Financial freedom necessitates a life-long revenue stream which is very difficult to achieve with traditional investments like stocks, bonds, CDs, etc. To learn about the difference between traditional investments (accumulate and draw-down) vs. real estate (revenue streams) see this article: Why Real Estate. In this article I will explain why Las Vegas is one of the best places for real estate investment. Before I get into specifics, I want to explain what real return means vs. apparent return.
Apparent return is what most ROI formulas calculate but this does not reflect what cash you will actually receive from a given property. ROI formulas (there are several) do not take into account state income taxes, property taxes, maintenance costs, risk (time and cost to evict a nonperforming tenant, etc) and longer term factors such as population migration, job market stability and other factors that effect both long term profitability and potential appreciation. Some factors, such as risk, are hard to quantify but the effect of state income taxes and property taxes can be easily estimated. For example, suppose you are considering three identical properties that rent for the same amount (yes, this is an over simplified and contrived example!). I will assume that the properties are located in Austin, Indianapolis and Las Vegas. Which one will produce the highest real return?
Below is a table showing the approximate state personal income tax (I will assume a person filing separately with a $50,000 income) and property tax rates for all three cities.
All three properties have the following characteristics:
- Purchase price $150,000
- Rent: $1,000/Mo.
- Financing: 20% down, 4.5% interest, 30 year term.
- Down Amount: $30,000
- Debt Service (PI): $600/Mo
Below is a (oversimplified) formula for estimating cashflow assuming 100% occupancy, no maintenance, etc. in order to keep the numbers simple:
Cash Flow = Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice
And, to take into account state taxes:
Annual Cash Flow = (Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice) x (1 - StateTaxRate)
For Austin: ($1,000 x 12 - $600 x 12 - 1.9% x $150,000)x (1 - 0%) = $1,950/Yr
For Indianapolis: ($1,000 x 12 - $600 x 12 - 1.07% x $150,000)x (1 - 3.4%) = $3,086/Yr
For Las Vegas: ($1,000 x 12 - $600 x 12 - 0.86% x $150,000)x (1 - 0%) = $3,510/Yr
Real return is about how much money actually flows to you, not gross rent, and real return is part of the reasons why investments in Las Vegas generally have a higher real return than similar returns in other states. Also, factors indicating that real estate investments in Las Vegas will likely appreciate include:
- Land shortage
- Business friendly laws and regulations
- No state taxes
- Not dependent on manufacturing or other declining business sectors
- Population migration away from cold climates and the rust belt.
When people fly or drive into Las Vegas the vast undeveloped areas around the city leads people to believe that there is a vast amount of space available for future development. In this case appearances are deceiving. Below is a map of the Las Vegas valley. The blue areas are federal land; not available for development. As you can see Las Vegas is land locked. In fact, the total amount of land available for any kind of development is about 35,000 acres. But there is actually far less than that.
The largest portion of available land is in the north east, between Nellis AFB and the Nellis Ordnance Test Range. It is the green area between the two blue boxes in the upper right corner on the map. There is a lot of military aircraft activities between Nellis AFB and the Nellis Ordnance Test Range and military aircrafts are VERY loud. So, a lot of the land in the north east is pretty much unusable for residential housing.
Once you remove this area and a few areas that are virtually landlocked by federal land you actually have very little available left for residential expansion. When you have a limited supply of anything and there is a demand for it, prices invariably go up. And it is not just the Las Vegas metro area that has limits. Only 11% of the entire state of Nevada is in private hands; the rest is federal or state owned.
Business Friendly Laws and Taxes
Business Friendly Laws
Nevada is a law and order state and this applies to rental properties as well. In Las Vegas evictions generally take less than 30 days and cost less than $500. See here for the details.. Compare this to California where evictions can take up to one year and can cost thousands of dollars if the tenant resists the eviction. I understand that in some areas of New York state evictions can take up to 18 months.
No State Taxes
There are no personal income taxes in Nevada. Nothing to file and nothing to pay. This alone gives Las Vegas investments a 1% to 5% advantage over other cities or states. The example in the beginning of the article clearly shows the advantage of this fact.
Additionally, Nevada is one of the few states that has no data interchange agreement with the IRS. See here for more details.
Reasonable Property Taxes
In Las Vegas property taxes average about .86%/year of market value. In other states/counties property taxes can exceed 2% or 3% per year. This gives Las Vegas investments another 1% to 2% advantage over many other locations.
Other Factors That Increase Your Real Return
Low Maintenance Costs
In other cities where I owned investment properties (Houston and Atlanta for example) I spent a lot of money repainting, repairing siding, replacing roofs, replacing rotted window frames, gutters, termite damage and never ending yard maintenance. Below is a photo of a typical single family home in Las Vegas. There is little to no maintenance with tile roofs, stucco siding, desert landscaping (rock), concrete block "fences" and metal doors and windows. In fact, my clients generally expect to have between $500 to $1,000/year of maintenance unless an appliance needs to be replaced.
High Percentage of Renters
For many workers in the hospitality industry, the majority of their total income is tips (cash). One bartender I know does not feel she had a good night if she does not come home with at least $500 in tips. Hostesses frequently make over $100,000/year; many over $200,000. Do these high tip earners always report all their cash income to the IRS? No. So, there is a large population of people in Las Vegas who have cash but cannot obtain financing for a home since their W2 shows a very low income so they have no option but to rent. In many of the single family home subdivisions over 50% of the homes are rentals.
A Great Place to Live
I remember reading about a company that planned a brilliant dog food campaign for a new product. Everyone loved the campaign and lots of consumers bought one can. The problem was that the dogs did not like the food and would not eat it so the product failed despite the great campaign. This is true for where people live; if it is not a good place to live and raise a family, it will not have sustained growth.
Once you get away from the strip, Las Vegas is a great place to live. Prices are reasonable and there are lots of parks, sports, golf, entertainment, and 310+ days of sunshine per year. Here, a valet or bar tender can afford to live well. And, contrary to the popular image, only a small portion of the local population spend time in casinos (unless they work in one). I offer myself as an example. I moved here from the New York City area about 8 years ago. I do not gamble, smoke and only occasionally drink. The only time I go to the casinos is to meet clients, see movies, watch plays and to occasionally enjoy the buffets. In total, I probably go into a casino less than 10 times a year. So I have a very different view of Las Vegas than most. To me, Las Vegas is:
- A place of law and order. The "anything goes" image is only marketing.
- A place were everything works. I don't know if it's because the city is so new or because Las Vegas learned from the older cities' mistakes.
- Only a few hours drive to many of the nation's best national parks.
- Close to a ski area; less than an hour away.
- Close to water sports; Lake Mead is less than an hour away.
- A place where I can go to live performances and, as a local, get a significant discount on tickets.
- A place without state taxes.
- A place where the people are friendly. Moving from the New York City area the friendliness of the people of Las Vegas came as a surprise to me.
- A place with over 310 days a year of sunshine.
- A clean new place with a low cost of living compared to similar sized cities.
- Low cost flights to other places.
If you are interested in achieving financial freedom faster, you need to invest in Las Vegas.