Investing in Las Vegas

Investing in Las Vegas real estate

I should probably preface this article by disclosing that I am not an investor. However, I do have many clients who are, and have learned a few things along the way. Like many others, I've kicked myself for not investing during times when prices were rising rapidly and quick profits were there for the taking. During such times, it seems that I have been too busy helping my investor clients to actually buy properties.

Over the past ten years Las Vegas has attracted investors from all over the country and beyond. More than enough favorable national magazine articles have pointed both first-time and seasoned investors to the rapidly expanding Las Vegas market. In the spring of 2004 investors were so active in our community that builders were turning them away. During that period realtors had instructions from their clients to buy just about anything that wasn't nailed down.

Some Investing Basics

A typical textbook scenario goes something like this...

• You locate a desirable rental property.
• Ideally this is a single-family detached home with 3 bedrooms and 2 baths
• The home should have appreciation potential (newer homes appreciate better than older ones)
• You secure a loan with a 20% down payment financing the balance. (lenders require 20% on investment properties)
• You act as landlord or hire a management company to act as landlord (pay them 10% of rent)
• The rent should cover mortgage, taxes, association fees and management. (break even)
• If the rent pays you more than you owe then you have positive cash flow.
• If your monthly payments exceed the rent you have negative cash flow.
• For the next year or years you let the renters pay for your investment.
• If prices of homes rise substantially, you sell and reap a nice profit
• If prices do not rise very much, you wait it out and let the renters pay off your mortgage

Up until a few years ago, it was quite easy to create a positive cash flow situation. Rents were relatively high due to a shortage in the availability of rental properties. After all, you've probably heard that 50,000 people move to Las Vegas each year. Ah, supply and demand.

Changes in the Las Vegas market

Over the past year home prices have risen substantially. Rents have NOT risen proportionately. So the previous "break even" and "positive cash flow" scenarios will not work (with 20%down). In a 20% down situation on the purchase of an average Las Vegas home you will probably be paying $1400 per month while collecting $1150 rent.

Maybe that's not such a bad thing in your tax bracket. But I find that most folks, particularly new investors, expect to at least break even.

It's not all doom and gloom

As a good friend and fellow realtor, Bruce Ricks, points out... "if you pay all cash for a rental, it will all be positive cash flow". Right, why didn't I think of that! Why limit yourself to a 20% down payment? If you run the numbers through your spreadsheet you will probably find that a 30% down payment will put you in a break-even situation. After all, according to the law of supply and demand, rents will eventually catch up with current home prices and eventually exceed them. By that time, your rental investment will also have appreciated nicely.

Las Vegas High-Rise Investing

Some investors did very well in this niche market, but times have changed. Many knowledgeable people have told me that some of the proposed hi-rises will never see the light of day. Which ones... who knows? Another factor is that the hi-rise developers have tightened their cash deposit requirements (money due prior to completion of the project). In this situation, one needs deep pockets (and nerves of steel) to play the game.

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