All Forum Posts by: Eric Fernwood

@Account Closed

On your statement, "Vegas is number one. In forbearances/deliquency [sic]"

The following comes from RealtyTrak

Will there be a lot of foreclosures in Las Vegas? I do not believe so because most properties are above water; if people get into financial trouble, they will sell their homes and pocket the profit. This is not 2008, where most homes were underwater.

I searched the MLS for distressed properties:

• Bank owned: 20
• Short sale: 19
• Foreclosure started: 7

Not a significant percentage of all available properties.

You stated you did not agree with the returns I provided, "Even Fernwood whos rental analysis i disagree with". Below are the numbers on one of the 8 properties we put under contract this month. All have a similar return.

What part do you disagree with? Please be specific. How am I misleading people? My clients have positive cash flow from day one. Otherwise, >90% would not buy more than one property, and >80% buy three or more.

There were several comments on investing in Las Vegas, and I wanted to share what we are seeing with everyone.

What We Are Seeing

• We regularly close properties with a cash-on-cash return between 4% and 6% (10 last month), so they are available.
• Rents rose about 9% in 2020. We expect the same or more in 2021.
• The average time on the market for most of our client's rentals is under seven days.
• The average tenant stay (for ours and our clients' properties) is about five years, with an average turnover cost of about $500.
• COVID - To date, out of the 170+ client properties we track (out of a total of > 200 properties), at some point during the last nine months, ten tenants have had trouble paying the full rent on schedule. A relatively small percentage of the total. I expect most of these tenants will catch up on their rent. For example, one of the tenants just paid close to $9,000 to bring their rent current. Paying $9,000 to catch up on the rent is a lot more expensive than moving. However, moving is not the issue; bad credit report is their fear. A negative hit on their credit will dog them for years. Plus, even if they wanted to move, no property manager would rent an A Class property to anyone with any black mark on their credit. So, eviction moratorium or not, credit risk is the primary control factor for our tenant pool. We've only had five evictions in the last 14+ years.
• For Class C and Class B properties, it is a very different story. The landlords I talked to have a lot of tenants who have not paid the rent in months. The tenant pool for C and most B Class properties are lower-paid, lower-skilled workers. These are the first to be laid off during economic stress and the last to be rehired. This is one reason we do not recommend Class C and rarely B Class.

Las Vegas is in a unique position. There is little land for expansion, a growing job market, and an influx of people. Unless there is another "COVID Event", prices and rents will continue to increase at a rapid rate through 2021 and beyond. Unless California suddenly turns business and people-friendly, Las Vegas will have a long run of prosperity.

Supporting Information

First, the statistics.

The information below only concerns the narrow property profile/tenant pool we target. No data for any other property type is included. The typical property we target has the following characteristics:

• Single family
• Sale price < $400,000
• Bedrooms: 3 to 4
• Garage: 2 to 3
• Stories: 1 or 2
• Note that while the green area appears homogeneous, in actuality it is more like Swiss cheese.

Below you will find the statistics we generate each month.

Rental Statistics

Rentals - Median $/SF by Month

Rents rose by approximately 9% YoY, which is a tremendous growth.

Rentals - List to Contract Days by Month

There is very little rental inventory and what is available goes under contract in days.

Rentals - Availability by Month

Inventory was low in January 2020, today it is even lower.

Rentals - Months of Supply

2 to 3 months is typical. Today we are just over 0.5 months of supply.

Sales Statistics

Median $/SF by Month

YoY $/SF increased by about 8%

Sales - List to Contract Days by Month

Due to the limited supply and the high levels of demand, properties went under contract in days, not weeks or months.

Sales - Availability by Month

There is very little inventory, which continues to drive up prices.

Sales - Months of Supply

6 months of supply is considered a "balanced" market. Today there is about 0.5 months of supply.

Other Items of Interest

• Google Data Center - Google is in the process of building a $600M data center in Henderson. They also announced that they will add a second $600M data center on the same site. Las Vegas will be one of 11 data centers worldwide. Even though they will not employ many people (100 to 150 employees at an average salary of $65,000), the presence of Google is huge. I believe that where Google goes, others will follow. And, it will be infrastructure, which is what I want for Las Vegas. I've seen companies lay off thousands of engineers and programmers at a time, but no one walks away from infrastructure.
• announced three more centers in Las Vegas. Of special interest are two facilities: Merch by Amazon and Print on Demand. "Merch by Amazon allows brands and independent artists to create custom-printed apparel and electronics products. Print on Demand helps authors and publishers with on-demand publishing, helping to reduce upfront costs of printing for inventory." Amazon selecting Las Vegas for this type of infrastructure will bring others to Las Vegas as well.

The hospitality industry is still expanding:

