Follow Joe as he considers four cities but ultimately narrows it down to one to make his first investment.
- Now, even though Joe lives in Las Vegas, he doesn't want to just only look in Vegas right away. He wants to explore some of the other cities that are nearby that are within travel distance for him just to see if they are possibilities for him to invest. So, Joe looks at three other cities, and I'm going to walk you through his thinking process and how he comes to the conclusion that he should still invest Las Vegas after all. Alright, remember we left off in the last lecture that Joe wanted to compare these four markets and then ultimately decide which market he should invest in first.
So, to do that he gathers some data, and here's what he found. Starting with Los Angeles, he found that home prices have practically recovered from the dip and is almost at 2006 peak values. So these are the home price index from the Case-Shiller Index. Now, you're going to see in this course we're going to use the Case-Shiller Index quite a bit.
It is the most widely accepted, credible index for measuring home prices, and they have it at the national level. They track it at all the major cities, and they've been tracking it for many decades. This is definitely the index you want to follow. So this chart was created by FRED here, but it was using Case-Shiller Index. And this shows that from just around before the year 2000, if we were starting that it had an index of a hundred.
By the time of the peak in 2006, home values were more than 2.6 times higher than they were just six years ago. So that was a massive growth, obviously not sustainable. And then it stagnated for a little bit through the beginnings of 2007, and then it really started to drop with the crash of 2008. Then it started to steeply crash all the way down, and it didn't really hit a bottom until here.
But it really stayed there for a while, for about two years. It was a little uptick and then it, nope. It didn't recover. It was like a fake recovery here. And then it finally started to recover in 2012. So, this is where the LA market is right now which means that prices are pretty high compared to the lows here. Only a few years and it's gone up by quite a bit already. And if we look at the rental rate in Los Angeles, wow, we see that rents have gone up quite a bit as well.
This is a healthy sign. As an investor in a rental property, you want rents to be going up. So, rents are going up, but you know what? Prices have gone up really quickly, really fast. He's not sure he can actually afford things in here. So let's take a look at one of the other cities now. This is Phoenix, Arizona. So we see that the index did to the year 2000, relative to the year 2000, we see that in 2006 prices were as much 2.2 times higher than they were in 2000.
So I didn't quite run up as much as LA, but during the dip, it dropped way back down. We saw in LA it didn't drop all the way back down to 100, to the 2002 prices. It kind of dropped to about 2003, 2004-ish prices. Here it dropped really far down, practically went back to here. So somebody who bought a home in the year 2000 in Phoenix here in 2012 their home value would have been exactly the same.
But if somebody bought a home in the peak of 2006, their home would have been worth less than half that only five, six years later at the bottom here in Phoenix. But it started to recover a little bit, and we see that the home prices recovered but recovered more slowly. It's maybe about halfway to the 2000 peak highs, not as much as in LA. But when we look at the rents, of course, it's going to be less than the rents in LA.
But percentage growth-wise, it's very similar. It's been on a very healthy increase in rents, but the home prices haven't been increasing as steeply. So that's a really good sign. You want rents to increase faster than the appreciation in the home values 'cause that way you can get it at a lower price versus a rent that you can actually charge from it. Alright, now he's looking at Reno.
So Reno for all of these cities, we're going to see very similar things. We're going to see this huge growth run-up through 2006, and then this massive dip. And it looks very similar to the other cities, but the dip here is just as steep as Phoenix. But the climb has been just as steep as Los Angeles. So there's been some really significant run-up in prices, and Joe's not very surprised. Right around this time there was a lot of excitement about the Tesla car company, the electric car company, building one of their Gigafactories in Reno.
And because of that it brought in a lot of jobs, and there was a lot more of some other companies that are starting to think about going there. And there's been a lot more development and growth, and so rents and home prices have been going up quite a bit. And we look at the rents, we see that the rents over the last five years has been on a pretty steep incline as well, going up almost $400 there, 33% increases, much higher than the increases in LA percentage-wise.
Lastly, he's going to take a look at his hometown, Las Vegas. We see that it had a very similar boom here as Phoenix, 2.2 times the price, home prices in the year 2000 in the peak here. But during the dip, it dipped and it dipped lower than the year 2000 peaks. It went really low here. Somebody who bought a home in the year 2000, their home was probably worth less 12 years later in Vegas.
And what we see in here is that Vegas has been recovering well into the recovery here. And home prices have been recovering quite a bit, but just like Reno it hasn't recovered as close to LA. Actually just like Phoenix, it hasn't recovered as close to LA and Reno in terms of closing the gap to their all-time highs in the year 2006. Vegas is only about halfway there.
But if we look at rents, we see that rents actually kept coming down for a while before it started to go up. Rents didn't start to go up until 2013. There was just so much inventory in Vegas, and there was a lot of foreclosures. Joe recognized that in his market, and he's not surprised seeing this. So the rental growth has been not as steep, but it's very healthy. So, when he's looking at all four of these markets, here's what he gathered.
He gathered some more information. Overall, all of them have experienced very good growth in property values. They have recovered quite a bit from their lows in 2011 and 2012. Now over five years Los Angeles has, the property values have grown quite a bit. Now, it grew less per year, but it reached its 2006, or closer to its peak levels because it didn't drop as much.
So, because Phoenix and Vegas and even Reno have dropped so much, it dipped all the way back to their 2000 price levels. When you start lower, any kind of increase, you're going to have a higher percentage increase. So that's what we're seeing here. That's why the growth rate percentage-wise is higher in these markets, even though the prices are not any where near their peak. And rental growth, we see that Los Angeles and Reno has seen the highest rate of growth for rents based on what we saw.
