The Accidental Slumlord

Even if this place had "good bones"—and it doesn't—they'd be hidden beneath clutter. The living-room furniture appears scavenged; strangely, the room is equipped with four televisions. (Bill likes to find and repair old TVs.) By the front door are several dressers filled with tools, which Bill uses to maintain the place. Taped to the front of one bureau are four postcard-size pornographic photos. I point at them and raise an eyebrow. "What, don't you like naked ladies?" Bill asks. The other unit, where Will and Rose live, is slightly cleaner, but its state of disrepair is the same.

The conditions don't entirely surprise me, since I'd seen photos before I signed the contract. The pictures, however, didn't fully convey the seediness of the place—nor had I given much thought to the financial hardships facing its occupants. Bill, a thrice-divorced Vietnam veteran who worked in a copper mine before retiring, has just four teeth—he opens wide to show them to me, bragging how he removed most of the rest himself with pliers. Will's cell phone and satellite TV have been disconnected for lack of payment, and it's possible that the apartment's heater isn't working because the gas company shut off service because of unpaid bills. (They got through the winter using a small electric space heater.) While they have a few -luxuries—Bill has a 33-year-old Chevy camper and a satellite dish that gets 250 channels; Will has a $380 Sony PlayStation 3—there's clearly little slack in their finances.

My reaction to seeing my property and my tenants for the first time is common among out-of-state landlords who've visited their property. "When somebody is paying $300 a month in rent, in general they aren't the Rothschilds," says a 47-year-old Los Angeles schoolteacher who visited his own Pocatello duplex for the first time in December. "You're getting somebody who that's all they can afford." Although he'd seen photos of his property before he purchased it, this investor—who declined to be named because he's embarrassed to have made such a "boneheaded" investment—was surprised by its poor condition, citing holes in the walls, an awkward layout and general dinginess. "It was an eye-opener," he says.

After touring my duplex with my property manager, Ryan Olsen, we promise the tenants we'll fix the heater and hire an exterminator. Bill also complains about the worn carpeting and linoleum, and asks me to replace it. I'm noncommittal. Afterward, I walk Olsen to his truck. He tells me that five of the 60 local apartments he's managing are now vacant, and he's seeing more signs of economic distress. "I've gone from chasing five or six tenants a month [for rent money] to chasing 15," he says—including Will, whom he's been pressuring to find work and catch up on the rent. If Will and Rose move out—they've talked of moving to a trailer home with a separate bedroom for their son—Olsen estimates I'll need to spend $800 to clean, repaint and recarpet their unit before he could rerent it, draining more profits. What about Bill's request for new carpeting and linoleum? Skip it, Olsen says. The tenants aren't going to move if I don't replace it, and newer carpet won't let us increase their rent. It would be a bad investment.

Finally, I ask him the question that's brought me 2,450 miles: what's the place worth? If I needed to sell it today, he says, he'd suggest listing it at $50,000. That's less than the $55,000 I currently owe on the mortgage—and if I sold at that price, after commissions I'd suffer an $18,000 loss. It's not the answer I'd hoped to hear.

Olsen, thankfully, is a property manager, not a real-estate agent. So the next morning, I set out to find a more authoritative—and hopefully, higher—appraisal. Realtor Greg Johnston, a six-foot-six 31-year-old, is one of the city's most active agents. Johnston first showed me around Pocatello in 2005; the following year he sold me the duplex. As we sit in his Main Street office, he consults a chart of local housing data.

By most measures, Pocatello's market is holding up well. Its average home price fell less than 1 percent in 2008, far less than the national average. That resiliency is largely due to its tepid growth during the boom years: prices in Pocatello only rose by an average of 6 percent between 2000 and 2006. Johnston says most boom-era investors are doing just fine. "The people who were stretching or got in over their heads [with multiple properties], they're the ones who are in trouble right now," Johnston says.

Still, that doesn't mean buyers would line up to buy my house. The main problem: lack of financing. Since the credit crisis broke, lenders have radically altered how they underwrite mortgages for investment properties. When I bought my property in 2006, I put 10 percent down (including closing costs, I paid about $7,500) and was charged an interest rate only slightly higher than the rate on my primary residence. Today, banks require a down payment of 20 or 30 percent, and rates for investment properties are far higher. As a result, the market for investment properties "is almost nonexistent," says Ryan Ward, senior VP at Pocatello's Citizens Community Bank. "You might get a phone call [from a prospective buyer], but once they hear the rate it's 'OK, we're not going to waste our time'." Johnston cites numbers showing the decline: in 2006, when I bought my property, 116 multi-unit properties changed hands, but in 2008 only 47 sold.