Sunday, November 16, 2003
Copyright © Las Vegas Review-Journal

OUT-OF-STATE INVESTORS: Rental houses abound in LV

Still-affordable real estate market appeals to those seeking quick profit

Tom and Barbara Slight leave a house for rent on Elk Grove with Realtor Kay Poole in tow. Photo by John Gurzinski.

Kathleen Eckel has watched her Rosedale subdivision in Summerlin get trashed by renters who let the lawn and shrubs die, throw empty beer bottles in the bushes and leave water hoses lying around the yard.

"It's like Summerlin's dirty little secret," said Eckel, who purchased her home new in August 1999 and witnessed the transformation of her neighborhood as resident owners sold to investors.

Now 11 of the 14 homes on her street are rentals.

"It's gotten worse," she said.

Investors are creating artificial demand in the Las Vegas housing market, driving up prices and bringing down neighborhoods with a glut of rental properties.

With homes appreciating at double-digit rates, Las Vegas has become a lucrative haven for investors looking to make a quick hit in real estate.

Most of them come from California, where inflated home prices and rent controls make it difficult to get the kind of returns seen in this market.

"Yes, that is something I'm quite aware of," said Shawn Cunningham, a local realtor with Re/Max Advantage. "I've stated to my clients many times that Las Vegas is built on California money."

He estimated that 60 percent of the 130 transactions his office closed on last year were either relocaters, second-home buyers or investors from California.

"Not only do we have what I believe is the highest percentage of mortgaged houses of any major city in the United States, but the rich California real estate investors, who are finding it unappealing to invest in their own superhigh-priced markets, are finding the still-cheap Vegas real estate a great option for them," Cunningham said.

The median price of a new home in Las Vegas was $208,265 in September, a 13 percent increase from the same month a year ago, said Dennis Smith, president of Home Builders Research, a company that tracks the local housing market. Existing homes sold for a median price of $174,900, up 13.2 percent from a year ago.

Many Californians sell their homes there and buy two or three in Las Vegas, said Terry Robertson, owner and broker of Desert Realty.

"You look at the price of property in California, a lot of investors and people bought houses for $200,000 and $300,000, now it's $600,000 and $700,000 and they're bringing their money here," he said. "It's driving up the sales price (in Las Vegas) because it's supply and demand, more people wanting to buy."

The rising prices of both new and resale homes are the result of consumer demand in an "overheated" housing market, Smith said, with investors and speculators fueling the fire.

"It increases demand. It may be artificial. However, that demand is still there. You've got X number of people buying houses, and that drives up the prices," he said. "I know builders who, because of the demand, have increased prices even more to try to slow down sales because production can't keep up with sales. Builders have 150 people on waiting lists today and they can't lock in a contract because you can't guarantee prices."

Cunningham said the market is beginning to shift toward a more realistic portrayal of demand.

Most builders are trying to restrict investors and second-home buyers. KB Home, for example, allowed only one investor per release in its new Mariposa tract in Summerlin, he said.

Richmond American and other home builders are following KB's lead, limiting the number of sales to buyers who are not owner-occupants.

They want to keep "For Rent" and "For Sale" signs off the streets while they're still trying to sell future releases, Cunningham said.

"As investors have been driven mostly out of the new home market, we're still seeing prices rise steadily, and owner-occupants are just as willing to pay them as investors are, perhaps more so," he said.

Beverly Long, who handles property management and sales for Desert Realty, said it's not an investor market in Las Vegas right now. It's a buyer's market.

Low interest rates and comparatively low home prices allow renters who have a decent credit report to become a homeowner with about $3,000 in closing costs.

People are cashing in on the equity they've built in a home they purchased for $118,000 a few years ago, selling the home for $160,000 and moving into a new home, Long said.

"What we let our investors know when they call about a property is they have to be able to handle three-month vacancies," she said. "It won't get any better until interest rates go up, I would say 7 percent plus."

Meanwhile, they're paying $200 to $250 a month to advertise the rentals.

Investment home owners are starting to drop rents to under $1,000 for a three-bedroom house in the northwest valley, shorten contracts from a year to six or nine months and sometimes offer free rent for 30 days, Long said.

A lot of investors come to Las Vegas looking for a "steal deal" and it's simply not there, said Karyn Shaunnessy, a Realtor with Century 21 MoneyWorld.

"They know that we're a tax-friendly state and there's a high liquidation volume here," she said. "It's not like Nebraska, where it's on the market for 280 days."

Connie Sherman and her husband, Gary, own a fourplex in Los Angeles and considered buying a rental property in Las Vegas a few years ago but backed off.

"It just proved to be too expensive compared to what rents were," she said. "We were surprised at how low rents are. You couldn't cover the mortgage with the rent."

As for renters ruining the neighborhood, Robertson of Desert Realty said some of them are more meticulous than homeowners about maintaining a property.

"I don't know that it would bring the values in a neighborhood down unless it was a lot of them in the neighborhood," he said.

"Well, obviously when you have renters, their investment is a little different than owners," said Debra March, executive director of Lied Institute for Real Estate Studies at the University of Nevada, Las Vegas. "Owner-occupants take better care of their property generally, but not always. So yeah, you may see an impact on the condition of the property, which impacts the neighborhood and the value of homes. It helps to have a good property management group."

Smith said banks are more inclined to make home loans to owner-occupants and require such disclosures on loan applications. It makes a difference on the amount of a down payment, with investors usually having to put down at least 20 percent.

"That's why, if you talk to lenders, they don't want to see a lot of investors because they don't have as much of a stake in ownership as a typical homeowner," he said. "A lot of those investors are probably going to hold that property for one year because they need to get long-term capital gains, then take their profits and buy something else. You keep moving. That puts more houses on the market."

If something changes in the economy that causes a slowdown in the market, investors will unload the homes, much like they're cashing out of mutual funds now, Smith said.

"So they'll sell those homes, get their cash back. You'll see a rise in the inventory of houses for sale. I saw it happen twice in Phoenix."