On a recent flight back to California, I struck up a conversation with a fellow traveler. Turns out we actually went to the same middle school even though we were a few years apart in age. Small world, huh?
Eventually we started chatting about why we were on a flight. He told me that he was heading out to a friend’s wedding, and I explained that I had just spent a few days in the Midwest visiting some of my rental properties. That captured his interest, and he asked if I was planning to invest in Las Vegas since it’s pretty close to California.
My answer was simply “nope.” I got a perplexed look back from across the aisle.
“Why not?” he inquired. “You know, the housing market is really recovering out there.”
The conversation continued for a good 25 minutes, so I’ll give you the condensed version…
Yes, I’m in agreement that the housing market may be recovering in Las Vegas. However, keep in mind that my investment approach – and the approach that I recommend to my members and clients – is centered around the creation of investment income, not relying on price appreciation (capital gains). My plan is rarely to buy a property for a low price and then turn around and sell it for a higher price within a short timeline (flipping); that doesn’t fit my model. My plan is to buy a property, collect rental income, and capitalize on the tax benefits afforded to us as investors.
First and foremost, the reason I’m not currently investing in Las Vegas is because of the market fundamentals in that metropolitan area. The economy is heavily dependent on a single source: the casino industry. And the casino industry itself is very economically sensitive due to its reliance on consumer sentiment and discretionary income. Do you remember what happened in Las Vegas when the economy initially crashed in 2008? Unemployment levels spiked, home prices collapsed, and local businesses got slammed. Yes, that was the case with many areas around the country, but Las Vegas got hit extra hard. The casinos had only a handful of visitors trickling in, which sent shock waves reverberating through the entire Las Vegas market. Nearly everyone in the area felt it.
THE MOST DANGEROUS NUMBER IN BUSINESS
In my years of study and research as an investor, I’ve come to realize that “ONE” is the most dangerous number in business. Whether we’re talking about ONE customer, ONE supplier, or ONE product line, there’s a tremendous amount of risk if you’ve got ONE of anything because you’re completely dependent on that single source. And in the case of Las Vegas, when so much of your economy is predicated on ONE industry – and an industry that’s economically volatile at that – the risk profile of the investment becomes tremendously elevated.
Let’s contrast the Las Vegas economy to another metropolitan area in the same general part of the country – Phoenix, Arizona. Phoenix has a pretty diverse economy with a growing population and solid employment. They’ve got major sports franchises, technology companies, aerospace facilities, call centers, resorts, distribution warehouses, colleges, and much more, all feeding their local economy. That’s the kind of diversity we like to see as investors. Yes, Phoenix also took a hit during the Great Recession, but it doesn’t negate the fact that its economy is much more diversified and robust.
Now, I’m not saying that investors can’t make money in Las Vegas by acquiring rental properties. As a matter of fact, I know of several people that have done pretty well for themselves investing in Las Vegas. And to be perfectly honest, Las Vegas is an ideal destination for some fun and excitement. There’s tons of cool stuff to do. But in my opinion, there are other real estate markets around the country that offer better prospects for investors.
Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.
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