2022 - Las Vegas Investment Outlook

Written By Eric Fernwood

Photo by VOO QQQ on Unsplash

Updated 02-11-2022

At the beginning of each year we publish our outlook for the coming year. This year's report is divided into the following sections, so you can easily navigate to section(s) of interest.

2021 in Review

2021 was an exceptional year for Las Vegas investors. Below are some highlights.

Appreciation

Year over year prices increased by a whopping 32%! (for the segment of single family homes that we target) The investors who own Las Vegas properties have enjoyed a large increase in their equity, which provides them options to fund more investments.

Looking back, the average annual appreciation rate since 2013 for our target property profile is 15.25%!

Rent Growth

YoY rents increased by an astonishing 18%! According to a Zillow report, Las Vegas’ annual rent growth was fastest among the 50 metro areas in the report. This means a large cash flow increases for owners of Las Vegas rental properties.

The average annual rent growth rate since 2013 for our target property profile is 6.8%!

"...prices have surpassed the 2006/2007 peaks..."

Actually, no. See the chart below. Adjusting for inflation, prices are currently $55/SF below peak 2006/2007 prices. So, prices still have a long way to go to recover to 2006/2007 levels.

"It will take many months or years for Las Vegas to recover."

The "experts" were wrong on this one too. The recovery happened in one month (Washington Post, Las Vegas Review Journal). After the first month of recovery, gaming revenue continue to set all time record highs.

"Are we in a "bubble"?"

No. The classic bubble symptom is when prices do not track inventory. For example, in 2008, prices rose while inventory rose, which shows prices were driven by speculation, not demand. Today, prices are driven by demand as evidenced by prices mirroring inventory. See the charts below.

Continued Las Vegas Business Growth

Businesses continue moving to Las Vegas because it has the right combination of a cost-effective workforce, low energy costs, pro-business government, no state income taxes, good transportation, and more. Just as important, Las Vegas is also attracting the right types of business to grow our target tenant pool.

Las Vegas is getting far more infrastructure businesses than R&D, which is important. Employees of most infrastructure companies are our target tenant pool demographic. So, the more infrastructure companies move to Las Vegas, the better it is for our investors.

Another advantage infrastructure has over R&D is reliability. I've seen companies fire thousands of engineers in one day; no one walks from expensive infrastructure, so these jobs are relatively secure. No matter the economy. A good example is the Google data center in Henderson. (Google is proud to call Henderson home to one of our data centers.)

Some Other Businesses in the News

Major Drivers of Las Vegas' Real Estate

There are a combination of factors driving Las Vegas growth, some of which are listed below. We see no reason these drivers will not intensify in 2022.

  • Jobs - Today, there is a shortage of workers and help wanted signs are everywhere. And, with over $20B in new construction underway, and another $5B to $7B announced the demand for workers will increase which will bring more people to Las Vegas. The increasing demand will drive up prices and rents.

  • High Tax State Exodus - Almost every day, I read another article about companies and people fleeing high tax states in general and California in particular due to high taxes or high costs. This will drive more companies and people out of the state. As more Californians flee, more people will come to Las Vegas for the jobs and low cost of living. Demand for housing will continue to increase, driving appreciation and rent for the foreseeable future.

  • Pro Business Environment - Nevada has no state income taxes, low property tax, low-cost property insurance, reasonable traffic, reasonable property prices, lower cost of just about everything. Las Vegas is investor-friendly. Evictions take less than 30 days and cost about $500. Another advantage Nevada offers businesses is low electricity cost. For example, California commercial energy rate: $.22/kWh. Nevada: $.1258/kWh.

  • Land Shortage - As you can see in the gif below, Las Vegas has reached its boundaries in many locations. And, little of what remains is suitable for residential housing. The high cost of land and the limited supply results in the entry price for new homes in desirable areas being over $550,000. Properties that target our tenant pool today cost between $360,000 and $450,000. New homes will not dilute the supply of investment properties.

What We Expect in 2022

Before I continue, two statements on predictions:

"Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." ...Peter Drucker

"Predicting anything beyond yesterday is guessing." ...Eric Fernwood

Will Prices and Rents Continue to Rise?

Yes. Increases or decreases in prices and rents are the results of market imbalances. If there are more buyers than sellers, prices rise. If there are more sellers than buyers, prices fall. Las Vegas has been in a state where there are far more buyers than sellers for several years, and we see no end in sight. The best evidence of this situation is inventory levels. Below is a screenshot from the Las Vegas Realtor Association (LVR) MLS showing the overall inventory as of January 26th. As you can see, inventory has consistently declined since mid-2020 and dropped even faster starting in Q4 2021.

