The Threats to Yield
Many investors are attracted by the high yields that Las Vegas offers, with Realtors advertising 10%+ annual returns on all-cash residential purchases, but that is only part of the story. Yields that look good on paper can rapidly compress under the pressures of vacancy, delinquency and operating costs.
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This article looks at three different asset classes (condos, single family homes, multi-family) and examines how the choice of asset class can have a significant impact on the net return. I have owned all three asset classes in the last year, and had properties generating yields as low as 5%, and as high as 20%.
Potential pressures on a condo yield:
- One of the advantages as a condo owner-resident is that water, trash and sewer are all included in the monthly Home Owners Association (HOA) fee. However, as a landlord this is a disadvantage because the HOA fee is a fixed cost during periods of vacancy.
- Las Vegas is awash with cash buyers, many of whom are buying at historically low prices in condo communities. Not only is this increasing the number of rental units, it is also increasing the number of landlords with lower rental rate hurdles to clear to meet their return targets. These factors combine to increase vacancy and lower rents.
- Condo units are uniform in layout and amenities so it is difficult to position an asset as unique when marketing it for rent. Price tends to be the biggest distinguishing factor and the condos with the lower asking rents are those that lease first – it only takes a couple of condo owners to lease at below market rents, and you will either have more vacancy than you planned for, or a lower rental rate that you budgeted for.
- As a result of foreclosures being bought by investors there are more single family homes available as rental properties than has historically been the case. This is increasing the competitive pressure on condos, especially with some houses being rented out for as low as $800 p/m. To read the full article subscribe for FREE via the box above.