I recently had the pleasure of being interviewed for an article written by Brian Wargo for the “In Business” section of the Las Vegas Sun. Following is a reprint of the article which was titled, “Single Family Homes Catch Investors’ Eyes – Buyers Focus on Rental Income More Than Appreciation Potential”:
Southern California investors have returned to the Las Vegas market in force to look for bargains on single-family homes and helped drive Las Vegas to a record number of sales in June, housing industry experts said.
The number of investors buying new and existing homes in Las Vegas rose 35 percent when June numbers are compared with June 2008, according to San Diego-based DataQuick.
The demand for investors buying existing homes has helped that segment of the market fare the best when it comes to real estate investing over the past year and kept housing prices stable between April and June, analysts said.
“Real estate has always been a good investment, and right now it has never been better from a residential standpoint,” said Steve Bottfeld, executive vice president of Marketing Solutions. “I just wouldn’t invest in commercial (real estate) because it is about to go through what residential already has.”
DataQuick reported that investors made up 37.5 percent of the buyers of both new and existing homes in June. That’s the second highest June this decade when it comes to investor-purchased homes, next to the 39.4 percent in June 2004. It’s also the highest percentage of investors as buyers since it was 37.6 percent in February 2006, said DataQuick spokesman Andrew LePage.
The influx of investors into the market is evident since it hit a low of 25.3 percent in September 2008 in the aftermath of the housing boom. In June 2008, investors comprised 27.8 percent of the sales, below the 30.3 percent average for Las Vegas between January 2000 and June 2009, LePage said.
No one should confuse this class of investors in residential real estate with those during the boom that bought and flipped houses, Bottfeld said. These investors are looking to hold long term and earn money off rental income, he said.
It makes sense because if someone can buy a home for $100,000 in cash and rent it for $1,000 a month, that equates to a 12 percent return before taxes and other expenses are included, Bottfeld said. Even getting an 8 percent return is better than the 2 percent they might get at their bank, he added.
Glenn Plantone, a Realtor and president of the Real Estate Insiders Club in Las Vegas, said investors are taking advantage of a steep drop in prices since they peaked in 2006. In some cases, prices of homes in the northwest fell 70 percent.
Homes that sold for about $300,000 are going for about $110,000 he said.
“They are buying them for cash flow,” Plantone said. “We are not even talking about appreciation potential.”
The market to rent homes remains strong because people understand the value compared to renting an apartment, Plantone said. And for those homeowners who lost their home to foreclosure, they want to stay in a home.
“It is a lot easier to rent houses than condos,” Plantone said. “We are getting people who are walking away from a $2,000 a month home payment and going across the street to rent a home for $1,200 in immaculate shape.”
Despite the interest in Las Vegas, it is not as strong as Phoenix where 39.6 percent of sales were bought by investors, LePage said.
Most of the investor buyers that Plantone said he has dealt with are Southern Californians. Many are small businessmen who have several hundred thousand dollars to invest and have been waiting for an opportunity in real estate.
Plantone said these buyers are savvy because none of his investors has bought a property for more than $121,000. They are looking for homes built in 2003 and later.
Robyn Yates, the broker-owner of Windermere Prestige Properties said not only are investors coming from Southern California but there has also been a lot of interest from foreign buyers, especially in Asia. Some are even buying homes without seeing them in person, she said.
Many investors have been hurt by the decline in the stock market and liquidated some of those assets or took out money from their 401k despite having to pay a penalty, she said. In some cases, there are a group of five people pooling cash to buy 10 homes, but most are individual investors, she said.
“Some of them were just holding onto cash until the opportunity was right,” Yates said. “I think they are going to be around for another couple of years.”
As long as homes can be bought much cheaper than builders can construct them, there will be a market for investors in Las Vegas, Yates said.
Plantone said that many of these buyers will leave the market when prices go up $20,000 to $30,000 because their investments won’t pencil out for rental income as they will now.
“That’s why investors have been so aggressive,” Plantone said. “I am telling people they may not see a better time to buy since the Great Depression.”
Investors are winning out over frustrated first-time buyers for the properties because they are offering more than the list price and because they have the advantage of offering cash, Plantone said. It was only three months ago that buyers could get properties below list price, he said.
Any investors who bought in 2007 or early 2008 wouldn’t have had any luck with appreciation, although buying single-family homes fared the best out of all real estate investment categories over the past year, according to Larry Murphy, president of SalesTraq, a Las Vegas housing research firm.
“The single-family home has always been the preferred house of choice with most people,” Murphy said. “Most people want the picket fence and the back yard and not being attached to someone.”
Between the first six months of 2008 and first six months of 2009, the median price of single-family homes fell 34 percent, Murphy said.
The best performer on price appreciation when it comes to planned communities was Silverstone Ranch in the northwest valley. The Pulte Homes community had a median price of $226,000 in 2008 and that fell 19 percent to $182,500 through the second quarter this year, Murphy said.
Homes performed better than an acre of undeveloped land, whose median price fell 42 percent over that timeframe, he said.
Third on the list were mid-rise condominiums, which fell 49 percent in the past year They were barely ahead of high-rise condos whose values fell 50 percent and other condos and town homes which fell 51 percent, Murphy said.
The worst investment over the past year was apartment conversions with values falling by 56 percent, Murphy said.
The worst of the that segment was the Meridian at Hughes Center on Flamingo Road, east of the Strip that was converted from apartments to condominiums between 2005 and 2007, Murphy said.
The property, which had a failed attempt at trying to convert into a condo-hotel because of Clark County regulations, sold for $604 per square foot when it first entered the market. The average price was $539,000, Murphy said.
Through June, the average resale price has fallen to $87,611 or $121 a square foot, Murphy said. With that drop in price has come rising foreclosures. Murphy reports that 201 of the 680 units or 30 percent have been foreclosed upon, and that number is likely to rise. The foreclosures have been running as high as 25 a month so far in 2009, he said.
Murphy said he’s not surprised apartment conversions have fared the worst because in essence some are 20-year-old buildings that have a new granite countertop.
There was a strong demand for condo conversions during the housing boom because they were the only units available that could be bought for $200,000 or less. With homes more affordable today, that softens the demand for conversions, he said.
Land came in second after single-family homes because despite the meltdown in the market, it remains a precious commodity, Bottfeld said. Even though Las Vegas is overbuilt, there is a limited supply of land because of restrictions by the federal government, he said.
There is not as much movement on buying high-rise condominiums because the inventory is limited and banks have been reluctant to put that inventory on the market at bargain prices, Plantone said.
The high-rise condominium market that has fared poorly is condo-hotels in which buyers put the room in the daily hotel rental pool. Demand for hotel rooms has been weak in the economy and hotels only return about $30 for every $100 in rental income, Plantone said.