All Forum Posts by: Eric Fernwood

Hello Seth,

Buying properties through your self directed IRA is not too dissimilar from buying properties outside of an IRA. Below are some of the major points to be considered:

• There are very few restrictions as to the type of real estate as long as it is an investment property.
• Properties purchased through your IRA can be financed. The loan must be a "non-recourse loan". Search "ira non recourse loan" and you will find several.
• You can use 1031 Exchanges with properties held in the IRA.
• You can put properties in a LLC within in your IRA for protection.
• You do not hold title directly; a custodial service holds title for you.
• The custodian will be the entity signing the closing documents.
• All actions must be at arms length. This means:
  
  • You must use a property manager; you cannot manage the property yourself.
  • You may not personally do work on the property; a third party has to do it and the invoices paid by the custodian or the property manager.
  • You may not mix personal and IRA funds or the entire transaction may become an "early withdrawal" from your IRA and taxed as such.
  • You must report the market value to the custodian each year.

Rental income flows into your IRA, which you can utilize according to applicable IRA rules. The paperwork is not that different from normally held real estate and the only taxable event would be if you financed the property and then sold it at a profit. The financed portion of the gain would be subject to what is called the Unrelated Business Income Tax or UBIT.

Unrelated Business Income Tax (UBIT)

In most cases, people hold investment properties in their IRA for the income stream, not for flipping, so the UBIT is not typically a factor. However, should you choose to sell a financed investment property, there is a tax due on the financed portion of the gain. For example, suppose you decided to sell a property that was 60% leveraged and after deducting the cost of sales and other expenses you had a UBIT taxable gain of $20,000 and your marginal tax rate at the time of sale is 20%. The tax on the gain would be:

UBIT = $20,000 x 60% x 20% or $2400

Remember that UBIT only applies to financed properties that are sold. Note that if the loan is paid off 12 months prior to the sale, there is on tax since you only pay tax on the leveraged portion of the gain. Also, if you have paid down the loan to the point where you will have to start paying a meaningful amount of UBIT tax, it may be better to consider a 1031 Exchange.

Seth, I hope this helps.

@Mike D'Arrigo

Hello Mike,

You made a very broad statement, "They have a high unemployment rate and vacancy rates are high."

High unemployment - According to the local newspaper, the current unemployment rate is is 6.6%. This is a metro area average. What numbers like this do not show is unemployment by income. What I heard on the radio is that the lower income workers form the largest portion of the unemployed. These are not the people likely to rent class A properties, they are not our tenant base.

On high vacancy rates, did you mean apartments, condos, single family homes, ...? In fact, in the last three years we have had one Class A property take longer than two weeks to rent.

Please provide your data sources. The sources I have do not seem to align with your statement.

A lot of good comments and thoughts on this thread. I thought I would add my opinion which may only be true for Las Vegas.

Rental property stability during times of financial turbulence is dependent on the stability of jobs for the pool of tenants. If the pool of tenants for a given property remain employed at a similar income, they will scale back discretionary purchases but have to live somewhere so they will continue to pay the rent. This is especially true in the case of single family homes which are usually occupied by families with children. And, if families lose their home in foreclosure they will likely chose to rent a home similar to what they had.

We did a study on how Las Vegas rental performed during the period from 2008 through 2014. Below are our findings.

Methodology
One of the challenges we have with most reporting sources is that they use metro averages which combine different types of properties (single-family, condos, multi-family) in very different price ranges and different areas. In order to avoid such practices, we based our investigation on a specific area (see the map below) with a specific configuration: 3 bedrooms 2 car garage, 1,200 to 1,500 SqFt.

Property Prices
Below is a chart showing the monthly average $/SqFt sale price between 2008 and 2014 by month for conforming properties. As you can see, properties were selling for an average price of approximately $120/SqFt at the beginning of 2008 and by 2012 the average price fell to approximately $70/SqFt. The falling prices were largely due to a large surplus of homes coming on the market due to foreclosures and that people did not have the desire or income to buy them. During the early part of the 2008 to 2014 period over 4,000 foreclosures per month was not uncommon.

