why i like las vegas real estate

8/11/2019 Why I Like Las Vegas Real Estate

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The analysis of Eden Fund, LLC may include certain statements and projections of the anticipated performance ofcertain assets. Such statements and projections reflect the opinion of Eden Fund, LLC regarding anticipated results andare subject to economic uncertainties. The information contained within has been prepared solely for informationalpurposes.

This presentation is not a recommendation or solicitation to buy or sell any securities.

DISCLAIMER

Page 1 | Eden Fund, LLC


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There has been a once-in-a-lifetime housing bust in the UnitedStates that has destroyed misguided notions that home prices riseyear after year. Bullish sentiment that lasted for generations hasdisappeared without a trace. Gone are the days of the zero down,negative amortizing, adjustable-rate mortgage. Now it is time to getback to reality.

The operative word right now is panic: Foreclosures are rising;banks have tightened lending standards; and unemployment iselevated. It appears there is no worse time to buy a home.

So why am I now turning bullish onLas Vegas real estate?

Simply put, Las Vegas real estate is too cheap on a relative basis.There is a time and place for every market.

I believe it is Las Vegas' time.

WHY WE LI KE L AS VE GAS

REAL ESTATE

Each market has its own dynamics based on variables like Inventory levels, employment prospects, migration trends, andproperty taxes. This chart shows the variation in median homeprices across various markets. As you can see, the magnitude ofthe housing bubble was far from uniform nationwide.



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The Las Vegas real estate market has been hit especially hard bythis housing crisis, which makes sense if you think about it. As a hubof discretionary spending, the Las Vegas real estate market willtend to be procyclical. In other words, it will rise more than othermarkets in times of economic expansion, and it will fall more thanother markets in times of economic contraction. In a sense, it is theultimate leveraged play on real estate.

It is important to understand that Las Vegas real estate is no longera bubble; in fact, it is at pre-bubble levels. Distressed sale pricesare converging with conventional sale prices, which is a positive forbuyers. Prices continue to fall as short sales, foreclosures, and REOsales rise.

Buyers are hesitant to step in right now because they think anothermajor dip in home prices is coming. I personally think the worst ofthe housing crisis in this particular cycle is over, and I'll explain why.But first I want to take some to time to explain how real estateworks as an investment.

LAS VEGAS REAL ESTATE

M A R K E T



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The most important thing to understand about real estate is that itis an investment that depends on leverage. The implementation ofthe 30-year mortgage helped support home prices during the GreatDepression by allowing the average person to bring 30 years ofearnings forward. Once the 30-year mortgage was in place, homeprices rose more or less in line with inflation.

It was only after the introduction of leverage via securitized prod-ucts that housing expanded way beyond the rate of inflation. Nowthat these securitized products have blown up, it is reasonable tobelieve that housing will rise in line with inflation.

Loan-to-value ratios represent the leverage in an investment. Whileloan-to-value ratios have fallen considerably from their peak, theyare still very attractive. A standard 20% down payment stillrepresents 5 to 1 leverage. You will be hard-pressed to find thiskind of leverage in any other mainstream investment. The upsidepotential in these kind of leverage plays is tremendous.

UND ERSTA N DING

REAL ESTATE



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Real estate should not be bought as a speculative purchase; itshould be bought when the cash flow from rents exceeds the costof carry. With a positive cash flow position, one can ride out cyclesin real estate while building equity through loan amortization.

This presents a very cookie cutter, "safe" return in mosteconomic environments. However, by catching the right cycle, onecan return many multiples on invested equity.

Here's a very simple example of the potential returns in real

estate with the following assumptions.

C A S H F L O W V S C A P I TA L G A I N S

MONTHLY REVENUES AND EXPENSES

ASSUMPTIONS

Price $85,000 ($ on monthly basis)

Home Price Appreciation 0.0% Rent $950.0Down Payment on Property 20.0% Cost of Carry $506.7

Mortgage Rate 5.0%Mortgage Pay-ments $365.0

Closing Costs 2.0%Selling Fees 5.0%Property Taxes 1.5%Maintenance & Insurance 2.0% Down Payment $17,000.0Income Tax Rate 25.0% Closing Costs $1,700.0

