All Forum Posts by: 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.

Hello @Robert Griffiths,

You asked an excellent question. The short answer is that there are good investment properties in Las Vegas today. However, like everywhere else, good properties are not easy to find. So we have a common understanding, I define a good investment property as one that meets all three of the following criteria:

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future. This means that the property stays occupied by good tenants. I define a good tenant as someone who:

   • Pays all of the rent on schedule

   • Takes care of the property• Does not cause problems with neighbors

   • Does not engage in illegal activities while on the property

   • Stays for multiple years

• 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.

What level of return can you expect today in Las Vegas? Between 3% and 5% on class A properties (financed, 20% down, including all recurring costs including debt service, management, taxes, etc.). However, there are many ways to calculate return. Some formulas do not include all recurring costs while others include principal reduction and other such unrealized gains. The formulas we use for comparing properties are below. Note that we do not include a constant for vacancy rate or maintenance when we compare properties as any constant added to each equation would not change the difference between the equations. Also, vacancy rate and maintenance are property specific. Also, we do not take into account income tax benefits (like depreciation) which generally increase effective return.

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

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

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

So, what kind of properties in Las Vegas meet the above criteria? In general, a small percentage of the available town homes and single family homes. Why not condos or multi families?

Issues with Condos

• Except in rare cases, condos cannot be financed. Even if you are buying with cash, the inability to finance condos still matters because sooner or later you will want to sell. If condos remain non-financeable, your primary buyer pool will be other investors buying with cash and they will base their offer only on CAP rate. If rents do not rise, the value of the property does not rise.

• Condos compete 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. The result is high vacancy rates for most condos and lower than expected rents.

• The high condo HOA fees make profitability very difficult.

• Singles or couples without children are the dominate tenant pool for condos. These people are highly mobile making tenant turns more frequent than single family, which attracts mostly families with children.

Issues with Multi Family

Note: I include duplex, triplex and fourplex in multi family. Buildings with more than 4 units require commercial financing and are outside the scope of this post.

• Multi families in Las Vegas typically rent for between $400/Mo. and $650/Mo. Tenants in this pool are largely cash based. Cash based tenants carry no “financial history” so they are almost impossible to screen. The result of having cash based tenants is that skips, evictions and damage are much more common than with credit based tenants.

• Vast majority of available multi family are older buildings which have more maintenance issues. Below is a chart showing the number of units available vs. the year in which they were built. Older properties tend to have higher maintenance costs than newer properties. Plus, these properties have typically been used hard and need significant upgrades.

• The corollary is that multi family properties are only sold by investors. And, in my experience, investors do not sell performing assets. Thus, multi family properties for sale are typically not performing due to tenant or maintenance issues. And, with the inherent issues with cash based tenants as I described above I find it hard to justify investing a large amount of capital up front to correct the deferred maintenance and still have to deal with cash based tenants.

• Like condos, multi family properties compete with apartments.

• Singles or couples without children are the dominate tenant pool. These people are highly mobile making tenant turns more frequent than desirable.

In summary, Robert, Las Vegas is a great place to invest but you need to be selective in what you buy.

@Jeff Hall

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

@Teddy T.

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

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

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

Hello @Jack B.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Job quality and quantity - The value of a property is no better than the jobs around it. In many parts of the US, manufacturing and similar jobs are going away (or have already left) and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing jobs so the families of these workers have less disposable income today than they did in the past. Less disposable income means that they cannot afford to pay the level of rent they did in the past. A key indicator is inflation adjusted per capita income over the past few years. If inflation adjusted per capita income is flat or declining, you need to carefully consider the long term value of the investment before you buy.

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

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

Ongoing maintenance cost - When I owned properties in Atlanta, Houston and other places, I was always replacing roofs, siding, wooden windows, dealing with termites and the landscaping. These costs were a continual drag on profitability. Below are some generalizations about ongoing maintenance costs:

• Older properties require more maintenance than newer properties.
• Composition roofs require more maintenance than tile roofs.
• Properties in climates with hard freezes require more maintenance than properties in milder climates.
• Properties in locations with a lot of moisture require more maintenance than properties in dryer climates.
• Wood siding requires more maintenance than aluminum or stucco siding.
• Properties with lush vegetation require more maintenance than properties with little or no vegetation.

Below is a typical Las Vegas single family class A home.

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

Hello @John Gardner,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Job quality and quantity - The value of a property is no better than the jobs around it. In many parts of the US, manufacturing and similar jobs are going away (or have already left) and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing jobs so the families of these workers have less disposable income today than they did in the past. Less disposable income means that they cannot afford to pay the level of rent they did in the past. A key indicator is inflation adjusted per capita income over the past few years. If inflation adjusted per capita income is flat or declining, you need to carefully consider the long term value of the investment before you buy.

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

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

Ongoing maintenance cost - When I owned properties in Atlanta, Houston and other places, I was always replacing roofs, siding, wooden windows, dealing with termites and the landscaping. These costs were a continual drag on profitability. Below are some generalizations about ongoing maintenance costs:

• Older properties require more maintenance than newer properties.
• Composition roofs require more maintenance than tile roofs.
• Properties in climates with hard freezes require more maintenance than properties in milder climates.
• Properties in locations with a lot of moisture require more maintenance than properties in dryer climates.
• Wood siding requires more maintenance than aluminum or stucco siding.
• Properties with lush vegetation require more maintenance than properties with little or no vegetation.

Below is a typical Las Vegas single family class A home.

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

Hello @Brandon Duff,

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

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

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

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

Investors Do Not Sell Performing Assets

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

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

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

Property Age

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

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

Cash Based Tenants

In order to make money with any investment property, you have to keep it filled with good tenants. I define a good tenant as someone who:

• Pays all of the rent on schedule
• Takes care of the property
• Does not cause problems with neighbors
• Does not engage in illegal activities while on the property
• Stays for multiple years

Good tenants are not an accident or the norm. Good tenants are the result of careful screening by a skilled property manager. In order to select a good tenant the property manager needs two things:

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

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

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

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

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

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

Fantasy Vs. Reality

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

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

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

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

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

Questions/Comments On Your Proposed Purchase

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

Summary

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