[philmason]

With the fall in housing prices in LV, how have investor cap rates for residential rentals been looking? For instance, have rents fallen at the same ratio with sales prices, or have investment properties been looking more appealing?

I'm going to be moving to the LV area once I find a home (working with olecapt), and don't have any career lined up. Diversifying some of my investment dollars into a few rental properties may sound appealing, if I have the free time to devote to it.

In doing some reading, I saw there are some real estate investment groups that meet around LV, curious if anyone on here has ever participated in any of those and has commentary?

[Willy702]

Most of the investment groups around LV are either wannabes or those looking to make a buck off the meetings. The investment outlook for the town changes frequently so I wouldn't put too much stock in others assessments. Get into town, run the numbers, get a feel for how houses are selling versus list price or comps as they can be all over the place. The cap rates on paper are fantastic, but accept that many of them are not doable due to lack of financing.

My advice is if you have cash, great, keep it. Don't do cash deals. Just say no even though a lot of your competitors will be doing them. There are enough deals out there (pretty much every 3/2 or 4/2 house pencils out unless it needs ridiculous levels of work) and a slowly growing source of funds to be patient. Rents have fallen a bit, but nowhere near the rate that prices have. Quite simply prices of houses are in a weird state of impossible. Impossible to be built anywhere near current prices (unless you think land will be nearly free for decades to come) and impossible to remain at these price levels over the medium and long term. That is unless incomes go down 10-15% and/or we see double the unemployment. Provided you are not that pessimistic, you'll be waiting a while for equity gains, but they will eventually come up to correspond to the income levels of the city. Meanwhile you should be cash flowing with any amount down, but just expect getting your first and second deal to take a lot longer than you probably think.

[philmason]

Thanks for the commentary. I'll avoid the meetings then. Yes, when I pencil out many of the offerings, they look appealing (assuming that I am reasonable in expecting 10-20% vacancy over a 5 year period). As for buying in cash or not, I think that if the timing is stronger for cash right now, maybe you suffer that for now. There is always the option of getting that cash back in the future, especially years down the road if the market recovers from its danger zone. The cash can also be borrowed right now against a margin account at a rate of 1-2% (2% broker call). Here is one quick condo example.

Cash on cash return for simplicity: 6%

Condo Example:
41 INNISBROOK AV Las Vegas, NV 89113
Purchase price $65,000
Year built 1987
Move in Fix $4000

Total $69k, Gross rent $8400 (700x12)
Gross rent multiplier: 8.2
NOI assuming 50% (industry average) operating expense $4200
Capitalization rate 6% (4200 / 69000)
Mortgage at 6% of 52k = $311/mo Gross $700 income, net $350 income (50% operating cost)

That's cash flow positive with 20% down payment, and its using a comp sale. Many in that condo development actually for sale 1k sq ft 2bed/2bath in the 40s/50s. If you could get in around 50k you'd be looking very good.


I'm not in town yet but when I get out there I'll certainly look into some of these deals. This probably is a great opportunity for a "new to the business" landlord that can handle the property management and handyman side of it. If using a property manager, I'm sure you would be in the red pretty quickly though.

[WestieJeff]

Pretty good estimate, usually people ignore vacancy periods, repairs, etc. but you have accounted for that.

At the end of the day, do you really want to be a landlord for 6% cash on cash return?

[xofruitcake]

At the end of the day, do you really want to be a landlord for 6% cash on cash return?


yes, any day and any time.. Remember this number is not leverage.. if you run the leverage number (e.g. 20-30% downpayment), the return will be in the 20+% range and it is not counting any kind of housing appreciation or 30 yr from now you own the condo.. I think the problem is accounting for the time to manage the property. One cannot scale this thing up (i.e. more than a few properties at any given time and it become a full time job and now you have to account for the salary that you loss)

[WestieJeff]

Did you read the breakdown above? That 6% return is leveraged with a 20% down payment. By definition, "cash on cash" return will show you the leveraged return since it is the return based on your cash into the investment.

Now if you count appreciation then of course leveraging will help you a lot. Leveraging will kill you on depreciation, so double edged sword.

Nothing for free.

[olecapt]

Originally Posted by WestieJeff

Did you read the breakdown above? That 6% return is leveraged with a 20% down payment. By definition, "cash on cash" return will show you the leveraged return since it is the return based on your cash into the investment.

Now if you count appreciation then of course leveraging will help you a lot. Leveraging will kill you on depreciation, so double edged sword.

Nothing for free.

I am skeptical that you will get appreciation on the high yield, low end condos. The problem is that the owner occupant is being ruled out by the lack of financing so these developments become an invenstor only play. The are therefore valued on return not owner occupant usage.

I would think the better long term outcome will be the lower end single family. Particulary those brutalized in the downturn. I would think these will mostly go back to owner occupant if and when the market does trend upward.

That of course impacts return on value and drives the investor to cash out.

Then again we could sit here for a few years yet...with nothing happening.

[philmason]

To clear something up WestieJeff, the 6% breakdown I gave was a non leveraged number.

This is just a great opportunity now for someone who wants the extra diversification anyway. And its a strong inflation hedge. A lot better than TIPS right now.