• Virgin Hotels is opening a new hotel/casino on March 25, 2021)
• The First Atari Hotel Looks Like a Gamer's Fantasy — and It’s Opening in Las Vegas
• The Boring Company plans to expand the existing underground transit system in Las Vegas.
• Resorts World, a $7B hotel/casino is opening summer 2021.
• Las Vegas was the second fastest-growing city in the US for 2020 - according to updater. "Most people migrated [to Las Vegas] from cities like San Fransisco, Los Angeles, and Sacramento, Updater said."
• California fuels Las Vegas growth - As California continues to make the state less desirable for both individuals and businesses, many are leaving the state. Leaving California has actually become a significant business. A portion of these companies and people will choose Las Vegas. Hopefully, the number of people moving to Las Vegas will not become the torrent that Boise is attempting to deal with.
• Zillow is predicting a +10% increase in Las Vegas housing prices in 2021. Interestingly, in the summer of 2020 they predicted a 7% decrease for 2021.
• Housing prices for Las Vegas are still well below 2006 peak prices. See the chart below. If you ignore inflation, prices have almost reached the 2006/2007 peak. However, inflation is real and must be considered. $143/SF in 2008 dollars is the same as $174/SF in 2020 dollars so there is still a long way to go.
• Land shortage - The available land for development continues to dwindle. At the end of 2019, the amount of vacant buildable land in the Las Vegas Valley was less than 28,000 acres, of which 5,000 to 7,000 acres is not viable for residential development. (87.5% of Clark County is federally owned. 85% of the entire state is federally owned. ) Consumption rate is about 5,000 acres/year. See the animated GIF below. The areas in brown are federal land. The time-lapse only goes through 2018 and there was a large amount of development in 2019 and 2020. The southwest part of the city is now the least developed and construction in the area is relentless. For example, the $400M Uncommons has broken ground - a $400M complex in southwest Las Vegas.

  Las Vegas is and will continue to be a great place to invest for buy and hold investors.

Hello @Dexter Belleza,

Thank you for asking. A lot has changed since 2017, mostly for the better with our target tenant pool. First, a summary and then the supporting information.

What We Are Seeing

• We are consistently closing on properties with an average cash-on-cash return of between 4% and 6% (10 this month). And, we believed rents will continue to increase in 2021 and beyond. However, these sorts of deals represent only about 0.4% of all available properties. The days of finding such deals by cruising real estate sites or driving around are pretty much over.
• Rents rose about 9% in 2020, and we expect the same or more in 2021.
• The average time on the market for most of our client's rentals is under seven days.
• The average tenant stay is still at about five years, with an average turn-over cost of about $500.
• COVID - To date, out of the 160+ client properties we track (out of a total of > 200 properties), at some point during the last nine months, ten tenants have had trouble paying the full rent on schedule. A relatively small percentage of the total. I expect most of these tenants will catch up on their rent. For example, one of the 10 tenants just paid close to $9,000 to bring their rent current. Paying $9,000 to catch up on the rent is a lot more expensive than moving. However, moving is not the issue; bad credit report is their fear. A negative hit on their credit will dog them for years. Plus, even if they wanted to move, no property manager would rent an A Class property to anyone with any black mark on their credit. So, eviction moratorium or not, credit risk is the primary control factor for our tenant pool. We've only had six evictions in the last 14 years.
• For Class C and Class B properties, it is a very different story. The landlords I talked to have a lot of tenants who have not paid the rent in months. The tenant pool for C and most B Class properties are lower paid, lower skilled workers. These are the first to be laid off during economic stress and the last to be rehired. This is one reason we do not recommend Class C and rarely B Class.

Las Vegas is in a unique position. There is little land for expansion, a growing job market, and an influx of people. Unless there is another "COVID Event," prices and rents will continue to increase at a rapid rate through 2021 and beyond. Unless California suddenly turns business and people-friendly, Las Vegas will have a long run of prosperity.

Supporting Information

First, the statistics.

The information below only concerns the narrow property profile/tenant pool we target. No data for any other property type is included. The typical property we target has the following characteristics:

• Single family
• Sale price < $400,000
• Bedrooms: 3 to 4
• Garage: 2 to 3
• Stories: 1 or 2
• Note that while the green area appears homogeneous, in actuality it is more like Swiss cheese.

Below you will find the statistics we generate each month.

Rental Statistics

Rentals - Median $/SF by Month

Rents rose by approximately 9% in 2020.

Rentals - List to Contract Days by Month

There is very little rental inventory and what is available goes under contract in days.

Rentals - Availability by Month

Inventory was low in December 2019, today it is down to the lowest I've seen in the last 15 years.

Rentals - Months of Supply

2 to 3 months is typical. Today we are just over 0.5 months of supply.

Sales Statistics

Median $/SF by Month

YoY $/SF increased by about 8%

Sales - List to Contract Days by Month

Due to the limited supply and the high levels of demand, properties went under contract in days, not weeks or months.

Sales - Availability by Month

There is very little inventory, which continues to drive up prices.

Sales - Closings by Month

Sales - Months of Supply

6 months of supply is considered a "balanced" market. Today there is about 0.5 months of supply.

Other Items of Interest

• Google Data Center - Google is in the process of building a $600M data center in Henderson. They also announced that they will add a second $600M data center on the same site. Las Vegas will be one of 11 data centers worldwide. Even though they will not employ many people (100 to 150 employees at an average salary of $65,000), the presence of Google is huge. I believe that where Google goes, others will follow. And, it will be infrastructure, which is what I want for Las Vegas. I've seen companies lay off thousands of engineers and programmers at a time, but no one walks away from infrastructure.
• announced three more centers in Las Vegas. Of special interest are two facilities: Merch by Amazon and Print on Demand. "Merch by Amazon allows brands and independent artists to create custom-printed apparel and electronics products. Print on Demand helps authors and publishers with on-demand publishing, helping to reduce upfront costs of printing for inventory." Amazon selecting Las Vegas for this type of infrastructure will bring others to Las Vegas as well.

