Las Vegas, Heloc, home equity loan, investment
Las Vegas, NV · Member since 2014 · 72 posts · 8 votes
Las Vegas, Heloc, home equity loan, investment
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- 11yEric FernwoodBusiness MemberRealtor · Las Vegas, NV · Member since 2014 · 1k+ posts · 1k+ votes
Hello @Oliver Martin ,
I broke your questions into two parts:
• Condo vs. single family vs. four-plex
• Using a HELOC vs. an investor loanThere are multiple factors to consider when you are comparing different types of properties (some of which are unique to the specific location and Las Vegas in general), two of which are:
• Sustained profitability
• Probable appreciationCondo vs. Single Family vs. Four-Plex
Since all three types of properties are located in the same area I was able to put together a simplified comparison below using typical association fees, etc. for Las Vegas:
Notes:
1) Financing is not available for many condos. Requirements on most condo investor loans: 51% owner occupied, less than 15% HOA delinquencies, no structural litigation.
2) Four-plexs with an HOA fee (usually a converted apartment complex) are extremely difficult to finance.
3) Depreciation is mandated by the IRS and can be shown as an income or a negative expense.Looking at just the numbers I think anyone would decide on the four-plex. However, this may be deceiving.
• In Las Vegas, most of the four-plexes that I have seen for sale have significant deferred maintenance. The few that I explored in depth had rehab costs in the $10,000 to $30,000 range. Remember that these types of property have only one buyer: investors. To investors, everything is based on the cap rate. And, if the investor is making money on a property, they do not sell them.
• Depending on who you ask, average condo/multi family vacancy rate is about 16%. However, this is misleading. The new large apartment complexes (which are sprouting up all over the city) are offering huge discounts and incentives making it very hard for individual condo investors to compete. Typical incentives I have seen include one to two months free rent and discounted rent. Another factor is that since you will be competing with the large new complexes, you will have much fewer applicants from which to choose so you tend to get more problematic tenants thereby increasing your maintenance costs and increasing your vacancy rate. I did not know how to represent this in the table above so I used 20% on the condo vacancy rate and 15% on the four-plex vacancy rate which may or may not be a valid estimate.
• Potential appreciation: You buy for cash flow, never just appreciation. However, in the future you will likely sell the property (1031?) so appreciation is very desirable. With multi-unit, the only buyers are investors. Investors value a property based almost exclusively on CAP rate. In Las Vegas, rents have been stable for many years (However they are increasing somewhat at this time). What this means is that even if residential properties increase in price, multi-unit properties may not increase as much because investors buy on CAP rate. In other words, no rent increases, no appreciation. This is not entirely true but is largely true.People buy real estate as a path to financial independence which requires long term profitability. Factors to consider include:
• Crime: Long term profitability and high levels of crime do not occur together. Many of the multi-unit and reasonably priced condos are in higher crime areas. Before you buy any property, check both the specific area in which the property is located and the nearby major shopping areas. Not too long ago I was checking a property for a client and while the specific neighborhood was OK, the nearby strip mall was not. When I checked the strip mall on one of the crime sites I discovered that robberies and assaults occurred frequently and that the situation appears to have been the same for the past few years. I rejected the property based on these findings. So, check the shopping areas that tenants would use. You should also check the sex offender database. See familywatchdog.us but there are likely many others. Some states/counties/cities have their own sex offender/crime websites.
• Long term tenants: Single people and couples tend to be a significant percentage of condo/multi-family residents. Families (children) tend to be a significant percentage of the single family home residents. Singles and couples in the Las Vegas market tend to move more frequently than families because families want stability for their children. So, expect more turnover with condos and multi-family properties than single family homes.
• In general, people with lower income rent lower priced properties. People with lower incomes typically tend to live in a "cash" based mode as opposed to people with higher incomes who tend to live in a "credit" based mode. People who live in a cash based mode have little to fear from collections agencies and negative credit reports; they have little to fear if they damage the property or skip out on a lease. So, in general, lower income properties tend to have more damage and more maintenance. That is why I used $4,000/yr for the 4-flex maintenance provision in the table. Whether this is high or low would depend on the specific property.Oliver, I hope this gives you some ideas on evaluating a condo vs. a single family vs. a four-plex.
Using a HELOC
A lender I regularly work with just provided me with an update on HELOCs:
• HELOCs can only be used on a primary residence.
• Maximum amount is 80% of the market value.
• The interest rates are reasonable but they adjust each month. Adjustable interest rates are a big concern for me. The official inflation rate for 2014 is 1.7%. However, the official inflation rate does not include energy or food. Personally, I use electricity and drive a car plus I eat so the official inflation rate means little to me. The actual inflation rate is between 6% and 10% depending on whose numbers you believe. I believe that the government can only manipulate interest rates (which is a factor of inflation) for so long and then the actual interest rate will come into effect. During the 1980's interest rates exceeded 18% source. Below is a comparison of the monthly payment on a $100,000 loan based on the interest rate.
So, while the HELOC is easier to obtain, it is not what I would call permanent financing. One of the big advantages of real estate is that if you have a fixed rate loan, inflation can be beneficial to cash flow. Historically, rents and property prices have tracked inflation but your debt service is constant. This would absolutely not be the case with a HELOC. Other than the ease in obtaining the funds, I see nothing to recommend using a HELOC as a long term financing alternative.
Oliver, I hope the above helped answer some of your questions.
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