California’s rental struggles helping Las Vegas

Southern Nevada didn’t stand out on a new list of the nation’s best and worst rental markets. But California did, and that has implications for the Las Vegas Valley’s housing economy.

California markets made up half of research firm RealtyTrac’s Wednesday list of the 10 worst markets for rental returns, thus pretty much guaranteeing that investor flight from the Golden State into Nevada will continue for the foreseeable future, observers said.

“Las Vegas continues to be a natural spillover market for investors who have been priced out of California,” said Realty­Trac vice president Daren Blomquist. “It’s still viewed as a bargain market.”

What that means for you depends on whether you’re a renter, a landlord or neither. The effects could include flat to falling rents and tougher competition for people buying a home to live in, but also a more stable housing economy in the short term.

Whether a market appeals to investors comes down to returns — a blend of what an investor pays for a property and how much rent the market can bear.

In California’s coastal markets, returns are about a third of Southern Nevada’s yields.

Take San Francisco County, which had the nation’s second-worst return after New York County, N.Y. San Francisco County’s median home price was $1.05 million in February, while the typical fair-market rent on a three-bedroom house or apartment was $2,801 a month. That meant an annual yield of 3.2 percent.

San Francisco’s rent was nearly double Clark County’s $1,428 average. But its median price was six times higher than Clark County’s $172,000 median. The lower price meant a much higher annual yield of 9.96 percent.

So for every $100,000 spent, an investor would get a one-year return of $3,200 in San Francisco County, versus $9,600 in Clark County.

California’s numbers weren’t much better in the south. In Orange County, the median price of $559,000 plus fair-market rent of $2,250 meant a yearly return of 4.83 percent.

Those returns are partly why Steve Hawks, an investment specialist with Platinum Real Estate Professionals in Las Vegas, said the stream of California investors has turned into a flood. Higher property and income taxes are contributing to the push, as Californians buy not only investment homes, but also increasingly move here themselves. One of Hawks’ clients sold his $700,000 Fresno home and bought a primary local residence and two rentals for $650,000, he said.

“The return here is huge. California is a nightmare right now,” Hawks said.

It’s the same story on the apartment side, said Spence Ballif, senior vice president of commercial brokerage CBRE Las Vegas. Among local communities of 100 or more units, returns are better than those not just in California, but in Phoenix, Seattle, Salt Lake City and any other regional market, Ballif said. That’s because the average monthly rent of $846 in the first quarter was still 9.2 percent below the market’s $932 high in 2007.

“What appeals to investors are well-below-peak rents, and rents in other markets have exceeded their peak,” Ballif said. “Las Vegas is still in the fairly early stages of recovery from that point of view.”

If you’re a local renter, you benefit: Competition in the city’s rental market helped push down average rents by 7 percent from a year ago, RealtyTrac’s numbers showed.

But renters who want to buy must still beat out cash investors, who made up roughly a third of local buyers in March, according to Tuesday numbers from the Greater Las Vegas Association of Realtors.

Landlords, on the other hand, have to “raise the bar in terms of service to their tenants,” Blomquist said.

If you’re not renting or investing, you still reap the rewards of the stability Blomquist said investors brought the market in its hardest times, buying up properties that would otherwise have sat empty. The local economy will also get a broader boost as apartment investors and developers buy or build new communities to meet rental demand, he said.

But long-term housing stability and sustainability will require more traditional buyers and fewer investors, Blomquist said. It’s not clear when investors will give up their market share.

Investments in Las Vegas are not as robust as they were in the boom, because economic fundamentals here aren’t as strong. Nevada’s in the top three for unemployment, and year-to-year wage growth through the third quarter of 2014 was half a percent.

“Even though some of the numbers look good for investors, you have to look at the fact that the market might be getting a little saturated,” he said. “More jobs might be coming back, but wage growth is not very robust.”

Still, Southern Nevada has a big inventory of distressed homes that have yet to hit the market, and few investors can resist a bargain.

“Discounts are a big part of the formula for investors. If they can get homes at a discount, that can trump some of the market’s other weaknesses,” Blomquist said. “Price point is a trigger, and we expect that will eventually pull investors’ gaze back to Las Vegas as a nice, shiny object to go after.”

Contact Jennifer Robison at jrobison@reviewjournal.com. Find @J_Robison1 on Twitter.