The hospitality industry is still expanding:

• Virgin Hotels is opening a new hotel/casino this month (January 2021)
• The First Atari Hotel Looks Like a Gamer's Fantasy — and It’s Opening in Las Vegas
• The Boring Company plans to expand the existing underground transit system in Las Vegas.
• Resorts World, a $7B hotel/casino is opening summer 2021.
• Las Vegas was the second fastest-growing city in the US for 2020 - according to updater. "Most people migrated [to Las Vegas] from cities like San Fransisco, Los Angeles, and Sacramento, Updater said."
• According to Newsweek, Nevada is the third fastest-growing state.
• California fuels Las Vegas growth - As California continues to make the state less desirable for both individuals and businesses, many are leaving the state. Leaving California has actually become a significant business. A portion of these companies and people will choose Las Vegas. Hopefully, the number of people moving to Las Vegas will not become the torrent that Boise is attempting to deal with.
• Zillow is predicting a +10% increase in Las Vegas housing prices in 2021. Interestingly, in the summer of 2020 they predicted a 7% decrease for 2021.
• Housing prices for Las Vegas are still well below 2006 peak prices. See the chart below. If you ignore inflation, prices have almost reached the 2006/2007 peak. However, inflation is real and must be considered. $143/SF in 2008 dollars is the same as $174/SF in 2020 dollars so there is still a long way to go.
• The median sales price for new single-family homes is $415,000. The current price range for our target property profile is between $250,000 and $350,000. What this means is that new homes will not compete with resales as investments. The quantity of conforming rental properties is limited. This will tend to drive up rents and prices.
• Land shortage - The available land for development continues to dwindle. At the end of 2019, the amount of vacant buildable land in the Las Vegas Valley was less than 28,000 acres, of which 5,000 to 7,000 acres is not viable for residential development. (87.5% of Clark County is federally owned. 85% of the entire state is federally owned. ) Consumption rate is about 5,000 acres/year. See the animated GIF below. The areas in brown are federal land. The time-lapse only goes through 2018 and there was a large amount of development in 2019 and 2020. The southwest part of the city is now the least developed and construction in the area is relentless. For example, the $400M Uncommons has broken ground - a $400M complex in southwest Las Vegas.

  I hope this answers your question on the current state of the investment market in Las Vegas. If you have questions, please contact me directly or post them and I will do my best to answer.

Determining a Property Specific Maintenance Provision

In this post I will describe a method for determining a property specific maintenance provision and explain where this method can fail. Before I do, I want to explain why there is no "universal constant" that provides any meaningful result for all properties. To demonstrate the problem, I will compare the maintenance on two cars.

Suppose you are asked to determine a single yearly maintenance amount that would be accurate for the two cars shown below.

One is a new small car and the other is an older wrecked Humvee. If you chose an annual amount to match the new car, it would be insufficient for the Humvee. If you chose a maintenance amount that would match the Humvee, it would be way more than what is needed for the small car. If you decided to use a average of the maintenance cost for the small car and the wrecked Humvee, you would be wrong on both.

Even if such a universal maintenance constant could be determined, multiplying this constant (percentage) by the rent does not work. When you multiply any maintenance constant by rent, the higher the rent, the higher the predicted maintenance cost. The following example will demonstrate the problem with this approach.

Suppose I assume that 10% of the rent is the correct amount of all properties, no matter the tenant pool, age or condition, length of tenant stay, construction materials used, tenant pool, climate or anything else. I will use the maintenance constant multiplier for estimating the maintenance of a typical C Class Las Vegas property and one of the A Class properties we deal with.

In Las Vegas, many C Class properties rent for about $650/Mo., average age is about 40 years and most are in poor condition. If I use the 10% rent multiplier, the result is: 12Mo. X $650/Mo. X 10% = $780/Yr for maintenance cost. Does this approximate the actual cost? In short, no. In my experience, $2,000 to $2,500 might be low.

A Class properties that conform to our property profile have an average cost of about $300,000 with a typical rent of about $1,800/Mo. All were built after 1985 and we cherry pick properties that require low maintenance. If I use the same 10% multiplier: 12Mo. X $1,800/Mo. X 10% = $2,160/Yr. According to the property managers we work with, average maintenance cost is closer to $350/Yr. The amount of rent has no relationship to the annual maintenance cost.

Determine a Property Specific Maintenance Provision

The method used with commercial properties is to create a "reserve" fund to cover future repair costs based on remaining useful life of the expensive components. The following example shows the two most expensive repair cost items for our typical residential properties. You might have 2 or 10 items on your spreadsheet. It depends on the property age, condition, construction, etc.

Suppose you want to determine a maintenance provision for a property and you know the age of the existing units. From this you can determine the remaining useful life.

Based on the projected remaining useful life, you need to accumulate the replacement cost of the AC compressor ($2,500) within 11 years, and to accumulate the replacement cost of the water heater within 3 years. So, how much do you need to set aside each month to handle both repairs?

• AC compressor: $2,500 / 11 Yrs / 12 Mo/Yr = $19/Mo.
• Water heater: $800 / 3 Yrs / 12 Mo/Yr = $22/Mo.

The total for each month is: $19 + $22 or $41/Mo.

Using this approach, once you have accumulated enough funds ($2,500 + $800) to replace the two units, you do not keep accumulating funds. However, the odds of the AC compressor and the water heater failing in the same years are small. I would accumulate the funds for the more expensive items (the AC compressor) and not worry about the water heater.

Another factor to consider is the monthly cash flow from the property. Suppose the cash flow for the property is $300/Mo. You could cover the replacement cost of the AC compressor with $2,200 plus one month's cash flow ($300). That changes the calculation for the AC compressor provision as follows:

• AC compressor: ($2,500 - $300) / 11Yrs / 12Mo/Yr = $17/Mo.