Rental Rates
With so many properties coming onto the market we expected that rental rates would also fall along with property prices. In short, they didn’t. Below is a chart showing $/SqFt rental rates during this period. As the graph shows, rental rates were virtually unaffected by the market crash. 

What this meant to investors was that if property was generating an 8% return in before 2008, it would still be generating an 8% return in 2012 even though the market value of the property went down by over 40%.

Class C Properties
We did not do the research on class C properties but based on the vacancy rates during this period, class C properties did not fare as well. We believe that many of the class C properties were occupied by construction related workers. Construction was one of the hardest hit segments of the Las Vegas during the crash.

Additional Thoughts
As several people in this thread stated, you can not prevent crashes. Crashes are going to happen. Hopefully the next one will not be as severe but they will happen. I believe that the best way to protect yourself is to buy properties with a tenant population that is less likely to be crushed. This is why our clients were relatively unhurt during this period. Of course, they would have lost a great deal of money if they choose to sell during this period but few people willing choose to sell a performing asset. Today, property values are approaching pre-crash levels and rents are increasing.

Summary
Rental price stability is totally dependent on the jobs the tenants have. If their jobs go away, you are going to lose a lot of money. So, when you are considering a property, consider how the tenant population for the property were affected during the previous crashes. The events of the past will not necessarily be repeated in the future but are the best indicator of what might happen.

Hello @Kellan Martz,

There are a lot of discussions on Biggerpockets about where to invest. I am a Realtor in Las Vegas and most of my clients live in other states or countries and one of the first questions I get is, “Why should I invest in Las Vegas?” My response is,“What are your goals?” It is important for me to know what they are seeking because Las Vegas will not meet everyone’s goals. In this post I will discuss where I think Las Vegas is strong and where I think it is not as strong. Note that I will focus on single family properties, the multi-family market is quite different.

I believe that every property/location you consider must meet three criteria:
• Sustained profitability - The property must generate a positive cashflow 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.

When you research a market, the key decision factors can be subdivided into short term and long term (10+ years). Short term factors predict how the property is likely to perform today but tell you nothing about how the property is likely to perform over the next 10+ years. And, while how the property performs today is important, how it will perform over the long term is more important.

Short term factors:
• Price range
• Real return
• Rehab cost

Long term factors:
• Population trends
• Job quality and quantity trends
• Regulations
• Ongoing maintenance costs
• Probable appreciation

In the following sections I will briefly discuss each of these factors.

Price Range
The following is my opinion of the price ranges in Las Vegas. These prices are not fixed, we occasionally find class A properties for $175,000 but that is unusual. 

• Class A properties: generally from $180,000 to $230,000 
• Class B properties: generally from $120,000 to $180,000 
• Class C properties: generally from $50,000 to $120,000

I understand that there are other parts of the country with much lower purchase prices but what you have to consider is how it will perform in the long term.

Real Return
When you estimate return you need to include all the major recurring cost elements. In most locations, the major recurring cost elements include: 

• Purchase Price 
• Property taxes 
• Landlord insurance 
• Management fees 
• Periodic fees (association fees, assessments, etc.)

The impact of property taxes and landlord insurance are best compared with an example showing comparative returns. The formula we use for return is:

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

So you can see the difference landlord insurance and property taxes can make I put together the following example.

Suppose you found the exact same property, in three different cities, renting for the same amount, in the same condition with the same financing terms. (Yes, this is impossible.) The specifics of the example property are below.

