Why Am I Not Selling Multi-Family in Las Vegas?
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.
Quote from @Eric Fernwood:
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.
do you also shy away from owning a lower priced single condo for similar reasons?
Hello @Joe Fermin,
Excellent question. Below are my thoughts on Las Vegas condos.
Note, everything I say applies specifically to Las Vegas, although it may apply to other locations too.
Goal Considerations
Every investment must be evaluated against the goal of getting off and staying off the daily worker treadmill. This requires that your property is continuously occupied by a reliable tenant. 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
Below is a table comparing what I learned about the demographic for condos compared to the single-family homes that target our tenant segment.
Condo considerations
- Vacancy Cost -Vacancy costs can have a significant impact on profitability or be a minor expense, depending on how long the tenant remains in the property. Condos typically attract tenants who stay for about two years, resulting in higher vacancy costs compared to our target single-family residences, where tenants typically stay for more than five years.
- Maintenance costs - Many believe condos have lower maintenance costs than single-family homes. This is generally true in most locations, but not in Las Vegas. Las Vegas is located in the Mojave Desert, which means builders had to use durable materials that could withstand the harsh climate. As shown in the image below, there is not a lot to maintain on the properties we target. In our experience, the maintenance costs of the condos and the single-family homes we target are about the same.
- Cross-unit maintenance issues - Condos are in close proximity to other units. The result is unwanted interactions. For example, if the unit above you has a leak, it damages your unit. You have almost no way to compel the upstairs owner to fix it, let alone pay for your damage. Sometimes it isn't easy to get hold of the owner. It could take days or weeks. Meanwhile, the problem in your unit gets worse. This is especially true if there is mold caused by a leak upstairs or a unit on the other side of the wall.
- Condos have a lot of competition - In Las Vegas, condos compete with apartments for tenants. This competition keeps condo rents low. After all, would you rather rent a 20-year-old condo, or a newly built apartment with multiple pools, a theater, a running track, an exercise room, and free WiFi? Thus, condo rents are largely determined by apartment rents.
- Investor financing - In most cases, financing is available for homebuyers. However, investment financing is only available for condos if at least 50% of the units are owner occupied. More on this later.
- High HOA fees - Condos typically have high HOA fees, making it difficult to get a reasonable rate of return.
- Lower price point - As you stated, condos have a lower price point which is attractive.
Appreciation
I analyzed the numbers for sales of 1-bedroom condos and 3-bedroom single-family homes between 2013 and 2019. I selected this time period because the market was distorted by COVID in 2020 and 2021.
To my surprise, while SFR appreciated faster than condos, it was not much faster.
Rent growth
The MLS does not provide rental data statistics. Although I wrote software to generate statistics for our targeted SFRs, it does not work for townhomes or condos. Since I did not have the bandwidth to write software for condos, I will skip this for now.
Available Inventory
I next looked at the range of prices for condos meeting the following criteria:
- Built in 1990 or later
- 1 bedroom
- Within the area outlined below. I chose this area because it is similar to where our data mining software finds most rental property candidates.
I found 50 1-bedroom condos currently for sale, with asking prices ranging from $180,000 to $365,000. Since buying a condo for the same price as a townhome or single-family home would not make sense, I focused on the ten lowest-cost properties in various condominium complexes. Using tax records, I found the percentage of owner-occupied units, as shown in the table below.
As you can see, there is a low rate of owner occupancy in all the complexes. This will likely prevent obtaining investor financing. You might be able to get second home financing, but I do not know what restrictions second home financing has regarding renting the property.
Summary
- I was surprised to learn that condos appreciated almost as much as single-family homes.
- The average tenant stay of two years could significantly reduce profitability. If condos are a viable option, I will need to research the time to rent and length of stay for each complex under consideration.
- Before recommending condos, it is critical to analyze rent growth.
- Inability to obtain investor financing could kill condos as investments. Does anyone know of a financing source for condos with less than 50% owner occupancy?
- In my opinion, the most desirable condos would be newer ones (built after 1990) located in built-up areas where new apartment complexes are unlikely to be built and compete with existing condos.
Unless there is a source for investor financing that allows less than 50% owner occupancy, I do not recommend condos. If there is a reasonable financing source, I will dive deeper into condos as investment properties.
Did I miss anything on this quick look at condos?
The image showing the typical single-family home construction did not show up. So here it is.
