• Efficiency:  Due to their varied locations managing and maintaining 8 properties after work can begin to be a rat race.
• Financing:  Banking rules only permit each lender to have 10 residential loans at any one time.  Under certain market conditions banks sometimes lower the 10 residential property loan maximum to 4. This will limit Jerry’s efforts to acquire new properties unless he elects an “all cash” acquisition strategy.  If it takes a high (or even 100%) amount of cash to acquire an asset you had better be getting a much higher percentage return on your investment or your yield percentages will drop.
• Non-scalability:  Jerry is just about at the limits of what he can take care of after work in varied locations.  If he wants to grow his portfolio and potential returns he needs to adopt a different strategy.

 Its a great time to start or expand your multifamily investments.  Contact Rick Bean of Rose City Commercial Real Estate to learn more about Portland multifamily and other good investments at: 503.577.1034, or rick@rosecitycre.com.

Options

 You should have seen the “lights go on” for Jerry when I told him that his plan had great elements but he was placing his energies in the wrong  type of property.  There is no limit to the number of commercial loans you can have at one time.  Banks don’t say:  “Sorry, Sam Zell…no more apartments for you, you have more than 10 commercial loans.”  Residential investment multifamily is 2-4 units.  Commercial investment multifamily is 5 and up.

It would take time, but my counsel to Jerry is to sell off his single family properties, aggregate his equity and purchase a 20-30 unit apartment complex.  He can give one of his tenants a break on rent to be his on site “eyes and ears” and collect rents.  He can elect to do all the maintenance himself, which will increase his monthly cashflow.  If is tired of management and maintenance duties he can get help.  His total cash flow will be slightly lower intitally…and much higher in a couple of years.

An additional option would be for Jerry to by a property with need of some “lipstick” and use his crews to help turn it around.  After stabilizing higher rents it could be sold for a substantial profit, and by using a 1031 exchange the equity could be turned into a 40 to 60 unit property…complete with M+MBO.  (Maintenance and management by others).

Multifamily scalability

Costco is based on the principle that makes apartments a great investment: Do you want to pay $43.75+ deposit for 35 single bottles of water…or $4.99 + deposit for a case of 35?  Apartments are by nature a highly scalable investment.  I once worked as an intern for a man who was truly self made.  He started many years ago by buying a triplex.  Since then he has bought multiple complexes that have over 1,000 tenants each.  The best part of this story?  He still hasn’t paid the taxes for the gain on the 1976 triplex sale due to the advantages of 1031 exchanges…but that’s a discussion for another post.

We want, expect, maybe even demand good…but excellence deserves special attention, doesn’t it?  It is the policy of Rose City Commercial Real Estate to celebrate excellence.  I have worked with a number of fantastic property management firms in my career.   Today I want to salute one of them.

I like to see an organization do something just because its the right thing to do for their clients…not just trying to improve their operational metrics.  Princeton Property

No one associated with this blog is a stakeholder, nor have they received payment from anyone cited for excellence.  Previous posts have celebrated Holly Bray/Love Funding, David Moore/Equity Advantage, John Adams/Logo Products, Montage Restaurant, Chinook Construction, and more.  If you think what someone is delivering is excellent not just good…let us know and perhaps we’ll celebrate them here.  Contact Rick Bean at: 503.577.1034 or rick@rosecitycre.com.

Management’s aggressive approach to lowering property taxes for it’s client’s properties is an example.  They’ve done a superior job of supporting tax reduction advocacy.  And they have taken the extra effort to be certain that each asset they run is reviewed for possible reductions.  The irony is that most of  Princeton Property Management’s clients won’t even know about the extra effort that Princeton has expended…but that’s why I’m citing Princeton for multifamily management excellence.

Remember that the norm is for management companies to get paid on gross revenue.  While successful property tax reductions pay off handsomely for the owner, the property management firm is not compensated or even acknowledged.  Office Manager Amy Acala is heading up the effort, but she also  has enlisted and received the support of the entire organization in pursuit of lowering property taxes.  That’s how things ought to be done!

From what I’ve observed, the overused word “excellent” is appropriate when discussing Princeton Property Management!

How should “Jerry the plumber” invest?

Jerry is a 50 year old who owns a successful plumbing business.  In addition to his own home Jerry has 8 other single family residences that are rentals.  He currently manages and maintains all the properties himself.  They have significant equity in them.

