Vegas Baby, Yeah!
A couple of weeks ago, I got an email from a friend of mine who was thinking about buying a condo in Las Vegas. Naturally, this excited me as it would mean a place where I could couch surf when I eventually go down there.
This friend has been to Vegas several times, and has even rented condos there short term, so he already has a good handle on the local market from that point of view, but he was looking for some feedback on his assumptions, and also wanted to make sure he wasn’t missing anything.
I wasn’t the only one who turned to for advice, but here are the questions he sent me and my answers (I’ve added additional notes for you readers in italics):
Q: Are utilities usually included in condo fees? A: Doubt it.
Q: Is insurance usually included in condo fees? A: Doubt it. Note: he may need additional liability insurance if he decides to rent it out. He should consult a local insurance agent as the laws there might be different. The US is a litigious country and getting sued is more a question of when than if.
Q: For a 1000 sq/ft rental condo how much would you budget for yearly maintenance? A: Rent x 1/12 (or one month’s rent per year) for new, increasing as the unit ages (for apartments, use mortgage payment for condo). Everything wears out, but your maintenance fees to the condo association should pay for everything outside your condo walls, therefore you should be prepared to replace everything inside your walls approximately every 10 years (sooner if you plan to flip before then). Note: this formula came out to around $50 per month, which I thought was low. If you have to hire someone to do repairs, then $50 will only cover the labour for an hour or two. I’m conservative, so I told him to budget for $100 per month. Any serious maintenance issues can easily eat up $1,200, so this budget should be managed closely, ideally by not having to use it. That’s not an easy thing to do if you don’t plan on doing repairs and maintenance yourself and you don’t live in the area to manage workers.
Q: How much would you estimate it would cost to get appliances and furnish cheaply? A: Up to $500 for electric appliances, $200 for the rest… kijiji/craig’s list = your friend… there’s a guy around here who gets seconds from Sears by the truckload and sells them them for a fraction of the new cost. Find such a person in your area and make them your friend.
Q: Would it be correct to assume rental management fees would be around 5% of rental income? A: No/maybe. For a single unit, management fees could be more… figure 3 hrs per unit per month x an hourly rate, for me I wouldn’t agree to manage a single unit for less than $100/mo… I would go down to 5% if I managed a building with 10 or more units in it. What’s a fair hourly rate for a property manager? Start with 2x the minimum wage and negotiate from there. Note: if you’re not in the area, you will be at the mercy of your property manager. You should be very diligent on checking out the manager you hire.
Q: Do you know anything about the tax issues, loopholes, with purchasing real estate in the US as a foreign investor? A: No. I don’t believe in tax loopholes, only creative interpretation of current tax laws. The US is foreign to me (literally and figuratively)… however, I understand there are bargains to be had, I just wouldn’t want to see one of my friends make their first real estate investment in such a way. Note: a person who has never bought a property before may find the learning curve of investing in real estate in a foreign country to be a little steep. The tax implications alone mean that you most likely will need to hire a tax professional who is familiar with Nevada tax laws and Canadian tax laws, which might mean having to hire two. You could try to do it yourself, but remember the old saying, “a lawyer who represents himself has a fool for a client.”
Q: What margins would you expect as positive cash flow to consider a rental property as a worthwhile property? A: Greater than $0 is positive, but your exit strategy determines the answer you seek… are you looking for a cow you can milk every month, or a cow you feed and then slaughter in a few years? A dairy cow must produce milk, while a beef cow costs money only to pay off the day it’s sold.
Q: How much green beer did you drink for St. Paddy’s? A: Not enough.
We spent some time looking at the numbers and this deal doesn’t look too bad, even using my worst case scenario numbers. He plans to travel to Las Vegas a few times a year anyway, so he would have a place to stay while he is there. However, as I mentioned before, there is a difference between this deal in Las Vegas and this same deal down the street. I cautioned him that since he doesn’t live in the area, he will be at the mercy of whomever he hires to manage the property. Working in one country and having an investment in another means a more complicated tax return, which translates to higher fees for professional services.
Would I do this deal? No, but my circumstances and investment goals are much different than his. This deal could be very good for him.