only future buyers are likely to be investors.

• High condo HOA fees tend to make profitability difficult.

• Condos have the advantage of the association maintaining the exterior of the property. While this seems like a huge advantage, typical residential construction consists of tile roofs, stucco siding, concrete block fences, metal doors and windows, slab foundations and desert landscaping (rock), which do not require much maintenance. More about this later.

• The systems (HVAC, plumbing, electrical, appliances, etc.) in condos are pretty much the same as in a single family home so maintenance costs are not significantly different.

What We Recommend

We recommend select class A single family homes and select class A town home properties. These properties performed well over the years both in terms of appreciation and increasing rent. Below is a chart from a paper we did in 2016 showing the 5-year rental trend for conforming properties (double click the image for full size).

Single Family

Select single family homes in specific locations. General comments on single family homes:

• Single family properties appeal primarily to families with children. Families want to provide a stable environment for their children so they tend to stay in place for multiple years. Our average class A tenant stay is between 3 and 5 years.

• Single family homes do not compete with condos or apartments so the presence of the new mega apartments is not a factor.

• People in single family homes have a lot of stuff. Moving a large amount of stuff is expensive and time consuming. This is a barrier to them moving resulting in longer tenant stays.

• When it comes time to sell a single family residence, you have two buyer pools: homeowners and investors.

• Historically, single family homes have appreciated faster than other types of properties.

• Due to the desert climate residential construction consists of tile roofs, stucco siding, slab foundations, metal windows and doors and desert landscaping (rock) which require little maintenance. See the image below for typical single family home construction. Not a lot of maintenance to do on such properties.

Town Homes

I get frequent questions on the difference between condos and town homes. With condos, you have exclusive use of the air gap within the walls of your unit and an undivided share of all buildings, grounds, etc. With town homes, you own the physical structure and the land upon which it sits. This is called fee-simple, just like a single family home. In other parts of the country where I've lived, Las Vegas town homes would be called patio homes or attached homes.

Out of the ~100 town home complexes in Las Vegas, we only like a very small number. General comments on town homes:

• Town homes tend to have a small yard. This is a big differentiator from apartments or condos.

• Town homes have one or more garages, a big differentiator from most condos and apartments.

• Town homes tend to have significantly lower HOA fees than most condos but higher than single family homes.

• Most townhome complexes tend to have a community pool, like apartments and condos.

• Townhomes can be financed, just like single family homes.

• When it comes time to sell a townhome, you have two buyer pools: homeowners and investors.

Summary

This post turned out much longer than I originally expected. But, I hope it will provide food for thought when you are considering investing. Feel free to ask questions and I will do my best to respond promptly.