Phoenix had very healthy growth as well. Las Vegas, solid but not nearly as good as the other places. And the percentage of mortgages that are delinquent in the market, these are very healthy markets now. At the peak of the housing crash in Vegas and some of these other markets, there were 30, 40% delinquencies, or maybe more than 50% delinquencies, lot of homes in foreclosure, now far, far fewer.
Very, very small percentages here. This is a very clear sign that we've definitely come out of the dip, the recession there. When Joe is thinking about all this, he looks at the pros and the cons of these four markets. So let's look at them here. For LA, we see that LA is a mature market. The rent is very stable. It's been growing significantly. Housing and rental growth is expected. It's Los Angeles. It's a place that there's always more people wanting to move there and live there than in other places.
But the biggest con is it's probably out of his budget. I mean, the median home price is 750,000. He only has 75,000 for a down payment. He can probably afford not even half of that. And the other downside which he's noticed is that the home prices have pretty much gone back to their 2006 peak values. It's 97.4% there already. Plus California has the highest state income tax rate. Any rental income generated from that state, well, you're going to have to pay state income taxes as well.
That's not as attractive from that standpoint. So that doesn't make sense for him. It's probably out of his budget, and so he's going to eliminate that from his option. Now, let's look at the next one. Phoenix, the home price, median home price is very affordable. It's appreciated over the last five years, definitely grown a lot. But rent has grown very healthily as well. There's a very solid housing and rental market.
It's still 25% below the 2006 peak values. But the cons is that there's state tax in Arizona. It's not as much as in California, but there's still a state tax. There's falling household income. That's not a good sign. If household incomes are stagnant or falling while home prices are going up that means on average as a whole that community is having a weaker and weaker ability to pay their mortgage and buy things.
So that's going to eventually have a downward pressure on prices because people can't afford for prices to keep going up in that market. And the longterm demographics and job outlook is not that clear. There aren't as many big industries that are looking to relocate there. So it's not very certain for him, Joe, looking at market whether there's going to be good longterm prospects. It maybe really good place for him to go to in the next down-cycle because in these weaker markets compared to Los Angeles and some of these, New York and San Francisco, the housing crash is going to hit these markets, just like Vegas, much harder.
And we're going to see prices drop really low in maybe the next downturn we may see prices drop back down to where they were in the year 2011 and 2012 or very close to it. Now, the next one he's looking at is Reno. Reno, median home price, it might just be out of his price range, but there may be some homes that are a little bit more affordable in that market that could work for him.
Median rent has been growing very healthy. There's a lot of jobs that are coming and people are getting excited, a lot of new development. They've seen double-digit job growth here mostly due to the high-tech, the Tesla factory there. And one of the biggest pros, just like in Vegas, Nevada has no state income tax. So all that rental income, he's just only going to have to pay federal income taxes on that. So that's really good because that's another five, 10% that he doesn't have to give to Uncle Sam.
The biggest con here is Reno's about 40% more expensive than Vegas. It's actually the furthest away from all the cities from his home base so it's actually the most tough to get to. And it's, like LA, it's very close to their peak values already. It's run up the most, so he may not get the best value here. And when he thinks about his hometown, Las Vegas, the prices are still quite reasonable.
It's gone up but not anywhere close to the peak values. In fact, out of the four cities, it's gone up the least compared to the peak values. And they're starting to be more tech companies. More companies that want to relocate to Vegas, especially near the downtown a little bit away from the strip where they can take advantage of the low cost of living, the zero income taxes. And it's a lifestyle that there's a lot of things going on. People can always just take a short drive to the strip, and there's plenty of entertainment.
So, there's more and more good signs in terms of jobs coming in. But the biggest con is its biggest industry is still tourism. It's very tourism heavy, so if there was going to be a downturn, tourism will get hit. And a lot of the workers that work in the tourism industry, they are more blue collar working and more cash driven. They're not on salaries, tend to be. And so if the industry gets hurt, the workers get hurt.
And then when the workers get hurt, the housing market gets hurt there, too. So those are the cons there. Now, when he looked at all four of them, he looked at the rent versus the purchase price. 'Cause it's not just how much rent you make, but how much you have to pay for in order to get that rent. Sure, Los Angeles has more than two times the rent of the other markets, but it's also more than two times the cost.
So when you look at that ratio, we see more on a dollar-for-dollar basis what actually is better. So he sees that between all the cities right now, on average, Phoenix and Vegas gives the best returns. But between Phoenix and Vegas, he'd rather stay in Las Vegas because of the better longterm prospects of tech companies moving in. There's more growth. He knows the neighborhood better, and it's closer for him to manage.
So between the two, he's going to keep Vegas over Phoenix. Now, between Reno and Vegas, they're practically the same, but Reno's just more expensive and tougher to get to. So between those two, he'll pick Vegas right now as well. So out of the four, even though he looked at other places, he ultimately chose to start with Las Vegas. This is where he's comfortable with where he knows the market and where the homes are still very affordable for what he can invest and he likes the longterm prospects.
So in the next lecture, we're going to see what Joe finds in Vegas and how he goes about thinking through which property makes more sense for him.
Note: This course uses data and example properties from the United States, but the concepts taught and tools provided are just as useful for any market.
- Determining if real estate investment is right for you
- Choosing a market and a property
- Using financing
- Strategies for first-time investors
- Real estate market cycles
- Valuing a property
- Analyzing your market
- How leverage impacts investments
- Real estate investment case studies