Investment Properties?

Reader littletiger1969 writes:

Hi El-Bee, This is littletiger. A bit off topic. I was recently at Las Vegas and talked to one of the dealer at the table. She told me that she just bought a 3 bedroom 2 bath condo in Vegas with her brother as a investment for $60K. After I came back, I did a quick Zillow check and found out that she may have even "over-paid". Maybe U can have a "special Vegas" posting just to contrast how absurd RE in Long Beach has become.

Great topic, littletiger. This is something I've been meaning to get into. $60k for a 3 bed/2 bath? What's not to love?

Well, for one, they bought it as an "investment." Huge mistake. Just exactly who are they going to rent to?

Unemployment is insane in Nevada--it doesn't matter how "cheap" your mortgage payment is if you can't find responsible, gainfully employed tenants.

If you told me that they bought it to live in, I would applaud their decision. Even if they "overpaid" for it (tough to imagine at $60,000), they would have an incredibly low mortgage payment (under $600 assuming FHA) and would likely have their home paid off in 15 years depending on how aggressive they were.

Another consideration besides unemployment is fierce competition from other "investors." Everybody and their slow uncle are out in Las Vegas buying "investment properties" for "dirt cheap," hoping to nab those perfect renters who will sign 5-year leases and be model tenants.

Well guess what? To attract that ever-shrinking base of qualified tenants with good credit scores and cash on-hand for a security deposit, you're going to have to drop your asking rent to compete with those thousands of other new landlords. To be a prospective renter in Vegas (or just about anywhere) right now is like being a bikini-clad Natalie Portman at ComicCon: Everyone wants a piece.

Hence, plummeting rents. Which is not a concern if we're finally at a bottom, but I certainly don't see any sign of rent deflation coming to an end tomorrow. So, if you buy a condo with certain assumptions in mind, you may quickly find that the reality of the rental market and general economy will blow those assumptions out of the water.

On a related note, as condo prices in Long Beach have continued to get hammered, I've been increasingly tempted to buy one all-cash as an investment property. And with no mortgage, all I have to do is cash a check every month, right? Piece of cake!

Ah, but therein lies the rub. Any condo you can buy for $60,000 is going to be in a shit neighborhood with shit tenants. Sure, you might get lucky and find renters who will take care of the place and refuse to let their extended family move in, but are you really willing to take that risk?

And what about the other knucklehead "investors" buying up apartments in the same building with the same idea? Anyone who bought at auction or got a better deal than you will be able to undercut you on rental rates. Whoops, there goes your profit margin.

Ultimately, my philosophy is: Never buy a property as an "investment" that you wouldn't be willing to move into if times got tough or you couldn't find reliable tenants.

Trust me, any place you can buy for $60,000 in Long Beach is not someplace you want to live yourself. Unless your name is Marion Cobretti.