Six months is considered a balanced market (where buyers ≈ sellers). Today, the overall inventory is below one month (including condos). For the segment we target, there are about .5 months of inventory. These low inventory levels are unprecedented; we have never seen such low inventory levels before. Due to the low inventory and increasing population, we believe prices will continue rising for the foreseeable future.

For the rental segment that we target, there are about 1.5 months of inventory, also firmly in the seller's market zone. We expect the rents to continue to rise for the foreseeable future.

In this market, the real opportunity for investors is appreciation, not initial cash flow. If you want to understand why appreciation is the fastest way to grow your portfolio, see this article, Achieving Your Passive Income Goal with Less Capital. As a teaser, below is a comparison between appreciation and cash flow over three years, assuming 10% annual appreciation and a 10% cash on cash return. Keep in mind that annual appreciation for Las Vegas exceeded 15% since 2013, well above the 10% appreciation used in the example.

Will Rising Interest Rates Depress Prices?

No. In a classic market situation, increasing interest rates will result in fewer buyers qualifying to buy homes, increasing the number of renters. The long-term result of rising interest rates is usually prices stabilizing or even decreasing. However, Las Vegas does not conform to a traditional market. The number of buyers moving in from high-cost states will absorb almost any amount of inventory. The diagram below illustrates the forces driving prices. So, unless there are other major factors, I believe prices (and rent) will continue to increase throughout 2022.

What is the outlook of the interest rate throughout 2022? The Mortgage Bankers Association predicts the 30-year fixed rate will reach 4% in Q4 2022 and 4.3% in 2023. Probably higher if the Fed starts to shrink its balance sheet.

Will Inflation Reduce My Passive Income?

Not if you invested in Las Vegas. In the five years before COVID, most locations had annual rent growth of 2% or less. If I assume 6% average inflation (closer to reality than the official 2% to 3% rate) for that period, the buying power declined, as shown in the table below. For example, if rent only increased 2%, your buying power declined by 26% after six years. So, if the rent was $1,500/Mo. in 2015, and rent increased 2% annually, by 2021 the amount of goods and services you could buy declined to $1,110/Mo. For people depending on their passive income streams, inflation can be devastating. If your property was in Las Vegas, where the average annual rent increase of the same period was 9%, by 2021, your inflation-adjusted buying power rose to $1,725/Mo. "Location, location, location" is especially relevant for investment properties.

If you have income streams that are not increasing faster than inflation, talk to us about a 1031 Exchange.

Note, in the table below, 6% is a likely "real world" average inflation rate so I marked it in yellow.

Rent Growth 2015 2016 2017 2018 2019 2020 2021
2% 100% -4% -8% -12% -17% -21% -26%
3% 100% -3% -6% -9% -12% -16% -19%
4% 100% -2% -4% -6% -8% -10% -12%
5% 100% -1% -2% -3% -4% -5% -6%
6% 100% 0% 0% 0% 0% 0% 0%
7% 100% 1% 2% 3% 4% 5% 5%
8% 100% 2% 4% 5% 7% 9% 11%
9% 100% 3% 5% 8% 11% 13% 15%
10% 100% 4% 7% 11% 14% 17% 20%
11% 100% 5% 9% 13% 17% 21% 24%
12% 100% 5% 10% 15% 20% 24% 28%
13% 100% 6% 12% 17% 23% 27% 32%
14% 100% 7% 14% 20% 25% 31% 35%
15% 100% 8% 15% 22% 28% 34% 39%

Will Las Vegas Rent Growth Continue to Beat Inflation?

Yes. Research shows that there is a strong relationship between property prices and rent. Depending on the market, rents lag property price trends by 2 to 10 years. So, today's inflation-adjusted $/SF sales price trend is an excellent indicator of what will happen to rental rates in the foreseeable future. Based on today's phenomenal price increases, I believe Las Vegas rent growth will continue to exceed inflation. The chart below shows the rent growth in Las Vegas for the past ten years, which has tracked the price increases well.

Continuing Population Growth

According to a study from UNLV's Center for Business and Economic Research, Las Vegas population is expected to continue growing for the foreseeable future. The growing population and limited available land will drive up rents and prices for the foreseeable future.

Will Water Limit Las Vegas' Growth?