Multiple Properties

How do you determine a maintenance provision if you owned multiple properties? You would create a spreadsheet with the useful life, remaining life and replacement cost for major component for each property. To keep things simple the following table only contains one item, the AC compressor, for each property and the replacement cost is always $2,500.

The table below contains the monthly cash flow for each property.

In this example, the total monthly cash flow is sufficient to cover the replacement cost of one AC compressor. Since the odds of two AC compressors failing in the same month are low, no provision is actually needed for this (overly simplistic) example.

The point is that as the number of properties increases, you actually need a lower maintenance provision since the combined cash flow will cover most repairs.

The same method can be applied to base level repairs, such as dripping faucets, etc. Work with the property manager to determine a reasonable base repair cost and then amortize it on monthly basis. For example, if you assume 2 repairs each year and each repair costs $100, the repair provision for the earlier property can be revised as follows:

• AC compressor: $2,500 / 11Yrs / 12Mo/Yr = $19/Mo.
• Water heater: $800 / 3 Yrs / 12Mo/Yr = $22/Mo.
• Base maintenance: $200/Yr / 12Mo/Yr = $17/Mo.

Total for each month is $19 + $22 + $17 or $58/Mo.

Where This Falls Down

Individual items do not necessarily conform to national averages. For example, consider a water heater. While the useful life according to national sources is 12 years, could a water heater fail in 6 years? Yes it could. Could a water heater last 20 years, yes it could. Plus, the unexpected will happen. You handle this by establishing an initial maintenance fund and then add to it using the previously described maintenance provision method. What I did was to place $1,000 in a maintenance fund at the time I closed on the first property. With additional properties, I may or may not add to the fund. To date, all the repairs are minor and the repairs were covered by the monthly cash flow so I have not touched the maintenance fund.

Only Insure What You Can Not Afford to Lose

A maintenance fund is like an insurance policy. The accumulated funds are there to cover costs that you cannot afford to pay. What if you have sufficient funds from your job or other sources to handle any anticipated maintenance expense? You may choose not to maintain any maintenance provision.

Summary

The real world does not run on "averages". Maintenance is a good example. There is no universal constant which you can multiply by the monthly rent to get anything reasonable. The best way to estimate the annual maintenance is to talk to your property manager. They can tell you what they are experiencing with similar properties. However, always remember that you did not buy an "average" property, you will purchase a specific property, and every property is different.

Vacancy cost can be provisioned in a similar way. If anyone is interested I can write a post about this as well.

Hello @Julius Chinn,

First of all, the monthly payment for a $240,000 mortgage @3.5% is ​$1078, not $1,173 as you put it above.

Between our clients and ourselves, we have > 200 rental properties in Las Vegas. We are doing 5 to 10 closings each month. We provide an end-to-end service in conjunction with our investment team members. This includes a property manager, property inspector, renovation company, plumber, electrician, roofing company and several others. No one can do it all on their own.

I will respond to some of your statements:

Julius: "I surmise Eric handles the buy and then hands the Football to someone else to manage."

Eric: We work with a team of people. The property manager we work with is also part of our property selection and validation process. Unless the property manager approves the property, we do not move forward with purchasing it. On the other hand, if a client has an issue with a property 5 years or even 10 years after they purchased it, they come to us and we own resolving it.

Julius: "I think Mr. E is in protect your behind mode. He cant say oh you wanted cash flow too-sorry about that."

Eric: As stated previously, our clients plus us own > 200 properties in Las Vegas. All provide a significant positive cash flow. The six properties we closed recently will average between 5% and 7% return. There is one currently in escrow that will generate near 10% (in Summerlin). This includes all recurring costs: management, 25% down debt service, taxes, insurance, and provisions for maintenance and vacancy. By the way, the $296,000 property that I mentioned earlier in the thread has already signed a lease for $1895 + $25 pet fee total $1920 monthly rent, before the rehab is even finished or being put on the market. The purchase offer was made based on a ​$1750 rent. The tenant is moving in tomorrow, and the client won't start paying their mortgage until March 1st.

Julius: "No need for Capital fund because thing wont need replacing for awhile. My head still spinning over that GEM."

Eric: With residential, you mostly repair items but you will replace carpet, paint, etc. at some point in the future. The big factors on how frequently you need to replace items are based on: the tenant pool, construction, the materials used, the skill of the property manager, etc.

On your statement that there is a "national standard". Please send me the link to a single factor that works equally well for all properties no matter the age, condition, tenant pool, climate, construction, skill of the property manager, etc. Below is a simple example of why there is no "national standard" that works.

Suppose you were tasked to determine a single annual maintenance amount that would be accurate for the two cars illustrated below.

One is a new small compact car and the other is an older wrecked Humvee. If you chose an annual maintenance amount to match the new car, it would be insufficient for the Humvee. If you chose a maintenance amount that would match the Humvee, it would be way more than what is needed for the small car. If you decided to use a average of the two, you would be wrong on both. This is a simple demonstration where universal constants for maintenance do not work. The amount of maintenance a property will need is unique to that property. While there is no "national standard" there is a standard method to determine a property specific maintenance provision. If you or anyone actually wants to know how to calculate a property specific maintenance and vacancy provision, let me know. (Spoiler alert, there is no "national standard" for vacancy either. There is also a standard way to determine a property specific vacancy provision.)

Julius: "As price go higher ratios get funkier. Id hate to see what Erics $400,000 properties bring in."

Eric: We target a very specific tenant pool and the majority of the properties that match our property profile cost between $250,000 and $360,000. We have very few $400,000 properties. Those that we do are in either Summerlin or Green Valley and are performing very well.

