Why Las Vegas?
It is not how much money you make, its how much money you get to keep. In Las Vegas, you get to keep more of the money you make because of the low cost of doing business. And, due to a combination of factors, properties are very likely to appreciate and good properties today are very likely to remain good properties in the future. In this article, I will explain the specific combination of factors that make Las Vegas an excellent place to invest.
In my opinion, good investment properties meet the following three criteria:
- Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
- Likely to appreciate over time - Properties appreciate in locations that have increasing demand, which the key driver for sustained profitability.
- Located in an area where you can make money and business risks are low. Only in such an environment can you achieve both current and long term profitability.
Meeting all three criteria requires both the right location and the right property. In this article, I will only focus on how Las Vegas meets the key location requirements.
As long as you buy property in a good location, all but the worst mistakes will be corrected over time through appreciation, inflation, and rent increases. Said another way, if you buy in a bad location, there is almost no way to recover. What are the factors that make a location "good" or "bad"? Below are some of the most common factors to consider.
- Population stability
- Job quality and job quantity
- Urban sprawl
- Business environment
- Operating cost
If the population in a location is stable or growing at a sustainable rate, I consider the location population stable. Population stability is critical because if people are moving out of an area, housing prices and rental rates are likely to fall due to decreasing demand. If people are moving into an area, housing prices and rental rates are likely to rise due to increasing demand. Depending on which source you believe, Las Vegas population is expected to grow by 1.8% to 3% per year into the foreseeable future. This rate is excellent sustainable growth.
Job Quality And Job Quantity
In many parts of the US, manufacturing and similar jobs are going away 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. Less disposable income means that they cannot afford to pay the level of rent they did in the past. A key indicator is inflation adjusted per capita income for the location over the past few years. If you see a declining per capita income, housing prices and rents tend to fall because the residents can no longer afford to pay what they did in the past.
In 2016, the number of jobs in Las Vegas exceeded pre-crash levels with 50,000 fewer constructions. Most construction jobs are transient, so the fact that there are more jobs today than at the pre-crash peak with fewer construction jobs is great news. Also, according to the federal reserve, per-capita incomes continue to rise.
Urban sprawl is a major factor to consider. In every major city I've seen, there are areas that were once the best places to live and over time have become distressed areas. The major cause of such declines is urban sprawl. People want newer floor plans, newer homes, less crime, better schools, etc. If people have the income, they will choose to move to a location that better meets their current needs. As people with higher income move out of an area, those left behind will, on average, have lower incomes. One result of the outward migration of people with income is that property prices (and rents) will tend to fall because the remaining residents have less disposable income. As property prices fall, property tax revenues will fall. City services, which primarily depend on tax revenues, will be reduced. This creates a downward spiral which few locations ever recovered. Below is a gif of the Las Vegas valley which shows the growth between 1984 and 2016. The green areas are federal land. 2017 was a good year for Las Vegas so there is even less land than what is shown in the gif.
As you can see, the Las Vegas valley is almost entirely built out of the federal land boundary. In the future, Las Vegas' only growth path will be redevelopment. This means that A class property you buy today is very likely to stay an A class properties in the long term because there is no place else to develop.
Very few cities have such a limitation to expansion. Click on the various cities below and see the effects of urban sprawl where there are no limits to expansion. (Note that you will likely have to zoom out to see the sprawl.) Think about investors who purchased class A properties in the suburbs in 1984 (the starting year of the time lapse aerial views) and where the suburbs are now. Their properties are likely no longer attracting the level of tenants as they did in the past and the trend down is very likely to continue as the city sprawls. As an investor in such sprawling cities, you will likely need to sell your property every few years and repurchase further out of the current class A areas.
It is very hard to consistently make money in business climates where the state and the local government imposes undue restrictions on your ability to make a profit. One of the easiest ways to determine the business environment for a location is the cost and time to evict. In some states, it can take up to one year and cost thousands to evict a non-performing tenant. In Las Vegas, the time to evict is usually less than 28 days and costs less than $500. Note that nightmare evictions are rare but I view nightmare evictions like I view cancer. The odds of your getting cancer are relatively small but if you do get cancer, it is devastating and "odds" mean nothing.
Another warning sign is rent control. Over time, rent control can turn good investments in money pits. There is no such thing as rent control in Nevada.
Overhead costs - A good example is a cost for a permit. In Austin TX, the permit to replace a water heater is $450. In Las Vegas, the cost for the same permit is $60.
Two other easy methods to evaluate the cost of doing business in a particular location are to consider property taxes and insurance cost.
- Property taxes - A friend in Austin, TX is paying 2.5% property taxes. The average in Las Vegas is about 0.55%. Property taxes are a direct hit on your bottom line.
- Low Insurance cost - landlord insurance in Austin is close to $2,000/Yr for a typical 2,000SqFt single family home ($350,000+) vs. about $450/Yr. for a typical 2,000 single family home (<$250,000). This is another direct hit on the bottom line.
Debt service, taxes, insurance, and management are relatively fixed costs. The wildcards are vacancy and maintenance cost. The vacancy rate is property specific so I will discuss this in another article. Maintenance costs can be very different from one location to another. When I owned properties in Atlanta, Houston, and other places, I was always replacing roofs, (wooden) siding, (wooden) windows plus the cost of dealing with termites and lush landscaping. Such costs are a continual drag on profitability. Below are some generalizations about maintenance costs:
- Older properties require more maintenance than newer properties.
- Composition roofs require more maintenance than tile or metal roofs.
- Properties in climates with hard freezes require more maintenance than properties in milder climates.
- Properties in locations with a lot of moisture require more maintenance than properties in dryer climates.
- Wood siding requires more maintenance than aluminum, vinyl or stucco siding.
- Properties with lush vegetation require more maintenance than properties with little or no vegetation.
Below is a typical Las Vegas single-family class A home. As you can see, there is not a lot to maintain.
It's not how much money you make, it's how much money you get to keep. In Las Vegas, you get to keep more of the money you make because of the overall business-friendly environment and the low cost of doing business. And, with the continued population growth, economic expansion, rising per-capita income, and no urban sprawl, your properties are very likely to increase in value over time. See our latest Las Vegas outlook update.