Quote from @Eric Fernwood:Thanks for taking the time to do this Eric. i certainly find this information very useful. this definitely gives us some food for thought
Hello @Joe Fermin,
Excellent question. Below are my thoughts on Las Vegas condos.
Note, everything I say applies specifically to Las Vegas, although it may apply to other locations too.
Goal Considerations
Every investment must be evaluated against the goal of getting off and staying off the daily worker treadmill. This requires that your property is continuously occupied by a reliable tenant. 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
Below is a table comparing what I learned about the demographic for condos compared to the single-family homes that target our tenant segment.
Condo considerations
- Vacancy Cost -Vacancy costs can have a significant impact on profitability or be a minor expense, depending on how long the tenant remains in the property. Condos typically attract tenants who stay for about two years, resulting in higher vacancy costs compared to our target single-family residences, where tenants typically stay for more than five years.
- Maintenance costs - Many believe condos have lower maintenance costs than single-family homes. This is generally true in most locations, but not in Las Vegas. Las Vegas is located in the Mojave Desert, which means builders had to use durable materials that could withstand the harsh climate. As shown in the image below, there is not a lot to maintain on the properties we target. In our experience, the maintenance costs of the condos and the single-family homes we target are about the same.
- Cross-unit maintenance issues - Condos are in close proximity to other units. The result is unwanted interactions. For example, if the unit above you has a leak, it damages your unit. You have almost no way to compel the upstairs owner to fix it, let alone pay for your damage. Sometimes it isn't easy to get hold of the owner. It could take days or weeks. Meanwhile, the problem in your unit gets worse. This is especially true if there is mold caused by a leak upstairs or a unit on the other side of the wall.
- Condos have a lot of competition - In Las Vegas, condos compete with apartments for tenants. This competition keeps condo rents low. After all, would you rather rent a 20-year-old condo, or a newly built apartment with multiple pools, a theater, a running track, an exercise room, and free WiFi? Thus, condo rents are largely determined by apartment rents.
- Investor financing - In most cases, financing is available for homebuyers. However, investment financing is only available for condos if at least 50% of the units are owner occupied. More on this later.
- High HOA fees - Condos typically have high HOA fees, making it difficult to get a reasonable rate of return.
- Lower price point - As you stated, condos have a lower price point which is attractive.
Appreciation
I analyzed the numbers for sales of 1-bedroom condos and 3-bedroom single-family homes between 2013 and 2019. I selected this time period because the market was distorted by COVID in 2020 and 2021.
To my surprise, while SFR appreciated faster than condos, it was not much faster.
Rent growth
The MLS does not provide rental data statistics. Although I wrote software to generate statistics for our targeted SFRs, it does not work for townhomes or condos. Since I did not have the bandwidth to write software for condos, I will skip this for now.
Available Inventory
I next looked at the range of prices for condos meeting the following criteria:
- Built in 1990 or later
- 1 bedroom
- Within the area outlined below. I chose this area because it is similar to where our data mining software finds most rental property candidates.
I found 50 1-bedroom condos currently for sale, with asking prices ranging from $180,000 to $365,000. Since buying a condo for the same price as a townhome or single-family home would not make sense, I focused on the ten lowest-cost properties in various condominium complexes. Using tax records, I found the percentage of owner-occupied units, as shown in the table below.
As you can see, there is a low rate of owner occupancy in all the complexes. This will likely prevent obtaining investor financing. You might be able to get second home financing, but I do not know what restrictions second home financing has regarding renting the property.
Summary
- I was surprised to learn that condos appreciated almost as much as single-family homes.
- The average tenant stay of two years could significantly reduce profitability. If condos are a viable option, I will need to research the time to rent and length of stay for each complex under consideration.
- Before recommending condos, it is critical to analyze rent growth.
- Inability to obtain investor financing could kill condos as investments. Does anyone know of a financing source for condos with less than 50% owner occupancy?
- In my opinion, the most desirable condos would be newer ones (built after 1990) located in built-up areas where new apartment complexes are unlikely to be built and compete with existing condos.
Unless there is a source for investor financing that allows less than 50% owner occupancy, I do not recommend condos. If there is a reasonable financing source, I will dive deeper into condos as investment properties.
Did I miss anything on this quick look at condos?
Hey @Eric Fernwood,
I'm a beginner in the REI space and had a question for you. What are your thoughts on Section 8 investments in these areas?