Julius: "All you Vegas investors tell me im Wrong you are rolling in cash flow. Those of you who bought pre 2018 need not reply."

Eric: I do not know your definition of "rolling in cash flow" but every property we put into production since 2018 has been generating a positive cash flow for me personally and for our clients. Properties we closed this month will provide a return between 5% and 7%. Note that rents increased for our target property profile by about 9% in 2020. We are expecting a similar increase in 2021. This means that over time, return will increase.

Julius: "Bread and butter 3-2 rental. A mom n Dad, 2 Moms, or 2 Dads......2 kids, one of each approved gender, a puppy on a 5 year stay. You want me to believe day 2000 the property is in same condition as day 1."

Eric: I believe what you are trying to say is that over time properties need to be renovated. This is true. You determine a property specific maintenance provision for this. You set aside money each month to accumulate the funds for when you need them.

Julius: "What abount those Dinky Condos like Spring Oaks. Buy in lower $100,000s they might bring in a bit of cash flow, that i can believe."

Below is a simple analysis of how the 1008SF Spring Oaks condo is likely to perform, using your numbers of 20% down 3.5% interest rate, 10% management fees and 10% vacancy. 0.34% in this market is not good. Also, the median days on market today is about 25 days. In the current market, where good properties are going under contract in 3 to 7 days, this is a warning. When inventories rise again it will take significantly longer to rent these condos. And, looking at the rental history, it appears that the average tenant stay is about 2 years. Turning tenants every two years with a long time to rent will kill any potential profit.

Julius: "The topic is cash flow."

Eric: I agree. If a property is not generating a positive cash flow from day one, it is not a good investment.

Julius: "...$500...turn cost"

Eric: Turn cost is highly dependent on many factors including the tenant, construction, flooring, lease agreement, state laws and property manager tenant selection skills.

A little about the importance of the tenant pool. In Las Vegas, typical C Class properties rent for between $600/Mo. and $850/Mo. The security deposit is usually $300 or $400. These are cash based tenants so there is no blowback to the tenant for an eviction or destroying the property, except that the security deposit can be withheld. (This is true in Las Vegas, I have no idea what is possible in other states.) The small security deposit combined with the inability to collect for additional damages with cash based tenants is why turn costs are so high. Also, in Las Vegas, tenant stay in C Class properties averages about 1 year so turn costs are frequent.

Our tenant pool is credit based. They know that the terms of the lease are enforceable plus they have a significant security deposit; usually in the $1500 to $2,000 range. The lease is both proactive and reactive. Some of the proactive terms in the lease that reduce maintenance cost include:

• No waterbeds, boats, campers, trailers, mobile homes, recreational or commercial vehicles or any non-operative vehicles.
• The tenant is responsible for any repairs necessary to the premises up to and including $100.
• Any damage done by wind or rain caused by leaving windows open and/or by overflow of water, or stoppage of waste pipes, or any other damage to appliances, carpeting or the premises in general is the responsibility of the tenant.
• The tenant is responsible for any water and/or mold damage, including the costs of remediation of such damage if they do not report a leak in timely manner.
• The tenant is responsible for watering all lawns, shrubs and trees, mow the lawns on a regular basis, trim the trees and fertilize lawns, shrubs and trees. If the tenant fails to maintain the landscaping in a satisfactory manner, the landlord may have the landscaping maintained by a landscaping contractor and charge the tenant with the actual cost.
• Smoking is not permitted in or about the premises. The tenant will be charged any costs incurred for the abatement of any damages by unauthorized smoking in the premises.
• The tenant and any member of tenant's household or any guest shall not engage in any criminal or illegal activity, including but not limited to, illegal drug related activity, gang related activity, or acts of violence on or near the subject premises.
• Window screens are not necessarily provided (there are few flying insects in a desert). The tenant may install or replace screens at their own expense.
• The tenant is responsible for replacing all broken glass, regardless of cause of damage.
• The tenant is responsible for changing filters in the heating and air conditioning systems at least once every month, at tenant’s own expense. Any repairs to the heating or cooling system caused by dirty filters due to tenant neglect will be the responsibility of tenant.

On move out (reactive):

• Any damage to the premises caused by tenant or tenant’s family, agents or visitors, landlord may use funds from the deposit to repair, but is not limited to this fund and tenant remains liable for any remaining costs.
• Property must be professionally cleaned to include carpets and all hard surface flooring including tile and grout. Upon request by landlord, tenant must furnish receipts for professional cleaning services.

So, if there is damage beyond reasonable wear and tear, the tenant has to pay for it. The tenants know this so they tend to take good care of the property. And, even if the total cost of turning the property is $1,000 or more, the landlord rarely pays more than $500 with the rest coming from the tenant's security deposit. And, if the damage exceeds the security deposit, the property manager will file a collection or lien on the tenant.

With a lien, a damage judgement, a late payment, let alone an eviction on their credit, it is very unlikely the tenant will be able to rent another Class A property. They will end up in C Class or at best B Class with all the associated issues with crime, poor schools, etc. Since our target tenant is younger families, credit risk is a huge factor.

Because of all the downsides of damaging or not maintaining the property to the tenant, the turn cost to the owner is very low. The total turn cost not covered by the tenant's security deposit on a recently vacated property is $85.

The materials you use when renovating the property greatly impact maintenance cost. For example, LVP flooring has a much lower maintenance cost than carpet. However, if carpet is appropriate, we use a commercial grade carpet and the color consistence and durability is excellent. To date we have not replaced any carpet we installed.

