Las Vegas Condo Conversion

In the past few years, the condo-conversion has been a very popular and profitable trend for many. For anyone who is not familiar with conversions, they are simply apartment complexes (often built to condo specs) that are bought out, rehabbed inside and out, (consisting of minor cosmetic repairs such as re-painting the interior and exterior walls, putting in brand new flooring, and sprucing up the landscaping) and then sold as separate units. This has been a relatively inexpensive way to get in to the real estate investing game for those who are just starting out (average price for a 1 bedroom unit ranging from $130,000-$160,000, and $190,000-$260,000 for a 2 or 3 bedroom), as well as for investors who would rather not go through the hassle of purchasing and trying to rent out a single family home. The advantage being that the condos would have a much lower rate of vacancy, and more appeal to some with the included amenities.

The communities typically have homeowners associations, with fees ranging from $80-$150/mo, which may include: grounds maintenance, water, sewage trash, and structural insurance on the outer walls of the building (insurance from the “decorated” walls in is the responsibility of the homeowner and is not included). They have been known to contain one or more pools, Jacuzzis, fitness centers, tanning beds, barbeque grills, and even racquet and tennis courts, all the makings of an attractive package for the tenant. As an incentive to the buyer, builders are, in many instances, offering (if using their “preferred” lender) to pay closing costs, and to include all new appliances.

One builder, who recently opened its doors, had a deal as yet unheard of in Las Vegas in a few years. This particular builder has several “preferred” lenders to choose from, and is offering to pay the homeowners association dues for one full year (approx. $130/mo), and pay up to $6,000 towards closing costs, and even to pay the entire interest payment on the mortgage for the first 12 months! Upon speaking with the lenders personally, they claimed they can get investors in for 5% down (average cost of the units are $220,000-$270,000 for a 2 bedroom, 2 bath about 1,074 sqft).

This would be an ideal opportunity for the investor who is looking simply to buy in Las Vegas, and more importantly one who is willing to hold on to the unit for at least 2 years. The reason is because I believe that the other investors, who purchase in this community, will try for an interest only loan, let the builder pay it for them for the 12 months, and then sell the units off. The problem with this is that after that first year, there may be a period where there are quite a few units for sale.

My thinking is that if you were to hold off until the second year, ride through what may be an initial selling frenzy, and then decide if they want to sell it, you may be in pretty good shape. The first year’s interest and HOA dues being paid would mean that there would only be perhaps $200-$300 due each month. Rents for a 2 bedroom in that area run about $1000-$1200, leaving a good positive equity position for the first 12 months. The condo community is in an excellent area of Henderson, with good freeway access, and is close to shops and restaurants.

What the condo owner should be doing that first 12 months, in preparation for the second year, is setting the interest payment aside in an account, (offset by the positive equity aided by the rents) in order to be able to draw from this to offset the second years note.

To answer the question of how is any money made off of this, seeing as how the first year is interest paid in full, but the second and subsequent years are not, lets compare this to any other condo conversion community in the valley. The price point will still be similar, there may be a seller contribution of $2,000-$3,000 for closing costs, and there may be new appliances included as well. So that leaves us with appreciation. With Las Vegas appreciating as greatly as it has the last few years, appreciation would be one of the primary factors. Even if we appreciated at a lower rate than the past (say 10% instead of the almost 16% we had in 2005), that would mean the investor is receiving one full year’s worth of appreciation, plus the positive cash for that year. The second year may turn into a negative cash situation, but there is still the compiling appreciation (10% from year one, added to the value of the condo, plus the appreciation of year two, and so on for any subsequent years the unit was kept and not sold).

If you feel up to it, play with the cash flow calculator for a bit, see how the numbers work out, don’t forget to factor in property management fees (8%-10% of rents) if that is something you would use (there are other options that are less expensive though) and if it seems like something you would be interested in, feel free to e-mail me with questions.

What's the real state of the Vegas housing market?

Jan 11, 2007 10:27 AM

Depending on who you ask, the Las Vegas housing market can be either gloomy or bright. The current edition of Fortune Magazine predicts a bad year, but local experts say otherwise.

We've been hearing conflicting opinions for a while now: the market is turning around, the market is not turning around. Whom should we believe? The important thing to remember is that these are all predictions and speculation.

The article in this magazine about Las Vegas is not positive. But local experts say these analysts don't take into account the entire picture. The article is less than encouraging; Las Vegas housing still overpriced and a predicted market performance among the lowest in the nation.

Devon Reiss of the Greater Las Vegas Association of Realtors disagrees with Fortune Magazine's analysts, however. In fact, he says Fortune made similar predictions last year at this time and overall Vegas housing prices dropped only about two percent.

He says the analysts fail to take into account the uniqueness of our market. "The fact that we have so many people moving here every month, the tremendous job growth that we have. Also the lack of land that we have available for development."

The article predicts housing prices in Las Vegas will drop 6.6 percent this year and an additional 8.1 percent in 2008. But local analysts point to the current inventory, about 17,800 single family homes available compared with 23,000 last year.

They say the law of supply and demand will prevail, and contrary to the prediction in the article, the Vegas market could actually turn around. "You know, I'd like to believe October was the bottom of the valley," Reiss said. "If it's peaks and valleys, October may have been the bottom and I think we're going to see things back on the upside of the swing."

Something else they point out is that some developers are actually pulling back on permits, which means they won't be building as many new homes. And again, that may create more demand for existing homes, driving prices upward.

The Greater Las Vegas Association of Realtors also points out single family home sales went up 6 percent in December and condo sales went up 15 percent. They believe if sales do drop off, it won't be a significant drop.