Total InitialCosts $18,700.0

SOURCES USES / COSTS

Yr Home PriceMonthly

Rent

MonthlyMort-gage

MonthlyMainte-nance

TotalMonthl

yCosts

MonthlyNet

Income

1 $85,000.0 $950.0 $365.0 $141.7 $506.7 $443.32 $85,000.0 $950.0 $365.0 $141.7 $506.7 $443.3

3 $85,000.0 $950.0 $365.0 $141.7 $506.7 $443.34 $85,000.0 $950.0 $365.0 $141.7 $506.7 $443.35 $85,000.0 $950.0 $365.0 $141.7 $506.7 $443.36 $85,000.0 $950.0 $365.0 $141.7 $506.7 $443.37 $85,000.0 $950.0 $365.0 $141.7 $506.7 $443.38 $85,000.0 $950.0 $365.0 $141.7 $506.7 $443.39 $85,000.0 $950.0 $365.0 $141.7 $506.7 $443.3

10 $85,000.0 $950.0 $365.0 $141.7 $506.7 $443.3



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ANNUAL REVENUES AND EXPENSES

As you can see, buying real estate when it provides positive cashflow results in returns even with no home appreciation. Buying

when the costs of carry are covered by rents defines yourdownside to an extent. This is your margin of safety. Theoptionality of real estate is derived from capital gains.

ANNUAL

Net Income(Pre-tax)

PropertyTaxes

Net Income(Post-tax)

$5,319.5 $1,275.0 $4,044.5$5,319.5 $1,275.0 $4,044.5

$5,319.5 $1,275.0 $4,044.5$5,319.5 $1,275.0 $4,044.5

$5,319.5 $1,275.0 $4,044.5

$5,319.5 $1,275.0 $4,044.5$5,319.5 $1,275.0 $4,044.5$5,319.5 $1,275.0 $4,044.5$5,319.5 $1,275.0 $4,044.5$5,319.5 $1,275.0 $4,044.5

IRR

17.2%



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When thinking about real estate, its important to distinguish be-tween nominal and real prices. Nominal prices, or prices not ad- justed for inflation, are what most people focus on.

However, the savvier investor focuses on real home prices. As Ivedemonstrated before, home prices nationally have more or lesstracked inflation for generations.

Currently, the real price of homes nationally is slightly above the long

-term trend in inflation.

However, in Las Vegas, not only have nominal pricescollapsed, but real prices have as well. In fact, real prices arecurrently below 1987 levels, which was before the initialresurgence in Las Vegas courtesy of Steve Wynn. Prices inLas Vegas have overshot to the downside, and it is reasonable to

expect the pre-bubble trend in real prices to reappear.

No matter how bearish you are on housing or the economy in gen-eral, you must understand that every asset has a price in which theexpected return justifies an investment. This is a situation that isdeveloping in Las Vegas .

I N F L AT I O N - A D J U S T E D H O M E P R I C E S



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There are three key factors that affect the affordability of homes:mortgage rates, household income, and home prices. While U.S.median income has stayed relatively stable, mortgage rates andhome prices have fallen off considerably from their peak.

Normally you would expect home prices to move inversely withinterest rates; however, home prices have fallen along with interestrates in this particular cycle. This is a positive scenario for potentialhomebuyers.

30 YEAR MORTGAGE RATE

H O M E A F F O R D A B I L I T Y

U.S. M EDIAN INCOME



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One metric used to calculate whether real estate is overvalued,undervalued, or trading at fair value is the median home price tomedian income ratio. Historically, the national ratio is 3.5, which is just about where we are trading at now.

In comparison, the ratio in Las Vegas is currently 2.5. In otherwords, homes are very cheap in Las Vegas relative to the income ofits residents. This phenomenon will work to support prices movingforward .

M E D I A N P R I C E / I N C O M E R AT I O

NATIONAL MEDIAN HOME PRICE TO MEDIAN INCOME


LAS VEGAS MEDIAN HOME PRICE TO MEDIAN INCOME


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AVERAGE MONTHLY MORTGAGE PAYMENT AS % OF MEDIAN INCOME

Another way of determining home affordability is to measure theportion of income that goes towards housing. Due to the curioussituation of mortgage rates falling with home prices, mortgagepayments have actually fallen as a percent of income, even duringthe recession.

