Q & A with America’s real estate professor: Out of state rental property investment

Price changes in real estate are not reliable gauges of whether values will increase going forward.
Zillow
Jun 25, 2013

 

Out of State Rental Property Investment

Q. Hi Professor, I'm planning to buy a single family house in Las Vegas as an investment (I live in New York). I’m wondering if you think Las Vegas is a good place to buy, and also is it a good idea to use property management service in Vegas? Susan Li, New York

A. It seems like you are ready to do a little real estate gambling in Las Vegas! According to Zillow’s Home Value Index, the prices in the Las Vegas market have increased 23.8 percent in the past year, with the top increases in Winchester (38.0 percent), Charleston Heights (36.8 percent) and Kyle Canyon (30.3 percent). I’m guessing you noticed these stunning numbers too, and that’s why you are thinking it might be worthwhile to double-down in Vegas!

Well, I can assure you that past price changes in real estate are not reliable gauges of whether values will increase going forward. Furthermore, buying property with the anticipation that it will go up in value is not a smart way to invest. Hoping something with go up in value is called speculation.

Investing is when you do the proper research, analysis, estimations, and calculate a rate of return you can earn on a property based on the cash flows, loan amortization, tax benefits – if any – and you can even add in a small value increase estimation. Then you review what you believe you can earn on a property and compare it to other types of investments with similar risk characteristics. All of this is hard work and challenging to do, especially when the property is on the other side of the country.

Las Vegas real estate may or may not be a good investment for you, but if you haven’t done the proper research, investigated and learned about the risks and returns, then I’d suggest you do that before you gamble away your savings.

If you do buy out of town, you will need a local property manager. Many do a great job, but not everyone is always happy with their property managers. You will have the added task of managing the property manager and finding a new one every once in a while.

I’d suggest buying a good investment property in your local area and managing the property yourself, finding and keeping good relations with your tenants and treating them with respect. This will give you the best chance to earn a fair rate of return with the least amount of hassle on your property investment. Good luck.

Electrical Service Panel

Q. I’ve bought a 1960s house with the original electric service panel. It has breakers and works fine, and the home inspector said it should be okay and its electric capacity is adequate. I had an electrician come by and he said it could and should be replaced, but not absolutely needed now as it is working fine. Cost is $1,900. I’m wondering how much a new service panel and breaker box will add to the value if I do the upgrade. Mike B., Ogden, Utah

A. A new service panel will add $0 to the value of your property. Unless the service panel is so old that it is non-functional, or doesn’t have enough capacity for your home – maybe because of room addition, hot tub or new electric appliances – there isn’t going to be any value added for your $1,900 in expense and you shouldn’t do it.

In fact, almost no renovation, rehabilitation or property improvements will add more value to the property than the cost of those improvements. Most will only increase your value a fraction of the money you spend on that improvement.

If your electrician and home inspector both say it’s fine, leave it! Spend your money on something that will make your property better that you can enjoy, like painting, new flooring or landscaping. Most likely you’ll only need to pay attention to your service panel once or twice per year for resetting the breakers, so leave it alone.

EDITOR'S NOTE: This story was written by Leonard Baron, MBA, who is America’s Real Estate Professor® His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com