If you: cherry pick low maintenance properties; have a good property manager; a lease agreement that protects the property; place a credit based tenant who will take care of the property; use materials that are very durable, your turn and maintenance costs can be kept low. Maintenance costs are especially low in Las Vegas due to the construction materials necessitated by being in the Mojave Desert. See the image below.

Julius, please don't forget to post how many properties you own and where they located.

Hello @Julius Chinn,

On your specific comments:

Chicken: "HVAC or whatever they call it. ..." 

A: Yes, the units are called "HVAC" (Heating, Ventilation, and Air Conditioning) because the system both heats and cools. We have never replaced an entire system. We have replaced air compressors, which cost between $1,700 to about $3,000. These are few and far between.

Chicken: "3. Can someone out there HOLLA if maintenance can de done at a rate of 2%"

A: Yes, 2% is a valid number if you:

• Cherry pick the right properties (no high maintenance properties)
• Target the right tenant pool
• Work with an excellent property manager who selects the right tenants.
• Renovate the property to reduce maintenance cost.

Chicken: "2. Most companies will charge a new lease up fee of one month in addition to monthly mgmt fee."

A: It depends on the property manager. The one we work with charges a $500 lease up fee and 8% of collected rent.

Chicken: "2% vacancy is unacceptable. Need to use board of standards rate which is 10%"

A: There is no "board of standards". No "universal constant" for vacancy or maintenance is possible. These are tenant pool, climate, construction, individual tenant, property manager and property specific.

Vacancy cost is a function of the specific location, the specific property, tenant pool, specific tenant, and the skill of the property manager. If you are dealing with C Class properties in Las Vegas, I think 10% is too low. Here is the math for the tenant pool we target: 5 years x 12 Months/Year = 60 months. (Note: 5 years is our average tenant stay.) So, you have 1 month vacant out of 61 months. 1/61 = 1.6%. Our typical time to rent in a normal market is about 2 weeks, much less today. Typical turn cost is about $500. Yes this is the number that we are seeing on our clients turnovers. Actually, the majority of them cost less than $500. Remember that a large portion of the turn cost such as deep cleaning, yard clean up, paint touch up is charged to the tenant's security deposit. The lease up fee is ​$500. The carrying cost to the owner during a vacancy is the mortgage and association fee (if any). Assuming a ​$295,000 property, the mortgage is about $933/Mo. $933 + $500 + $500 = $1,933. $1933 / (1750x12x5years) = 1.8% of rent. We round up to 2%. This is assuming rents stay flat for the full 5 years, which is not the case in Las Vegas. Rents have increased every year since 2013. YoY December 2020 is +9%. Also, if the property was purchased with cash, as you prefer to analyze with, the vacancy cost is drastically lower since there is no mortgage cost.

Chicken: " 7. Sinking fund to replace roof, etc needs to be 10% or greater."

A: We only target properties with tile roofs and, if during due diligence significant roof issues are uncovered, we either have the seller repair or we walk away. With a tile roof, unless you ignore the damaged or slipped tiles, it lasts for a very long time. In 15 years we have never replaced a roof for any properties that we or our clients own.

Chicken: "How many properties..."

A: Since 2018 our clients and we have purchased 120-130 single family homes and another +20 townhomes, all cash flow positive. We started tracking historical data on our target tenant pool and target property profile about 15 years ago.

How many and what type of properties do you own in Las Vegas?

Hello @Julius Chinn,

We just closed 6 properties in the last 2 weeks, all at 25% down, all will generate +5% actual return. Note, all the single family properties we target cost between $250,000 and $375,000. Townhomes cost between $230,000 and ​$260,000. Below is a spreadsheet for one property. If you would like the spreadsheet, send me an email.

Some comments:

Because of the tenant pool we target, our average tenant stay is about 5 years. So vacancy is about 2% of the rent (1 month every 5 years or 60 months). Average turn cost is about $500. For maintenance, because of the tenant pool, skill of the property manager and the properties we select, maintenance is a little less than 2%. Note that our property selection process, the desert climate and construction materials are the main reasons our maintenance is so low. See the image below.

Note that we do not include depreciation in our calculations. In our experience, depreciation alone increases return by 4% to 6% for most people. After the first year, we will have adequate data to estimate a maintenance provision. If you would like to know how to estimate a property specific maintenance provision, let me know and I will post it.

There are many methods on Biggerpockets for calculating return. Below are the formulas we use which include all recurring costs.

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

• Note that Nevada has no state income tax, but we include this in case we are comparing returns with a property in a state that has a state income tax.

Remember that initial ROI is not as important as how the market is likely to perform in the foreseeable future. ROI is only an estimate of how a property is likely to perform on day one of a lifetime hold. The most important long term profitability metric to look for is appreciation. Appreciation is a good barometer of the overall condition of a market. Unless appreciation is at or above the rate of inflation, your actual income (buying power) will decline. In Las Vegas, we've seen continuous rent increases since 2013. Below is a 13 month chart showing $/SF for all conforming rental properties. Rents increased in 2020 by about 9%.

Below is a 13 month chart showing $/SF for all conforming properties. $/SF increased in 2020 by about 7%.

Julius, if you have questions feel free to reach out or post on this thread and I will do my best to answer.

Hello @Kim Wong,

Thanks for the prompt, below is what is currently happening in the Las Vegas investment market. Know that the information in this post only concerns the narrow property profile/tenant pool we target. No data for any other property type is included. A typical property we target has the following characteristics:

• Single family
• Sale price < $400,000
• Bedrooms: 3 to 4
• Garage: 2 to 3
• Stories: 1 or 2
• The map below shows the location of about 80% of our client's properties as well as the approximate search area.While the green area appears homogeneous, in actuality is is more like Swiss cheese.