• Purchase price: $150,000
• Rent: $1,000/Mo. or $12,000/Yr.
• Financing: 20% down, 4.5% interest, 30 year term. Resulting debt service is $608/Mo. or $7,296/Yr.
• Down Amount: $30,000
• Periodic fees: $0 (for simplicity)
• Management fee: 8% or $12,000/Yr. x 8% = $960/Yr.
• Rehab cost: $0 (for simplicity)

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

Calculating ROI for each of the three cities:

Austin: ROI = (($12,000 - $7,296 - $960 - $1,625 - 1.9% x $150,000 - $0) x (1 - 0%))/($30,000 + $0 + $0) = -2.4%

Indianapolis: ROI = (($12,000 - $7,296 - $960 - $802 - 1.07% x $150,000 - $0) x (1 - 3.4%))/($30,000 + $0 + $0) = 4.3%

Las Vegas: ROI = ($12,000 - $7,296 - $960 - $710 - 1.07% x $150,000 - $0)/($30,000 + $0 + $0) x (1 - 0%) = 5.8%

As you can see, the major cost factors can have a significant impact or return.

Rehab Cost
There is no "standard" rehab cost, anywhere. For example, in a recent article titled "What It's Actually Like To Buy A $500 House In Detroit", the author estimated that rehab costs in Detroit average $75–$100 per square foot, and that's just for bare-bones repairs, it doesn't include anything structural like a roof or foundation. So, for a 1,000SqFt house you would spend $75,000-$100,000 in rehab. An investor I spoke with who was purchasing rental properties in Indianapolis told me that his average rehab was between $20,000 and $30,000 on $60,000 properties. So, you can see that there is no "standard" rehab cost.

In Las Vegas, our typical rehab cost for a class A property is between $4,000 and $5,000. That said, we recently rehabbed an excellent property in Summerlin (one of the best areas in Las Vegas) with tile floors, paint and some landscaping and the total was approximately $9,000.

Population Trends
If people are moving out of the area, housing prices and rental rates are likely to fall due to decreasing demand. If people are moving into an area, then there is likely to be appreciation and rising rents due to increased demand. Demographics changes can also effect property values and rents. I recently read an article where a metro area was experiencing an out-migration of traditional residents while at the same time they were experiencing an in-migration of immigrants moving into the area. In this case, while the population totals are stable the demographics are drastically changing. The people moving out of the area tended to have significantly higher incomes than the people moving in. In this case rents and property prices will likely fall over time.

Another factor to consider is urban sprawl. In every major city I've seen, there are areas which were once the best and have now fallen to being areas you would not want to be in after dark. One major cause of urban sprawl is that people want newer floor plans and newer homes. If they have the income they will move to areas where they can buy such properties. 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. As property prices fall, property tax revenues will fall. City services are largely dependent on property tax and sales tax revenues and as these fall, cities have no choice but to cut services. This starts a downward trend from which few locations have recovered. There are exceptions, but not many. Urban sprawl is harder to detect than area population trends because while it can have a huge impact on a specific area the city's overall population may be stable.

This is a big advantage of Las Vegas. Las Vegas is as land locked as San Francisco. Las Vegas is surrounded by federal land and has very limited ability to expand. In fact, only about 11% of the entire state of Nevada is in private hands. Landlocked cities like San Francisco, Manhattan and Las Vegas have little urban sprawl risk.

Las Vegas population trends: depending on which study you choose to believe, Las Vegas' population is projected to increase by 1% to 2% per year for the foreseeable future. When you combine a growing population with no expansion room I feel that appreciation and rent increases are almost inevitable.

Job Quantity and Quality
The value of a property is no better than the jobs around it. In many parts of the US, manufacturing and similar jobs are going away 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 over the past few years. If you see an adjusted declining per capita income you need to carefully consider the long term value of the investment.

Inflation adjusted income in Las Vegas have been slowly increasing (except during the 2008 to 2011 crash) and projections are that the increases will continue according to a Federal Reserve Bank study.

