A foot in the door
Becoming a landlord in Nevada while remaining a tenant in California felt backward to DeLanzer Huggy Ford.
Most people buy investment property after purchasing an owner-occupied residence.
But it was the only route the Sherman Oaks choreographer could find into the housing market. With a $200,000 limit on his purchasing power, Ford hit the price ceiling before he could find a desirable residence in Southern California. So he laid down $160,000 for a 2,400-square-foot, three-bedroom, three-bath house in Las Vegas.
Other Southland renters are taking similar approaches, staying put as tenants while purchasing their first properties out of state. Like Ford, they are anxious to grab hold of some real estate of their own, but with local home prices several rungs out of reach, they are buying outside California.
Eventually they plan to either sell their out-of-state investments or pull out equity to buy in Southern California. The success of this strategy will depend on housing appreciation, but so far those who have done it say it’s worth the risk.
“Don’t get me wrong,” said Elena Schmidt, a single mother in Los Alamitos who this year purchased a condominium in Las Vegas. “It was not easy. I put my finances in jeopardy. But you have to look at the big picture. I knew I was doing the right thing, but at the same time, I was like, ‘What did I get myself into?’ ”
Schmidt, who is in her 30s and works for a dental insurance company, followed the advice of a friend who has turned real estate investment into a second career.
Schmidt first considered Scottsdale, Ariz., but was concerned that it was too far away. Then she looked at Las Vegas and, after having her first choice snatched up by another buyer, found a $135,000, two-bedroom, two-bath condominium that met her requirements.
“It’s a lot of work, going back and forth and arranging,” she said. “You have to find the agent. You have to find somebody who will finance out of state.”
When all was done, Schmidt’s mortgage payment, property management fees and homeowners association dues totaled $1,000 -- about $300 a month more than the rent the market will bear.
But Schmidt thinks of the tax benefits she’ll receive as a property owner and considers the out-of-pocket expense akin to a monthly contribution to a 401K plan.
“This is the way I look at it: You put in $300 and they [the tenants] put in $700 a month,” Schmidt said. “Wouldn’t you agree to that?”
Ford, who manages the apartment building in which he lives, had a similar outlook as he assembled the down payment for the house he found with the help of an agent in Las Vegas and his Studio City agent, Pamela Marie Topa of Dilbeck Gibson Realtors.
“I was pulling money from stocks here and there,” he said, adding that he too considers the house a retirement investment.
Some lenders required 30% down, which was more than Ford could manage. He shopped around and, with the help of his agent, found a better deal.
Ford put 20% down, and the deal went through -- all without so much as a visit to the property.
“I didn’t see the house until it closed escrow,” Ford said. “I had to work. I couldn’t afford to take any time off to go to Vegas.”
The distance compounded the stress for Ford.
“When you buy ... there’s so many different things that you have to sign and read over,” he said. “And honestly, half the stuff you don’t understand.”
Ford recalled that as he drove up the street for the first time to see the home he purchased sight unseen he kept thinking, “Please, don’t let it be a hole.”
Not everyone buying a first property out of state is doing it solo.
Jessica Quintanilla, 26, a single mother and software engineer who rents a residence in Anaheim, partnered with her father last year to buy a single-family residence in St. George, Utah, and then purchased a duplex this year in San Antonio. In both cases they split the investment 50-50.
“I was a little nervous,” said Quintanilla, who, along with her 10-year-old daughter, lives with a roommate to cut expenses. “We were prepared. We had cash reserves in case we didn’t get it rented right away, which was the case in St. George.”
The house in St. George was found through research and the advice of friends who had already invested there. The San Antonio duplex, which already had tenants, was also purchased on the recommendation of friends.
“The builder funded the whole development, held onto it for a while and then sold it,” she said of the San Antonio residence. “They were already rented. If you wanted it, you just had to finance it.”
The process went so quickly that she and her father, Jaime Quintanilla, didn’t even have time to visit the property before buying it.
Her goal is the same as Schmidt’s and Ford’s -- to eventually afford a home in Southern California.
“We’re looking to stick it out for at least five years,” Jessica Quintanilla said. “Things are appreciating. I’m hoping that I can hang onto them and use it as investment property ... to finance my own place.”
But as promising as the strategy may seem, some real estate professionals caution against becoming an out-of-state landlord.
“I made this very mistake myself about 25 years ago,” said Robert Irwin, a broker with more than 35 years’ experience in the Los Angeles real estate market and the author of more than 50 books on real estate, most recently “Buy, Rent and Sell.” “I bought a couple properties in Phoenix. It turned out to be a disaster.”
Not long after Irwin hired a property manager, his tenants began to leave because they were unhappy with the management. There were other problems too, which required him to travel to Phoenix from Los Angeles more than once a month.
“After six months to a year, most people rue the fact that they bought something from a distance,” Irwin said. “The way to get out of that is if you have a relative willing to go in with you in that part of the country. That’s a different situation.”
Ford’s tenant is his sister, who’s employed as a nurse in Las Vegas. He also travels there often on business and has a brother who lives in the city.
But Schmidt and Quintanilla rely on property managers, who can charge 5% to 10% or more of the monthly rent for their services.
Schmidt’s property management company failed to find a tenant in a timely manner.
“I had to drive to Las Vegas to find a renter, and he [the tenant] complained to me that he couldn’t get ahold of the property management company,” Schmidt said. “If I didn’t have a contract with them, I would have fired them.”
Her property management company has many clients and is very busy, she said. “One more, one less, it didn’t matter to them.”
Still, property managers can provide valuable expertise -- responding to tenants with leaky roofs or broken furnaces and acting on behalf of the owner if a tenant damages the residence or fails to pay rent.
Robert Griswold, author of “Property Management for Dummies,” recommends that investors educate themselves about the law before leaping into the role of landlord.
Griswold points out that fair housing laws make it illegal to discriminate against tenants based on their lifestyles, for example.
“If you have strong beliefs about the way people should live, and you can’t comply with fair housing laws,” he said, “then find some other way of investing.”
Ford said he was aware of the responsibilities and the possibilities, which is why he thinks of his investment as a calculated risk.
Even though he has a family member as a tenant, he’s sure that if something changes, he can handle the $1,100 monthly mortgage payment.
In the end, Ford considers it a better investment than putting the money in a savings account or the stock market. “I can drive and go look at it and say, ‘That’s where the money is.’ ”
Even if it’s a backward approach, Ford said he hopes it moves him forward toward his goal of one day owning his own home.
T.J. Sullivan’s e-mail address is email@example.com.