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Homebuyers looking nationwide to invest

While some would-be homebuyers have been scared off by dire housing market predictions, some real estate investors are using equity gained in overheated markets to stake their claims in rental property in more affordable areas.
Amateur real state investor Debbie Harris poses in front of one her investment properties in Hesperia, Calif.Damian Dovarganes / AP
/ Source: The Associated Press

While many would-be homebuyers have been scared off by dire housing market predictions, Debbie Harris has taken out mortgages on five homes in the past 18 months. She’s among a growing number of fledgling real estate investors around the country using equity earned in overheated housing markets to stake their claims to rental property in more affordable areas.

The investors say there’s no reason to fear the housing market will collapse — although each purchase increases their risks of losing money if prices do take a dive.

“My husband believes there is,” said Harris, who runs two cell phone stores. “He’s thinking five houses is enough. I’m thinking, no, it’s not.”

Indeed, investors like Harris believe their investments are secure because people will always need places to rent — especially as homes become less affordable. But some observers say their zeal to scoop up property in emerging areas is helping drive prices there even higher.

Mike House, who hosts meetings for a real estate investor group in Las Vegas, thinks a number of markets have already soared out of reach for those looking to spend less than $200,000.

“Los Angeles, Phoenix, Las Vegas ... are all unaffordable now, theoretically,” he said.

Many of the new investors got into the market after watching their stock portfolios stall as their home equity soared. These days, they’re turning to friends, seminars and real estate clubs for advice on buying property for long-term rental income.

More gutsy investors are “flipping” homes for profit through quick sales.

A survey by the National Association of Realtors determined that 23 percent of all homes purchased last year were acquired as investment properties.

On the East Coast, investors in New York and Boston are grabbing real estate in growing areas of Florida and the Carolinas, said Lawrence Yun, senior economist for the association.

Californians, meanwhile, are buying in Nevada, Arizona, Utah and Colorado, among other markets.

“California is filling up with equity and now it’s spilling over into these other areas,” said James Joseph, owner of Century 21 Grisham-Joseph in La Mirada, a Los Angeles suburb.

Concerns raised
The investments have surged even as economists and analysts have raised concerns about the housing market.

Federal Reserve Chairman Alan Greenspan has said some of the nation’s pricier markets are experiencing a “froth.” Economists at the University of California, Los Angeles, have warned the national housing market is due to slow because prices have become unsustainably high.

It’s already happening in California, where some of the pricier markets have cooled significantly this year.

The rate of appreciation for homes in San Diego County has slowed every month since May. It was 2.1 percent in August — when the median price was $493,000 — a far cry from the double-digit annual percentage increases enjoyed by homeowners there in recent years.

More affordable markets, such as San Bernardino County, west of Los Angeles, continue to see higher annual appreciation rates, however. In August, median-priced homes there appreciated 31.8 percent.

Rental property investors say they can hold on to their properties through such cycles. But particularly those with multiple properties also face risks, said Rachel Drew, research analyst at the Joint Center for Housing Studies of Harvard University.

Such investors are dependent upon steady rental income to make their mortgage payments and even a few months without a tenant to cover their loans could leave them in financial trouble.

“Even if it’s a low mortgage, it’s still a low mortgage payment they’ll have to make,” Drew said.

Longterm investors also face the risks that short-term investors do if they find they must unload their properties during a down cycle in the market.

Still, in the Las Vegas area, the median home price has climbed to $275,000 — an 18.5 percent hike over the previous year. The value of some new homes there doubled from the time construction began until they were ready to be occupied.

Around Phoenix, the median home price jumped 34.2 percent to $229,500 in the past year.

Those prices seem like a steal compared to the $494,000 cost of a median-priced home in Los Angeles County. In the nine-county area around San Francisco, that figure stands at $619,000.

House got his start in real estate 10 years ago while working in California as an insurance adjuster after the 1994 Northridge earthquake. He was renting an apartment when a contractor told him about the profit potential.

He joined a Veterans Administration foreclosure auction in Jacksonville, Fla., and bought a single-family home for $49,100. It’s one of 40 houses he owns in Las Vegas, Texas, Florida and Arizona.

“I’ve never had a real desire to flip because my philosophy is the minute you sell the house, it’s the last dollar you make on that place,” House said.

Lon Hooker of Ojai runs real estate investment groups that include Harris, House and other members from as far away as Baltimore and New York. He also downplayed the impact of a possible real estate decline.

“Even if the whole nation slowed down, if less people are buying then they have to rent, and if they have to rent then the rental market goes up,” he said.

Hooker figures homeowners who bought beyond their means are at the most risk.

“The guy that’s going out making $80,000 a year and buying a million-dollar house because he can, and he’s living in the house — these are homeowners who are creating concern over a bubble,” Hooker said.

“Investors are going to sit back and wait,” he said.

Thus far, Harris has bought all her homes in Victorville, a booming desert area about 90 miles east of Los Angeles.

Less than two years ago, she and her husband used their savings to make their first investment, buying a two-bedroom, one-bath house from a high school friend for $115,000. The home now rents for $800 a month and is worth about $190,000, Debbie Harris said.

Like many California investors, she has decided her next purchase will have to be out of state in a more affordable market.

“We were very fortunate that our timing was great and our rent is paying for our mortgage — plus,” Harris said. “In the high desert, I don’t think there’s a way to do that right now. The homes have skyrocketed too fast.”