Regulations
State/county/city legislation can make an otherwise great investment a financial disaster. One of the easiest barometers is the time and cost to evict a non-paying tenant. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict and cost thousands. In some cold climates you cannot evict non-paying tenants in the winter. In comparison, in Las Vegas the time to evict is typically less than 30 days and usually costs less than $500.

Ongoing Maintenance
Maintenance costs can have a major impact on profitability. Here are some generalizations about ongoing maintenance costs:
• Older properties require more maintenance than newer properties.
• Composition roofs require more maintenance than tile roofs
• Properties in climates with hard freezes require more maintenance than properties in milder climates.
• Properties in locations with a lot of moisture require more maintenance than properties in dryer climates.
• Wood siding requires more maintenance than aluminum or stucco siding.
• Properties with lush vegetation require more maintenance than properties with little or no vegetation.

When you look at the maintenance elements in a residential property you can generally divide the elements into two groups: systems and the structure.
• Systems include HVAC, water heater, plumbing and wiring. In general, the ongoing maintenance costs of all these components are more dependent on age than location. A water heater in Las Vegas will last just about as long as a water heater in Atlanta.
• Structure includes the foundation, the walls, the windows and the roof. In Las Vegas, the foundation is a pre-stressed concrete slab. I have never experienced a problem with a foundation in Las Vegas. The exterior walls are stucco and rarely need maintenance due to the dry climate. Wooden fences are rare; fences are normally concrete block so little maintenance is ever needed. The windows and doors (including the garage door) are metal so little maintenance is required. Roofs are usually tile and as long as the tiles are not broken or missing there is no roof maintenance required. Landscaping is usually desert style - rocks with a few hardy plants. All this is in contrast to the properties I owned in Houston and Atlanta where I always seemed to be replacing siding, roofs and maintaining the landscaping. 

Probable Appreciation
You want to buy a property which is likely to appreciate. Appreciation is largely dependent on ongoing demand. Demand is a function of population growth and sustained job quantity and quality. Due to Las Vegas ongoing population growth, increasing job quality and quantity and the shortage of land, property prices and rents will likely continue to increase.

Summary
If you are looking for low cost, high return (10+%) properties and do not care as much about appreciation or long term return, Las Vegas is probably not your best choice. If you are looking for a sustained moderate return (4% to 8%) with probable appreciation and are able to pay the higher property prices compared to prices in the midwest, you should consider Las Vegas.

@Ryan B. Good point Ryan. I should have mentioned this in my earlier post.

When we first started about 9 years ago we approached property selection on "wants" basis. Some of the "wants" we considered included schools, proximity to shopping and proximity to concentrations of jobs. While we found some correlations, we learned that selecting properties based on expected tenant behavior did not work well in Las Vegas. What we found to be very accurate was time-to-rent and estimated return. And, while most properties with a low time-to-rent and high return turned out to be near the "wants", there were too many exceptions. The only reason we are able to use time-to-rent and return as a key selection criteria is the software we developed. Our software enables us to filter the very few good properties from the thousands that are available. During our research we had a lot of surprises about things that effect time-to-rent and return which we would never have guessed. Below are some examples:

• If the drive time to the strip exceeds about 20 minutes, the time-to-rent increases.

• If the width or length of the master bedroom is less than 12', the time to rent increases.

• Certain floor plans do not rent well at all even if they are within a subdivision that on average rents very well.

• If the master bedroom is on a different level than the other bedrooms, the time to rent increases.

Over time we've determined about 50 such criteria through which we filter properties before we apply time-to-rent and return calculations. Basing our selections on specific criteria (like master bedroom dimensions), time-to-rent and return has consistently proven to work well. Without such software, I believe a "wants" based selection approach would be the way to go.

@Marco Santarelli,

An interesting viewpoint. Las Vegas may be different than other locations but I have not seen class A properties in class B locations. Part of what makes a property class A is the location and the individual property. My experience is that people who can afford to live in class A areas do not choose to live in class B locations. Builders built the same floor plans all over the city so we have real data to support what I am about to say. The same floor plan in Summerlin or Green Valley (two of the A class areas) will rent for more than it will in some of the B areas. The same is true for sales price. The exact same floor plan will sell for more in a class A area than it will in a class B area. So, while what you are saying may apply to other locations I have not seen it in Las Vegas.