As you can see, the data simply does not support the notion thathome prices are overvalued. Real estate is a market dominated byirrational fear. At tops, everyone is exuberant; at bottoms,everyone is fearful. This is just how markets operate.



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All cash flow projections go out the door if there are no renters.This is why you should have a huge margin of safety when youInvest in real estate. Based on conservative projections, we cancalculate our breakeven vacancy rate using the projections fromPage 5.

Keep in mind that even in this somewhat drastic scenario, we arestill paying off the mortgage with other peoples money - hence in aflat market, we are still making a return.

W H O W I L L R E N T ?A R E N T VA C A N C I E S H I G H ?

Yr Annual Net Income Breakeven Vacancy Rate

1 $4,044.50 35.50%

2 $4,044.50 35.50%

3 $4,044.50 35.50%

4 $4,044.50 35.50%

5 $4,044.50 35.50%

6 $4,044.50 35.50%

7 $4,044.50 35.50%

8 $4,044.50 35.50%

9 $4,044.50 35.50%

10 $4,044.50 35.50%



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ECHO GENERATION, ANYONE?

Demographics play a huge role in any real estate market. Most peo-ple know about Baby Boomers and the effect they will have on oureconomy. However, fewer people know about the EchoGeneration, which is composed of people born between the mid1970s and the early 2000s.

The Echo Generation represents another Baby Boomgeneration, albeit smaller in scale. The average person in the U.S.now buys a home when they are 38. In other words, the majority of

the Echo Generation is still renting. Shortage of renters?



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HOME OWNERSHIP RATE

The home ownership rate in America gives us an idea of thenumber of renters there are at any given time. A lower home own-ership rate means there are more renters, which favors those whoown rental properties. According to the Census Bureau, thehomeownership rate has fallen, and with rising foreclosures, it willlikely continue to fall.

Each percentage point drop in the home ownership rate isequivalent to about 2 million people becoming renters.Everyone talks about foreclosures, underwater homeowners, anddistressed sales as if it were a bad thing for owners of rental prop-erties. But these seemingly negative housing indicators actuallyincrease the supply of renters and put upward pressure on rents.From the following chart from rentbits.com, it appears rents havestabilized even while home prices continue to fall. This is verybullish for owners of rental properties.



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BABY BOOMERS

One of the most important things to consider is the

migration pattern of Baby Boomers. The two things on the top ofBoomers wish lists for housing are:

1) low costs of living2) favorable climates

Las Vegas scores high on both counts.

Baby Boomers who planned on using their home equity toretire are now in trouble. While a rising market benefited the networth of Boomers, it didn't necessarily improve their cash flowsituation. Many Boomers are now finding that they are sitting ona liability with rising property taxes and energy costs. This isleading to the next big trend for Boomers: Trading down.

The majority of the wealth in the country is concentrated in theBaby Boomer demographic. By extension, the mostexpensive markets are dominated by Baby Boomers.

We believe you will see a converging of real estate prices

between the overvalued markets (NYC, Los Angeles, etc.) and theundervalued/distressed markets (Las Vegas, Miami, etc.) asdomestic Baby Boomer migration trends emerge.

While the Echo Generation will determine rental income, theBaby Boom generation will determine home appreciation. Boom-ers by and large are not affected by recessions; they are affectedby interest rates. They are the only demographic that has theability to spend in a downturn. In other words, Boomers willprovide liquidity to the housing market.



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After the bursting of the real estate bubble, housing has become a relatively shunned investment. There is no better time to invest thanwhen an asset as a whole is hated, especially when objective metrics suggest huge undervaluation. No one is rushing to buy Las Vegasreal estate, which means we can slowly build a position and capitalize on the eventual appreciation.

Considering the macroeconomic backdrop, mortgage rates, and prices, we believe 20% annualized compounded returns are a veryconservative forecast. In our opinion, a bottom in real estate is going to come sometime between late 2011 and late 2012. Thecountertrend recovery cycle in real estate should last 3-5 years, and Las Vegas should be one of the prime beneficiaries.

It is just time to invest in Las Vegas real estate.

C O N C L U S I O N



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CONTACT US

Moses Kim & Victor Yun

Managing Partners

Eden Fund LLC

[email protected]

expectedreturnsblog.com

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why i like las vegas real estate

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