Many gurus tout multi-family as the right option for everyone and every location. The truth is that such blanket statements are not realistic. Why are they touting multi-family?
The perceived benefits of multi-family properties are reduced vacancy costs and increased income reliability. However, for these benefits to be realized, the property must be consistently occupied by reliable tenants. A reliable tenant is someone who:
- Has stable employment in a market segment that is very likely to be stable or improve over time
- Pays all 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 many years
Most Las Vegas multi-family properties do not attract reliable tenants. I will explain.
Every tenant segment has specific housing requirements. They will not rent a property that does not meet these requirements. The converse is also true. Every property has specific characteristics and only attracts people with matching requirements. The property defines the tenant pool segment.
What if the property attracts a segment that does not meet the definition of a reliable tenant?
This is where multi-family housing in Las Vegas falls down.
In Las Vegas, the vast majority of multi-family properties were built before 1986 and are in distressed, high-crime areas. The only people who live in these areas are people who can’t afford to live in a safer, better place. The tenants are largely minimum-wage workers. The characteristics of the majority of these tenants are:
- Due to their low wages and minimal skills, these workers are easily replaceable. This makes them the first to be laid off and the last to be rehired during times of economic stress.
- There is no regularity to paying bills. They pay all their bills in cash at payment service locations like 7-Eleven. If they can't afford the rent, they don't pay it. If they get evicted, they pack up their few belongings and move down the street to another property. Since leases, evictions, and skipped payments have no lasting impact on them, there is little incentive for these tenants to pay their rent on schedule.
- The cost of repairs between tenants is high. The tenants know they are immune to damage judgments because they live cash-based lives. So, property damage is not relevant to their future.
- Las Vegas multi-family properties have tenants living in compact buildings, and there is a high level of interaction between tenants. One bad tenant can drive all the good tenants out.
- Drugs and other offenses are widespread in the neighborhoods where most multi-family properties are situated. So, the likelihood of tenants committing crimes while on the property is high.
- The average tenant stay is under one year. The result is high vacancy costs.
The tenants most Las Vegas multifamily properties attract are not reliable, and vacancy and repair costs are frequent and high. Also, the buildings are older and need more maintenance than newer buildings.
The goal of real estate investing is a reliable passive income that beats inflation and lasts a lifetime. Due to the tenants that occupy most Las Vegas multi-family properties and the high maintenance costs, there is almost no way to achieve reliable income.
My responsibility is to help clients acquire dependable passive income. Unfortunately, most multi-family properties in Las Vegas do not meet this goal.