I have been recently asked about where I think the Class A, B, and C properties in Las Vegas are located. So I put the following response together. The short answer is that the type of property class is defined more by the tenant population than the physical location.

In Las Vegas, and I assume most cities, class A areas tend to be in reasonably well defined geographic areas but class B and C locations are not. Class B and C properties are more defined by the tenant population than the geographical area. Below is my definition of Class A, B and C properties. Note that the following description is only my opinion, only applies to Las Vegas and should not be considered some sort of universal "definition".

Class A properties tend to be newer, prospective tenants tend to have higher incomes and are primarily credit based and typically pay the highest rent. Credit is very important to this tenant population so evictions and skips are rare. In Las Vegas Class A properties tend to be in subdivisions or communities with HOAs and have a well groomed and uniform appearance and in the best school districts. Class A properties tend to be lower risk, tenants stay longer and properties are more likely to appreciate. Summerlin and Green Valley are examples of class A property areas. 

Class B properties - Compared to class A properties, class B properties are generally older, tend to sell for a lower $/SqFt and tenants generally have lower incomes and credit scores. Tenants tend to stay shorter periods of time (1 to 2 years) and evictions are more common than with Class A properties (few total evictions since tenants know that they will be out in less than 30 days if they do not pay). Initial rehab is likely to be higher and tenant damage is also likely to be higher than class A properties. Class B properties tend to generate a higher return than class A properties.

Class C properties - Class C properties are generally older and are located in less desirable locations. These properties generally need significant rehab and significant tenant damage is much more likely. The tenant population is primarily cash based so leases mean little and many have government subsidies. Skips and evictions are common. Rent payments tend to be in cash. Tenants tend to use mass transit so selecting properties near bus routes is very important. Some of these properties generate high returns.

Now that you know how I define class A, B and C I will explain how we find such properties. We use software we developed to filter the thousands of available properties looking for the very few properties that meet specific characteristics. Usually less than .1% of the available MLS listed properties qualify as potential investments at any given time. Below are example characteristics for each of the classes. Note that we have about 50 characteristics for class A properties. The number of characteristics is less for class B and much less for class C.

Class A

• Within a specific price range
• Acceptable ROI using the following formula: ((Rent - Debt Service - Management Fee - Insurance - Real Estate Tax - Periodic Fees) x (1 - State Income Tax))/(Down Payment + Closing Costs + Estimated Rehab Cost). Note that for Nevada there is no state income tax.
• Time to rent <30 days
• Within a fairly well defined geographical area
• Single family
• Two+ garage
• Three+ bedrooms
• Two+ baths
• Within a minimum and maximum lot size
• Correct ratio of building footprint to lot size
• Master bedroom and guest bedroom sizes meet specific criteria
• Built after specific year
• Association fees above $20 and below a specific amount
• Certain floor plans are excluded
• Certain subdivisions are excluded
• Rehab below a specific amount with no high risk rehab items

Class B

The characteristics of class B are similar to class A but also includes town homes and the price range is lower. We look for a higher ROI than for class A properties due to increased risk.

Class C

Class C properties have a very different criteria than class A or B. Price range is typically less than $100,000 and includes all property types (single family, town homes, condos). The key criteria includes:

• Significantly higher ROI
• Time to rent < 30 days
• Adjacent to major bus routes
• 2+ bedrooms
• 2+ baths
• Certain locations, communities and floor plans are excluded

Once we have properties that meet the specific class criteria I personally visit them and evaluate the area and subdivision/community. If it looks acceptable, I evaluate the property including the floor plan and estimate rehab cost and rehab risk. If all of this is acceptable, I take a video and send it to the property manager and the client. The property manager provides an independent opinion of the property in general plus time to rent and the rental rate. If the return is acceptable and all agree that the property makes sense we make an offer. The offer amount is based on return, not the asking price. 

