Talking About Yields Again

This week is not shaping up into one of those weeks full of good news. When that happens, Frothing Developer thinks about the medium term. Today we want to talk about yields on investment real estate in Las Vegas.

Prices have fallen on some housing in Las Vegas to levels where, relative to the rent they fetch, they are not just good deals but amazing deals from a cash-on-cash yield basis.  One reason that yield is important is that if you’re making enough yield on an investment, that is, if your taking enough dollars to the bank every month, then you can ignore fluctuation in the price of the asset, and you can ignore disruptions in the market.

Let me dive into some examples.

Consider Park Avenue on Las Vegas Boulevard. One of the first of the wave of condominiums that were built during the boom. Not a project without drama. The Board of Directors has had upheavals. The property management company is being investigated by the FBI, and the whole site has been fighting a construction defect lawsuit for two years now.

Not at first blush what you might consider a perfect real estate investment.

But let’s look at what a purchase at Park Avenue yields.

To start with, we look at the MLS to try to get a sense of what Park Avenue rents for. We’ll filter out the furnished units and the 1 bedroom units. Since the 2 bedroom plans at Park Avenue are pretty similar in size and appeal, we’ll average all of the recent leasing activity in the last 2 months. Throwing out a couple of oddly high outliers (we want to be conservative in our assumptions here), we get average rent of about $1.01psf, or $1176 per month.

Now let’s look at costs:

HOA dues range from $146 to $220. I’m not sure how they’re calculated, so I’m just going to use $200 per month.

Property taxes end up being about .8% per year.

Now let’s look at what you can buy these units for. I took the lowest four prices for units that were not short sales, and that were two bedroom units. The average of the prices for these 4 units is about $140,000. They’re all bank repos.  Two of these units are on the first floor and two are on the second floor. Let’s move the rent down to $1150 to adjust for floor level.  Assuming a 95% occupancy, and budgeting 5% of rents for a property management fee and another $500 per year for maintenance/insurance, you would get a 6% cash-on-cash return if you bought one of these units and leased it out. Add in the tax benefits of depreciation and you get up to 6.7%.

With money markets only deliverying 2-3%, that’s a great return for something as steady as rental real estate. This analysis doesn’t factor in the potential impact of construction defect litigation. It assumes rents won’t fall (probably a safe assumption for Park Avenue, what with the 2000 jobs of M Resort popping up in the southern end of town.)

How about Manhattan, my first project? It doesn’t have the construction defect exposure, and it’s a newer project. We still own some units at Manhattan, which we’ve leased. At Manhattan, we’ve been consistently getting $1500 per month in rent (although the MLS shows that other landlords are not hitting that level). There are units that have shown up in the MLS as low as $200k for standard Midtown plans. Apply the same cost factors and logic, and Manhattan units when purchased at this price deliver 6.2%.

These yields are very impressive. Here’s another way to think about it: suppose you buy one of these units and plan to resell it in 2 years. You want to sell it for $50k more than today’s market. If you mark up the price of a Manhattan unit to $250,000, it still delivers a 5% annual yield.

Yields like this are why there are so many transactions in the market. I started buying undervalued, high-yield units this month, and have bought 4 so far.

What does this mean if you’re sitting on a unit at a much higher price and lower yield? It means that you can look forward to the market moving back up towards your level. How quickly it moves and how far it moves depends on your yield. This is where not all properties are created equal. A lot of the single-family residential units in town have lower yields because they require much more money for maintenance and don’t command rents at the level of Manhattan. But there are probably some real gems out there.


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