Below you will find the statistics we generate each month.

Rental Statistics

Rentals - Median $/SF by Month

Rents rose by approximately 9% in 2020.

Rentals - List to Contract Days by Month

There is very little rental inventory and what is available goes under contract in days.

Rentals - Availability by Month

Inventory was low in December 2019, today it is down to the lowest I've seen in the last 15 years.

Rentals - Months of Supply

For rentals, 2 to 3 months is typical. Today we are just over .5 months of supply.

Sales Statistics

Median $/SF by Month

YoY $/SF increased by about 8%

Sales - List to Contract Days by Month

Due to the limited supply and the high levels of demand, properties go under contract in days.

Sales - Availability by Month

Very little inventory.

Sales - Closings by Month

Sales - Months of Supply

6 months of supply is considered a "balanced" market. Today there is about .5 months of supply.

Headlines

We get a lot of questions on the news headlines so I thought I would address them here.

The news is wrong more often than it is correct. Below is a clipping from the CEO of Biggerpockets:

People hear the "news" spewing dire predictions, usually based on only an opinion, misunderstandings and rarely any facts. Below are my responses to the most common questions we receive.

"Large Number of Foreclosures in Las Vegas" - While there may be a significant number of foreclosures in other parts of the country, it is not true for Las Vegas. According to the UNLV Lied Center For Real Estate Research:

Note, Reno is in Washoe County.

There has been no increase in the number of distressed residences in Las Vegas because the home owner population has had limited economic impact due to COVID. Note that this does not mean no impact, just not enough to prevent most from staying current with their mortgage.

"The Coming Wave of Evictions in Las Vegas" - As usual, the "experts" got it wrong. Their mistake was that they grouped all tenant pools together into one basket and made their "prediction". As an engineer, I can tell you that their approach is invalid. You cannot combine disparate tenant populations into a single group and produce any meaningful information. They also made an even bigger error.

When the eviction restrictions end, a number of C and B Class tenants may be evicted. However, what the "experts" seemed to forget is that all these people will still need a place to live. And, all the owners of the C and B Class properties will need tenants. What I believe will happen is closer to musical chairs than a huge wave of vacancies. Evicted tenants will move to the next C or B Class property down the street. And, the people from that property will move to another recently vacated property. Most C Class tenants and many B Class tenants are cash based, they have no or very limited credit so an eviction has no impact on them. One property manager who handles a lot of such properties told me that the tenant screening criteria consist of: "A heart beat, 2 pay check stubs and enough money to pay the first month's rent." Whether they just got evicted or skipped is not much of a factor when screening such cash based tenants. So, in the short term, I see the potential for a lot of people shuffling around but not a lot of vacancies.

The tenant pool we target - To date, out of the 160+ client properties we track (out of a total of > 200 properties), at some point during the last 9 months 10 tenants have had trouble paying the full rent on schedule. A relatively small percentage of the total in my opinion. I expect most of these tenants will catch up on their rent in the near future. For example, one of the 10 tenants just paid close to $9,000 to bring their rent current. Paying $9,000 to catch up on the rent is a lot more expensive than moving. However, moving is not the issue, a bad credit report is their fear.

"The Las Vegas Economy is Crashing" - Basically, I believe none of these articles when it comes to Las Vegas and likely the nation. The US has the most stable economy in the world at this time. Also, almost all international transactions (oil, food, trade, etc.) are dollar denominated. The EU central bank has had a negative (yes, negative) interest rate for some time. The only market where Europeans are likely to get a good return is the US. So, the US securities market is likely to remain strong since it is a refuge for international investors.

Locally, the underlying economy is comparatively strong. At the end of 2019, Las Vegas had approximately $24B under construction. Some of these developments are already on line (Circa Casino, Project Neon, Raiders Stadium, etc.). Others are still under construction (Google's $600M data center, Amazon opening 3 more centers which brings the total to 6 in Las Vegas, etc.) and more new projects have been announced. No one walks away from billions of dollars of infrastructure so the vast majority of these projects will be completed. In some cases openings may be delayed but they will open. When they do, they will create thousands of new jobs, the majority of which will match our target tenant pool. These jobs will bring more people to Las Vegas, which increases demand for rentals and purchases, which will drive up prices and rents.

Observations:

• Google chose Las Vegas for the site of a data center. Google operates 11 data centers world wide and Las Vegas is one of them. The data center under construction will cost about $600M. Google also announced that they would build another $600M data center on the same site.
• Amazon announced they will build 3 more facilities in Las Vegas bringing the total to 6 in Las Vegas.
• Las Vegas is the 2nd fastest growing city in the US.
• Fleeing Californians are driving up Las Vegas housing prices.
• Nevada is the 3rd fastest growing state
• One reason Nevada is attracting companies from California is the cost of energy. California has the 5th most expensive energy in the US. Nevada is one of the lowest cost energy in the US.
• Las Vegas is an island in a sea of federal land. 87% of land in Clark County is federally owned. What is available for development is down to about 26,000 acres and a significant part of that is between Nellis AFB and the Nellis Test Range. No one is building residential housing under low flying military aircraft. So, you probably have about 21,000 acres (at the end of 2019) available for development. Las Vegas is consuming land at the rate of about 5,000 acres per year. See the map below for a time lapse between 1984 and 2018. (There has been a lot of development since 2018 so the available land is significantly less now.) I have never heard of a situation where an increasing pool of money bidding on a shrinking supply where prices did not rise.