No. Around 1890, there was a study performed on the potential growth of LA. It was scientifically proven that the water supply would limit the LA population to a maximum of about 400,000 people. Everyone agreed; end of the story. Then William Mulholland, head of the LA water district, proposed building the Los Angeles Aqueduct, a 233-mile-long system to move water from Owens Valley to the San Fernando Valley. Today, the Los Angeles Aqueduct is supplying a lot of LA's water.

There was a study concerning the cost of running a large water pipe from Las Vegas to northern Nevada, where there is sufficient water. The estimated cost was $2B. It is so inexpensive because almost all the land between Las Vegas and northern Nevada water source is across federal land. However, whether the cost is $2B, $4B, or $20B does not matter. The Resorts World Casino alone cost over $7B to build. No one will shut down a trillion-dollar business (Las Vegas) for a few billion dollars.

On the current water supply, one of our clients works for the local water company. He and I talked about water usage in the valley, and I learned that about 80% of the total water usage is for irrigation in private homes, mostly watering grass. When the water situation gets sufficiently dire, the water company will increase prices, and the lawns will go away. Grass in the Mojave Desert makes no sense.

There are currently a lot of major projects under construction in Las Vegas; the total is over $22B. All these companies did their homework on the water supply and other potential issues before they committed so much money. I trust their research.

In summary, I am not worried about the short or long-term water supply of Las Vegas.

Should I Buy or Should I Wait?

Do not wait. Waiting is beneficial only if one of the following happens:

  • Interest rates will fall significantly. This is unlikely - based on the latest Fed monetary policy release, the Fed is widely expected to raise interest rates two or three times this year, starting in March. The Fed also intends to trim its balance sheet and focuses primarily on Treasuries. This means the Fed will be looking to sell mortgage backed securities (MBS) vs buying them as they've been doing since the start of the pandemic. Less demand of MBS will push up the mortgage interest rates. Waiting will likely cost you more in terms of the monthly payment as interest rates rise.

  • Prices will fall significantly. Again unlikely - as we discussed earlier, we see no factors that will cause a pause or end to price increases for the foreseeable future. Prices (and rents) will continue to rise, which means you will have to pay more for a property if you wait.

I see no advantage of waiting.

Equity Reinvestment in 2022 Considerations

All of our client's properties experienced significant appreciation, especially in 2021 (32%). We believe many clients will want to repurpose this equity using cash-out refi's to buy additional properties. (Here is a case study on reinvesting equity for a property I own.) This is a proven approach to acquire additional income properties with little additional equity required. The challenges may be:

  • Rising interest rates - We expect two to three interest rate increases in 2022.
  • Low inventory levels - We are still consistently finding good properties and hope inventory will increase.
  • Renovation - There is a shortage of workers in Las Vegas. We are fortunate to have worked with the same renovation company for several years. They almost exclusively work on our properties and they can handle multiple simultaneous renovations. However, where we are having issues is getting materials, especially flooring. The result has been some delays on completing renovations and sometimes limited choices. So, we may need to add additional renovation time, depending on the specific renovation.

In summary, equity reinvestment is the fastest and lowest cost method to expand your portfolio. Talk with us if you want to explore this option.

2021 Market Statistics

The information below only concerns the narrow property profile/tenant pool we target. No data for any other property type is included. The typical property we target has the following characteristics:

  • Single family
  • Sale price < $400,000
  • Bedrooms: 3 to 4
  • Garage: 2 to 3
  • Stories: 1 or 2

The map below shows the location of most of our client's properties at the end of 2021.

Rental Statistics

Median $/SF by Month

List to Contract Days by Month

Availability by Month

Closings by Month

Months of Supply

Sales Statistics

Median $/SF by Month

List to Contract Days by Month

Availability by Month

Closings by Month

Months of Supply

Summary

Las Vegas is in a unique position. There is little land for expansion, a growing job market, and an influx of people. Unless there is another "COVID Event", prices and rents will continue to increase at a rapid rate through 2022 and beyond.

If you would like to learn about creating passive income stream through real estate, please contact me. If we or Las Vegas are not right for you, I will tell you. The worst case is that you will lose a little time. Below are two links. One is an introduction to our services, and the other is my scheduling link.

As always, I wecome your feedback.

Eric Fernwood
Eric@Fernwood.Team
https://fernwood.team
02-03-2022

Eric Fernwood
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February 2022 Market Report
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December 2021 Market Report