Current Market Condition
We recently responded to a few blog posts concerning the current Las Vegas investment market. The questions were basically asking whether there are still good deals to be found in the current Las Vegas market. The short answer is, "Yes". We consistently find good properties with 2% to 5% return (including all recurring cost: property manager, debt service (20% down, 30 year fixed), taxes and insurance). Now for the details.
Today, Las Vegas is a seller's market and good properties do not stay on the market long, especially in the sub $260,000 range. Above $260,000 we have a little time. Having to rapidly bid on properties is nothing new to us. Here is how we handle such market conditions:
- Frequent property updates: We send out properties to our active investors very frequently (every 2 to 4 days). This tool is a view into some of the data we use internally to evaluate properties.
- When a property comes onto the market, we have 1 to 3 days to submit an offer. In a hot area like Green Valley, we sometimes make offers based only on our knowledge of the neighborhood, floor plan, MLS photos and estimated return. Since it usually takes the seller one to two days to respond, we have time after submitting the offer to get to the property and if it looks good, take a video. We send the video to you and the property manager. The property manager gives us her opinion on probable rent, time-to-rent and rehab considerations. If everything makes sense, we leave the offer in. If not, we withdraw the offer.
- We continue to make offers (frequently more than one offer at a time) until we get a property that works for you under contract.
- Remember that during the 10 day due-diligence period, you can cancel for any reason. During the first few days, the property is inspected by both the property manager and the property inspector. We then get quotes for all the rehab items needed. If it still makes sense, we proceed to close. If not, we terminate the purchase.
In short, we need to move very quickly to get good deals but we do not skip any of the due-diligence steps to ensure your financial safety.
One of the reasons the Las Vegas market remains hot is the number of investors. Las Vegas is one of the few places in the US where you can achieve the three critical requirements every good investment property must meet:
- Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
- Likely to appreciate over time.
- Located in an area where you can make money and business risks are low.
Some of the advantages of Las Vegas include:
No urban sprawl - While not largely discussed, this is a major factor to consider. In every major city I've seen, there are areas that were once "the place to live" and are now distressed areas. This is usually the result of urban sprawl. People want newer floor plans, better schools and more space. So, they move to newer areas. The people who remain generally have lower incomes thus driving down home prices and rental rates over time. Note that such declining markets can be very appealing because they can have high returns today as rents tend to lag sales price by (depending on which study you read) 3 to 10 years. Below is a diagram we created to illustrate the effect urban sprawl can have on investments over time as higher income families move to newer areas.
Las Vegas is completely surrounded by federal land; there is very little land left to develop. Las Vegas' only growth path is redevelopment. Today's class A properties will very likely remain class A properties in the future. See the map below.
Population growth - Depending on which study you read, Las Vegas' population is expected to continue to grow at 2-3% per year into the foreseeable future. This is a very healthy and sustainable growth rate. As the population increases and there is no expansion room (urban sprawl) property prices and rent rates are very likely to continue to increase.
Job quality and quantity - 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 (or have already left) 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 today than they did in the past. Less disposable income means that they cannot afford to pay the level of rent they did in the past. In 2016, Nevada surpassed pre-recession employment with 70,000 fewer construction jobs. (Las Vegas metro area is about 80% of the total state population.) Construction jobs are one of the first to be eliminated when there is financial turbulence. So, reaching pre-crash levels with fewer construction jobs indicates that the economy is more stable than it was in 2008.
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. It can take up to one year to evict a non-paying tenant in California. In some cities you can not evict during the winter. Other places have rent control and other regulations that curtail ownership rights. In Las Vegas, there is no rent control and evictions usually take less than 30 days and cost less than $500. In addition, Las Vegas has one of the lowest property tax rates in the country (~0.55%).
Ongoing maintenance cost - When I owned properties in Atlanta and Houston, I was always replacing roofs, fencing, siding, terminate damage and dealing with lush landscapes. Below is a typical class A property in Las Vegas:
The health of every location is dependent upon job growth and that means current employers expanding or corporations opening new facilities. Current employer growth is dependent on the specific company and the location. New job growth is dependent on corporations choosing to open facilities. Corporations will generally choose to open new facilities where they can get the talent they need at the lowest possible operating cost. For example, manufacturing. I believe manufacturing will be highly automated and the location, cost of doing business, labor costs and regulations will be the major factors driving location selection. Some thoughts:
- Right to work states - 28 states (including Nevada) have enacted legislation prohibiting employees being compelled to join a union, nor compelled to pay for any part of the cost of union representation. I think new businesses will look to right to work states for future expansion. A 2008 editorial in The Wall Street Journal comparing job growth in Ohio and Texas stated that from 1998 to 2008, Ohio lost 10,400 jobs, while Texas gained 1,615,000. The opinion piece suggested right-to-work laws might be among the reasons for the economic expansion in Texas, along with the North American Free Trade Agreement (NAFTA), and the absence of a state income tax in Texas. Another Wall Street Journal editorial in 2012, by the president and the labor policy director of the Mackinac Center for Public Policy, reported 71% employment growth in right-to-work states from 1980 to 2011, while employment in non-right-to-work states grew just 32% during the same period. The 2012 editorial also stated that since 2001, compensation in right-to-work states had increased 4 times faster than in other states. See: Wikipedia article.
- Crime - When manufacturers and other employers are opening a new facility, they need a location where management will want to move. I believe that any city on the list of the 100 most dangerous places in America will not be considered a desirable location.
Based on the current market and economic state of Las Vegas and future prospects, I believe that Las Vegas will remain an excellent place to invest for the long term.
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