Summary

It is a great time to invest in Las Vegas real estate if you buy properties that target the right tenant pool.

Kim, if I did not answer your questions, pleased get back to me.

I want to explain what I called "hyper-local" information in an earlier post on this thread. Before I continue I want to state what I believe to be a fundamental principle. Each property is most desirable to a specific tenant pool segment. You do not control which tenant pool is attracted to a specific property since the tenant pool makes their own selections. For example, suppose you buy a property where the average rents are $800/Mo. You might want to rent to nurses. Nurses in the US have a median wage of $73,000 or about $6,000/Mo. At $6,000/Mo. this tenant pool segment is more likely to buy than rent. If they choose to rent, the properties they will seek are probably renting for about $2,000/Mo. They are very unlikely to want to live in a property or location where properties rent for $800/Mo.

My point is that you first need to identify a target tenant pool, and determine what they are willing and able to rent and buy properties that match.

I've done some investigation into the process people generally follow to find a property to rent. I call this the tenant selection hierarchy. See the image below.

Once you identify your target tenant pool, you need to have a deep understanding for at least the following:

• Price - A rule of thumb is to select properties that will rent profitably at about 1/3 of the median gross wage of your target tenant pool. If you can afford $1,200/Mo. rent, you will not consider properties renting for $1,500/Mo. or properties renting for $1,000/Mo.
• Needs - If you want to attract families, one bedroom condos will not work.
• Location - Factors such as crime, area amenities, schools, access to transit, etc define the location.
• Wants - For example, to attract our target tenant pool the property almost always needs tile or LVP floorings in high traffic areas. For another tenant pool, it might be bars on the windows. Another might be a swimming pool. Tenant "wants" also drives what renovations are required and which are not.

How can any national, state or city databases provide tenant pool specific characteristics? You can certainly get data like property age, year built, crime, median household income but I do not see how it will tell you that you need to have granite counters for a specific tenant pool segment.

If anyone knows of databases with tenant pool specific characteristics, please point me in the right direction.

Hello @Hengky Lim,

Before you choose a location in Las Vegas, you need to decide what tenant pool you wish to target. Each tenant pool has different characteristics, which defines the type, location, configuration and rent rate of the properties that will attract your target tenant pool.

Based on our research on Las Vegas renters, you can generally subdivide tenant pools into three general categories based on rent, as shown in the image below.

General characteristics of each segment:

• Transient - Cash based, average tenant stay 1 year, typical turn cost $1,500 to $2,000. Plan on lots of turnover and high maintenance costs. These are typically C class properties. Typical age of these properties is about 40 years. These are typically hourly workers making little more than minimum wage. They are the first to be laid off and the last to be rehired. When you hear about landlords not receiving rent due to the covid eviction moratorium, this is the tenant pool segment most are referring to.
• Permanent - These are typically families with an income between $45,000 and $65,000/Yr. They stay for long periods of time (average is about 5 years), pay all the rent on schedule and take care of the property. Average turn cost is about $500. This tenant pool primarily occupies A Class and some B+ Class properties. The physical act of eviction is not what concerns this tenant pool segment, the credit hit does. They know that if they have a late payment, let alone an eviction, they will not be able to rent another A Class property and the cost of credit will rise significantly.
• Transitional - These are people who make enough money to buy a home and typically only rent due to some event in their lives like a divorce, death of a spouse, etc. Once they sort out their lives, they buy a home. Typical tenant stay, 2 years. Turn cost, high. These properties are typically larger homes with significant amenities and tenant expectations are very high. Restoring a home to meet the next tenant's expectations is expensive.

Because of the above and other considerations, we choose a narrow tenant pool segment well inside the "envelope" of what we call the "Permanent" renter range. This tenant pool has worked out very well for us and our clients, including during turbulent economic times such as the 2008 crash and today.

How do you target a specific tenant pool? You need to understand the specific target tenant pool's selection hierarchy. See the image below.

• Price - If you can afford $1,200/Mo. rent, you will not consider properties renting for $1,500/Mo. or properties renting for $1,000/Mo. A rule of thumb is to select properties that will rent profitably at about 1/3 of the median gross wage of your target tenant pool.
• Needs - If you want to attract families, one bedroom condos will not work.
• Location - Factors such as crime, area amenities, schools, access to transit, etc. define the location.
• Wants - For example, to attract our target tenant pool the property almost always needs to have tile or LVP floorings for high traffic areas. For another tenant pool, it might be bars on the windows. Another might be a swimming pool. This also drives what renovations are required and which are not.

With these 4 factors defined, you can translate them into a property profile, which will include at least 4 characteristics:

• Rent - Rent range. Typically, you can use 1/3 of the gross monthly income for the pool.
• Type - Condo, multi-family, single family, etc.
• Location - You may find a few locations that will work.
• Configuration - 2 bedrooms, 3 bedrooms, single story, etc.

There are more factors to consider but the above are the major property selection criteria.

Below is a diagram showing the general process. Simplistically, talk to multiple property managers about what types, configurations, locations and rent ranges that will attract the tenant pool you want to target . (If you want a list of potential questions, drop me an email.) Pay special attention to factors like typical tenant stay and time to rent. You need a long tenant stay; a vacant property destroys profitability.

The map below shows where most of our client's properties are located. However, if you choose a different tenant pool, your search areas would be different. (Note, while the green area appears homogeneous, it actually looks more like Swiss cheese.)

Hengky, I hope the above helped. Email me or post any questions and I will do my best to answer.