In summary, we primarily select properties based on property characteristics, potential tenant characteristics, risk and return, not geographical locations. 

One additional class of properties is multi-family. We divide these into two categories: 4 units or less and more than 4 units. More than 4 units requires commercial financing. The criteria for multi-family is quite different since the value is largely based on the cap rate, deferred maintenance and tenant risk. Larger properties (~30 units+) are evaluated based on current usage and potential future usage.

What are your definitions of Class A, B, and C properties?

@Michael Bell

Location is not really an issue because the Las Vegas metro area is relatively small. What really matters is the type of property/tenant. We use multiple types of property managers.

• Class A & B - Traditional property managers. The key here is tenant screening and proactive cost management.
• Class C - Properties in undesirable areas with cash based tenants. Key here is rent collection, cost control, proactive in dealing with skips and evictions.
• Large multi-unit properties with no federal reporting requirements.
• Large multi-unit properties with federal reporting requirements.

You need to match the property manager to the type of property/tenant.

Hello @Michael Bell,

In Las Vegas, and I assume most cities, class A areas tend to be in reasonably well defined areas but class B and C locations are not. Class B and C properties are more defined by the tenant population than the geographical area. So we have a common understanding, below is my definition of Class A, B and C. Note that the following description is only my opinion, only applies to Las Vegas and should not be considered some sort of universal "definition".

Class A properties tend to be newer, prospective tenants tend to have higher incomes and are primarily credit based and typically pay the highest rent. Credit is very important to the tenant population so evictions and skips are rare. In Las Vegas Class A properties tend to be in subdivisions or communities with HOAs and have a well groomed and uniform appearance and in the best school districts. Class A properties tend to be lower risk, tenants stay longer and properties are more likely to appreciate. Summerlin and Green Valley are examples of class A property areas. 

Class B properties - Compared to class A properties, class B properties are generally older, tend to sell for a lower $/SqFt and tenants generally have lower incomes and credit scores. Tenants tend to stay shorter periods of time (1 to 2 years) and evictions are more common than with Class A properties (few total evictions since tenants know that they will be out in less than 30 days if they do not pay). Initial rehab is likely to be higher and tenant damage is likely to be higher than class A properties. Class B properties also tend to have a higher risk than Class A properties but generate a higher return. 

Class C properties - Class C properties are generally older and are located in less desirable locations. These properties generally need significant rehab and significant tenant damage is much more likely. The tenant population is primarily cash based so leases mean little and many have government subsidies. Skips and evictions are common. Rent payments tend to be in cash. Tenants tend to use mass transit so selecting properties near bus routes is very important. Some of these properties generate high returns.

Now that you know how I define class A, B and C I will explain how we find such properties. We use software we developed to filter the thousands of available properties looking for the very few properties that meet specific characteristics (usually less than .1% of the available MLS listed properties qualify as potential investments at any given time). Below are example characteristics for each of the classes. Note that we apply about 50 characteristics to class A properties. The number of characteristics is less for class B and much less for class C.

Class A

• Within a specific price range
• Acceptable ROI using the following formula: ((Rent - Debt Service - Management Fee - Insurance - Real Estate Tax - Periodic Fees) x (1 - State Income Tax))/(Down Payment + Closing Costs + Estimated Rehab Cost). Note that for Nevada there is no state income tax.
• Time to rent <30 days
• Within a fairly well defined geographical area
• Single family
• Two+ garage
• Three+ bedrooms
• Two+ baths
• Within a minimum and maximum lot size
• Correct ratio of building footprint to lot size
• Master bedroom and guest bedroom sizes meet specific criteria
• Built after specific year
• Association fees below a specific amount
• Certain floor plans are excluded
• Certain subdivisions are excluded
• Rehab below a specific amount with no high risk rehab items

Class B

The characteristics of class B are similar to class A but also include town homes and the price range is lower. We look for a higher ROI than for class A properties due to slightly increased risk.

