Is Las Vegas for You?

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

I believe that every property/location you consider must meet three criteria:
• Sustained profitability - The property must generate a positive cashflow today and into the foreseeable future.
• Likely to appreciate over time - You would never buy a property just for appreciation but appreciation is very desirable. Especially when using a 1031 to reinvest equity or adapting to market changes.
• Located in an area where you can make money and risks are low. Key factors include state income tax, property tax, insurance cost and landlord favorable regulations. Regulations include property related laws like the time and cost of evictions, rent control, code compliance requirements, etc.

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

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

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

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

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

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

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

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

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

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

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

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

Suppose you found the exact same property, in three different cities, renting for the same amount, in the same condition with the same financing terms. (Yes, this is impossible.) The specifics of the example property are below.
• Purchase price: $150,000
• Rent: $1,000/Mo. or $12,000/Yr.
• Financing: 20% down, 4.5% interest, 30 year term. Resulting debt service is $608/Mo. or $7,296/Yr.
• Down Amount: $30,000
• Periodic fees: $0 (for simplicity)
• Management fee: 8% or $12,000/Yr. x 8% = $960/Yr.
• Rehab cost: $0 (for simplicity)

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

Calculating ROI for each of the three cities:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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