Until a few years ago, Judy Peterson, a special-education teacher who lives near Sacramento, Calif., had never heard of Pocatello, Idaho. Nor did Peterson, 59, ever expect to own any real estate aside from her own home. But last year, tired of earning mediocre stock-market returns, she cashed in her retirement accounts and spent $120,000 on a three-family house in Pocatello. Then she bought another property. And another. Today, Peterson owns eight rental units in the city, which she's visited just twice. "I have friends who go, 'You did what?' " she says. But with rental income paying the properties' mortgages, she's pleased. "You can't find investments like this in California," she says.
You've heard about the current real-estate boom. You've read about investors who are "flipping" properties in hot markets like Las Vegas or Miami. Maybe you've even participated in a dinner-party discussion of what's becoming America's most tiresome question: will the housing bubble burst or not? Pocatello, a city of 51,000 set in a river valley 150 miles from anyplace you've heard of, seems far from this debate. Home prices there have risen just 22 percent over the past five years, compared with 50 percent nationally; today, the median house there sells for just $98,000. But those low prices and a strong rental market are turning Pocatello into some investors' idea of a can't-miss proposition. Dozens of investors, many of whom heard about the city at real-estate seminars and on the Internet, have begun buying up rental properties. In fact, Pocatello recently ranked third among the nation's cities in the percentage of mortgages being taken out by investors rather than by borrowers who intend to occupy the homes they're buying. Just as some investors bought value stocks during the tech boom, these folks are sidestepping the hot markets to buy low in Idaho--and dream of the upside. But they may be disappointed, especially if vacancy rates or interest rates rise or rents languish.
A strange mix of factors--economic and otherwise--have turned this faraway city into a destination for newbie real-estate investors. Pocatello is home to Idaho State University, whose 14,000 students form a solid base of renters. Some of the area's biggest employers don't pay well enough for workers to buy their own homes, boosting the pool of renters. Compared with other states, Idaho's laws are landlord-friendly, offering swift recourse if a tenant turns into a deadbeat. Even geology plays a part: because of the area's low water table, homebuilders typically dig deep basements, which are often turned into apartments.
Driving through a working-class neighborhood on Pocatello's north side recently, Realtor Greg Johnston shows off typical investment properties. Most are ranches or bungalows of about 1,500 square feet or drab multiple-unit apartment buildings. Some lie in well-kept neighborhoods; others, not so much. Inside a typical unit, conditions are ripe for a kegger: earth-colored carpeting, lots of linoleum, Nixon-era bathrooms. Out-of-staters call Johnston each day looking to buy places like this, but he urges caution, preferring that folks actually visit Pocatello. "Two years ago it was easy... but now because of all of these out-of-state investors, it's difficult to find a really good property," Johnston says. That demand helped Pocatello home prices rise 2.15 percent in the first quarter--more than they grew all year in 2001 or 2002.
Aside from the obscure location, the strategies employed by these investors aren't new. If you suffered insomnia during the 1980s, you may remember late-night infomercial hucksters pitching "no money down" real-estate deals. Today, new-generation gurus work hotel conference rooms, teaching similar lessons. For an example of how their formula works, consider 358 South Lincoln, on the market for $90,000 in the foothills on the Pocatello's west side. With 10 percent down and an $81,000 fixed-rate mortgage at 5.5 percent, the buyer might owe $650 in monthly mortgage payments (including taxes and insurance). But if the three-bedroom house rents at $650 and the basement apartment yields $275 (less 10 percent for a local property manager), that leaves $180 in monthly profit (tax-deductible mortgage interest and property taxes raising profits further). And over time, the theory goes, rents and property values should rise, boosting returns.
Of course, these calculations don't add up if you can't find tenants. But the new landlords dismiss that worry. Instead, they're crunching the numbers and using "cash-flow" as a verb ("How does that property cash-flow?"). Joe Carr and Tim Owens, who run real-estate seminars in southern California, each teach this philosophy--and lately they've been pointing clients toward Pocatello to implement it. They believe more than 100 of their clients have bought property there, using a real-estate agent who splits commissions with them.
This influx can lead to some strange moments, like when a NEWSWEEK reporter parked in front of the duplex at 77 Foothills Boulevard this month and called Edi Stocker, a Santa Monica, Calif., systems manager. Stocker began talking about the property, which he bought last month after attending Carr's seminar. Informed that the reporter was parked in front of it, Stocker bubbled with questions. "What does it look like?... How's the neighborhood?" Like many new Pocatello landlords, he's only seen it in photos. He and other investors rely on the home inspector and appraiser to look over the property, reducing the obvious risks of getting scammed by buying a house sight unseen.
Stocker bought the duplex with help from Todd Bohn, a local real-estate agent who caters to out-of-staters. Most agents spend long hours schlepping clients around to show property, but since most of Bohn's buyers never visit Idaho, he rarely leaves the office, relying mostly on e-mail. Bohn's wife sits in the adjoining office; she manages the properties for most of these investors, collecting rents and sending out repairmen in exchange for a cut of the monthly rent. Like most cash-flow enthusiasts, Bohn expresses disdain for the stock market. "[People] don't need GE stock--GE stock could go down to zero," he says. "But no matter what happens with the market, everybody needs a place to live."
For years economists have disputed that wisdom. Stocks, they say, offer higher returns, greater liquidity, easier diversification and lower transaction costs than real estate. Traditionally, housing has been viewed as "an intimidating, large asset that's awkward and illiquid," says National Association of Realtors economist David Lereah. But he says that's outdated thinking. Easier-to-get mortgages have raised liquidity, he says, and the tax advantages and leverage (which boosts returns) mean most people should have more assets in real estate.
Still, some see the growing enthusiasm for investment properties as evidence of a housing price bubble. Credit Suisse First Boston analyst Ivy Zelman says investors bought 14.5 percent of homes sold in 2004, a 31 percent increase over 2003. She worries most about places where investors are using "interest-only" mortgages to get deals done, such as Las Vegas, Phoenix and Los Angeles. If investor demand went back to preboom levels, she figures prices nationally would decrease more than 7 percent. "It's a red flag," Zelman says.
Even if ditching mutual funds in favor of Idaho apartments sounds ludicrous, these Pocatello investors probably face less risk than the folks flipping condos in Vegas or Miami. And now that they've had a taste of positive cash-flow investing, most are hungry for more. Seminar leaders like Carr and Owens say they're starting to direct investors toward rentals even further inland, including cities in Kansas and Nebraska. In the last year Stocker, the owner of the Foothills Boulevard duplex, has also bought rentals in Alabama and Florida; he hopes to buy at least 10 altogether. "Next year I plan to buy a motorcycle and take a tour of my properties," he says, since he's never seen any of them. Whether this boom continues or not, at least he's in for a heck of a ride.