Class C

Class C properties have a very different criteria than class A or B. Price range is typically less than $100,000 and includes all property types (single family, town homes, condos). The key criteria includes:

• Significantly higher ROI requirement
• Time to rent < 30 days
• Adjacent to major bus routes
• ROI (higher than class A or B properties)
• 2+ bedrooms
• 2+ baths
• Certain locations, communities and floor plans are excluded

Once we have properties that meet the specific class criteria I personally visit them and evaluate the area and subdivision/community. If it looks acceptable, I evaluate the property including the floor plan and estimate rehab cost and rehab risk. If all of this is acceptable, I take a video and send it to the property manager and the client. The property manager provides an independent opinion of the property in general plus time to rent and the rental rate. If the return is acceptable and all agree that the property makes sense we make an offer. The offer amount is based on return, not the asking price. 

In summary, we primarily select properties based on property characteristics, potential tenant characteristics, risk and return, not geographical locations. 

One additional class of properties is multi-family. We divide these into two categories: 4 units or less and more than 4 units. More than 4 units requires commercial financing. The criteria for multi-family is quite different since the value is largely based on the cap rate, differed maintenance and tenant risk. Larger properties (~30 units+) are evaluated based on current usage and potential future usage.

David, I hope this clarifies our process of selecting the various classes of properties.

@Michael Bell

When I decided to go into real estate business 9 years ago, I evaluated several places including London, Phoenix, Atlanta, etc and chose Las Vegas. Today I still feel my decision was right. I am frequently asked by new clients Why Las Vegas so I put together the following response.

Why Las Vegas?

The old adage that the three most important factors in real estate being location, location and location is especially true for investment real estate. And, it is not just how things are today but how they will likely be over the next 10 to 20 years. So, what are the unique advantages of Las Vegas for investors?

High Return

Las Vegas is one of the few major metro areas where you can still get positive cash flows. The reason you can get a high return include:

Positive Cash Flow - Our clients are typically seeing 5% to 8% on class A properties and higher on B and C class. And, this will increase because rents are increasing.

Zero State Income Taxes - Nevada has no state income tax.

Low Property Taxes - There are metro areas in the US with property taxes exceeding 2.4% (Houston, Dallas-Fort Worth, etc.) as opposed to Las Vegas where the average is about 0.86%.

Low Cost Landlord Insurance - Land Lord insurance in states with adverse weather like Florida and Texas can exceed $2,000/Yr. Our clients typically pay between $500/Yr. to $600/Yr.

Low Maintenance Costs - Maintenance costs are a direct hit on profit. Typical homes in Las Vegas have tile roofs, desert landscaping (rocks), stucco siding, metal doors and window frames, and concrete block fences all of which require little or no maintenance.

Low Risk

Landlord Friendly Laws - Nevada is a business friendly state. Its pro-business laws apply to rental properties as well. There are no rental control laws in Las Vegas and evictions typically take 30 days or less and usually cost less than $500. In comparison, in California it can take up to one year to evict a knowledgeable tenant. Landlord friendly laws protect your investments.

Rental Market Stability - The Las Vegas rental market is extremely stable. For example, we did a study on the rental rates during the 2008 market crash when property prices in Las Vegas plunged over 50% and found that rental rates did not decrease. Cash flow and return on investment were not impacted during the crash. You can see the actual data in this BP post.

Sustained Population Growth - Market demand is what determines the value of an investment property. If the area has a stable or increasing population, demand will remain stable or increase. If people are moving out of an area (either to other cities or due to urban sprawl) property values and rents will fall. Las Vegas’ population is expected to continue growing at approximately 1-2% per year for the foreseeable future.

