Portfolio Sale – Economic Background

Last month the Las Vegas portfolio went up for sale, and I got our first bite, that wanted to close quickly, long story short it fell through.  Here’s a series on little more on the second try to sell the portfolio.  But first lets explore some of the economics first. 

If you haven’t seen the news and know that Vegas is a great market to start buying in, you are living under a rock!  Well Sunset -  Las Vegaswelcome to the peak my friends.  Prices went up and up and up and skyrocketed in the last year.  Every month for the last 11 months we have seen damn near double-digit appreciation.  Until last month.  We came to a screaming halt.  Good news is that prices are waaaaaaaaaaay up.  Good job Vegas.

Now for the bad news, well for my niche at least.  Blackstone was still buying in our area last month.  Here’s why this is bad for me.  My properties are on the bottom rungs of the rental preference ladder.  Haven’t heard of the Rental Preference Ladder?  Well that’s probably because it’s in my head.  I would wager that most Renters are going to follow this progression in their rental preferences, and will therefore will apply pressure to rental prices.

  1. Single Family Home/Luxury Condo’s – Renters are most likely going to want to rent a place where they can feel like home owners and willing to pay the premium price on.
  2. Luxury Apartments – If you can’t get into a single family home, you are more likely to fall into a nicer “Class – A” apartment complex that has a lot of amenities and spiffs for living there.
  3. Condos – If you can’t get into a house, and can’t afford a luxury apartment, your next logical step down is moving into a condo unit.  It’s got more going for it than a large apartment complex without all the hassle that you can feel with being in a large apartment.  Usually higher security and sense of safety.
  4. Apartments – Yup here you are sitting around in the “Class – B” apartment complex with a couple of amenities.  It’s not the nicest and newest property in town but you are going to feel safe and feel comfortable with the prices.  You are probably splitting rent with a friend of are just moving in with a significant other.
  5. “It Depends” Rung – Here’s where it starts to get shady, but once you fall below the “Class – B” apartments the next couple of rungs are more dependent on the location of the property.  Here is where we are going to find our Portfolio.  Someone might go for a 4-plex over a “Class – C” apartment complex or the other way depending on where the location is better, and this will vary depending on your local market.
  6. WARZONE!  — See more about Vegas warzones in this apartment complex evaluation I did in the past.

After looking at the ladder I drew a conclusion based on a couple of facts:

  • Blackstone kept buying properties
  • Las Vegas home sales are going to cash buyers (I.E. Landlords)
  • I am at the bottom of the Rental Preference Ladder
  • Unemployment in Vegas is still high
  • Wages are still low

According to the Federal Reserve Unemployment in the Las Vegas – Paradise MSA is still slightly above 10% And the Median Single Earner Income is just about $44k.  Using the standard 30% for housing expenses formula that means a single earner will be spending $1,100/mo in housing expenses.  With the lack of inventory people are not going to be able to move into home-ownership in Vegas which means that the top rung is going to start to cater to the mean earner to eliminate vacancies.  So here we have SFH’s renting for $1,100/ month.  If that’s your average over 100 units you aren’t doing too shabby are you, Blackstone?  But if you don’t have that quantity you are going to start hurting.  And as you start to fall down the ladder to the “Depends” rung, rents should be 40-50% of the top of the market leaving my units at about $550.

Want proof?  From this article we get the following scenario:

“In June, for instance, it (Blackstone) bought 6437 Buttercup Creek St. in North Las Vegas for $95,000, according to Clark County records. The previous owner bought the 1,200-square-foot, two-story house for $240,000 in July 2005. Colony wants to rent it for $900 a month.”

Bing!  Now what happens when more inventory comes English: An example in gentrification in North...on board when NV AB240 filters out to the banks and the people who have been living rent/mortgage free are finally foreclosed on?  More rental inventory.  And if you understand your economics lessons, greater inventory means lower prices.  $550 is the sweet spot for my rentals, falling rents makes my cash flow much less attractive.  Which leads to one single conclusion, that my target yields and margins are going to evaporate very quickly come renewal season, and it’s time to find someone who wants the future margins.

 

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