Sustained Job Growth - Nevada is very aggressive in terms of recruiting businesses to move to Nevada and has been very successful. Two of our clients who moved their business from California to Las Vegas reduced operating costs by as much as 20%. Plus, the Las Vegas tourism business continue to do well due to its adaptability. For example, today Las Vegas hosts millions of Chinese tourists each year. Before the Chinese it was the Japanese. And, in the future it will be another group. Las Vegas has always been excellent at adapting to the changing world.

No Urban Sprawl - Urban sprawl can be devastating over the long term. Due to the shortage of build-able land in the Las Vegas valley, Las Vegas has almost no urban sprawl because it is surrounded by federal land. The blue areas in the map below is federal land. In fact, only about 11% of the entire state of Nevada is privately owned. Given the population trend and expansion limitations, property values and rents in Las Vegas are expected to continue increasing over time.

In Summary

Low operating costs and low risk give Las Vegas a unique set of advantages over many alternative investment locations.

Please post your questions, comments or concerns. I also have a lot more information on investing in Las Vegas real estate on my profile. Hope it helps.

Hello @Jennifer S.,

Reading your post you seem predisposed towards multi-family. Many people do believe that multi-family properties are better investments while others believe that single-family properties are better investments. I believe that you should select properties based on sustained return as opposed to letting any pre-conceived type of property limit your choices. However, below are some comments on multi-family properties that I hope will help.

Multi-Unit Considerations

• Lower rental risk. A single-family property is either 100% occupied or 100% vacant. With a multi-family property, if one unit is vacant, you still receive a portion of the total rent.
• Per unit cost is lower with multi-family than single family homes.
• When you wish to sell the property the only buyers will be other investors. This is a relatively small number of buyers compared to single family properties. And, the value of an investment to investors is largely based on the CAP rate. So, unless rents rise, the market value of the property does not rise.
• As long as you stay with 4 units or less, conventional financing is pretty much the same as single family investment properties. With 5 or more, you must obtain commercial financing with is more complex and takes longer.
• Multi-family (2 to 4 units) properties are usually purchased only by investors. And, in my experience, investors with performing properties do not sell them so you need to look carefully. The most frequent reasons I see for investors selling such properties include:

• High cost of completing deferred maintenance.
• Purchased at a high price or with expensive financing and can not generate the desired return.
• High turnover due to location or property issues.
• Frustration of trying to self manage the property.

Tenant Considerations

When you are considering any investment property, you need to think about the potential tenant population. Note: The remainder of this post is specifically about Las Vegas so only use the following material as points to consider if you are not buying in Las Vegas. 

Today, in Las Vegas, most of the 4-plexs I have seen rent in the $450/Mo. to $600/Mo. per unit range (This is very different than what I experienced in Fort Wayne, NYC, Atlanta and Houston). In general, people renting in this price range need to be near the major mass transit routes so you should only be considering properties within a block or two of the major bus routes. Most of the jobs are along Las Vegas Blvd so you only care about the east/west routes. The tenant population is largely cash based; many will not have a checking account or any credit cards, etc. This alters how rents are paid and collected. And, on average, evictions and skips are more frequent. Since this demographic is largely cash based, they have little to fear from a bad credit report or a judgment on unpaid rent so a lease means very little. You also have to expect more damage. For example, one such unit we have was rented earlier this year and after about 4 months the tenant skipped inflicting some significant damage. The cost to rehab this property will be about $3,000. 

Should the above dissuade you from buying a 4-plex? No. You can make good return on 4-plexes but you have to factor all the costs into your profit model. If you do and the property still makes sense, then it is a good buy. If the numbers do not look favorable, look for something else. Where is the best source of information on such properties? The property managers who specialize in these properties. Just drive the area and note the names of the property managers on the signs and talk to the major players. I have a list of property manager interview questions. If you (or anyone else) would like a copy, drop me an email.

I wish you success.