How should “Barry the bond holder” invest?

Barry is a retired businessman who has well over a million in bonds that pay anywhere from 2-4% per year.  He’s conservative, (he’s into bonds after all!) but he’s also concerned about inflation.  Monthly cashflow is very important as that is a major source of income.

How should “Jacob, the mid-30′s dynamo” invest?

Jacob is young enough that he doesn’t even think about cashflow…his focus is on the big chunks of equity that come upon sale so he can exchange into a larger property.  His current goal is to own as many doors and expand his holdings as fast as possible, even if that means a shorter hold period.  He doesn’t see himself as a risktaker…he times markets and buys at the bottom, although he does use higher leverage than most apartment guys.

How should “Dylan the daytrader” invest?

Dylan is a highly successful daytrader who understands the stockmarket and has made a killing in it.  He’s concerned that the volatility index of the market is increasing and that the European (and local) debt problems may reduce values.  He wants to put $1 million into multifamily, but he doesn’t know the first thing about asset management of real estate.

While these names are obviously made up, the profiles are similar to actual savvy investors I’ve met.  Please check back to follow the series as we explore the challenges and possible solutions for each of these scenarios.  If you want to me to assist you in developing a custom solution crafted to your specific economic circumstances, contact me, Rick Bean, at: 503.577.1034 or rick@rosecitycre.com.

Two stock market related articles caught my eye this morning.  One entitled: Investor Uncertainty At 6-Year High: Survey has details of a survey taken by the American Association of Individual Investors.  The percentage of stock market pros surveyed expecting the market to remain flat for the next 6-months is the highest that it has been in 6 years.  Ouch! Short term solutions to our domestic malaise and the European dept problems just don’t seem to exist. And this has the market on edge.

Another article from Aaron Task of The Daily Ticker was even more dire than the first: “Very Scary”: The World Won’t End in 2012, But Might Feel Like It’s About To.  Follow the link to the article and a video if you’re feeling cheery and want to change your mood.  Perhaps even scarier than the short-term fundamentals of the stock market is the overall lack of stability.

Daily changes in the Dow are much greater than they used to be.  On May 6th of 2010 the DJIA lost a $1,000,000,000,000 in a few minutes. 1,000 points. Starting at 2:45 PM the bottom fell out and within a few minutes a trillion dollars in value was gone.  Shortly thereafter the market went back up again and people seemed to forget about it almost immediately.  For thrill seekers that like stock markets and roller coasters:  Good luck to you!  I am counseling potential clients that real estate offers a more stable placement for equity that has never gone down a trillion dollars in value in a single hour.

Contrast the doom and gloom with the apartment market.  Over the past few years apartment construction both locally and national has come to a near standstill.  Rents are beginning to rise, vacancy rates are falling…I expect to see raising Net Operating Incomes and falling Cap Rates for the foreseeable future.  Portland has become a great market for institutional investors, and other ownership segments are following their lead.  Please contact me to discuss equity expansion at: 503.577.1034 or rick@rosecitycre.com.

1. Unmanaged property tax liability. This is an item that needs an annual review by a professional. As an example, exception value in Oregon can only be appealed the first year it appears. No, they don’t identify it…so failure to appeal can cause a permanent increase in taxes.  There are a few exceptional professional property management companies that consider property tax minimization as part of their mandate to run the property.  Many do not!

2. Resident retention…and turnover costs when we fail to do so. Many multifamilistas don’t focus on this so much, after all the next renter is just around the corner. While the vacancy component of total turnover cost is lower than it used to be, the costs of turnover can be huge, particularly if retention rates drop. Below is another great article from Keat Foong of Multi-Housing News Online. Interesting reading that challenges commonly held beliefs about renter behavior.

Concerned about maximizing your apartment portfolio’s profitability?  Contact Rick M. Bean of Rose City Commercial Real Estate for an evaluation.  We’ll discuss low hanging fruit as well as more involved projects.  Phone: 503.577.1034, or e-mail me at: rick@rosecitycre.com.

According to Miller, being able to successfully keep your residents has to do with paying attention to basic “blocking and tackling” tactics on the operational side of apartment management. “What we have found is that when prospects are first enticed to a community, they are interested in how the community looks and all the bells and whistles. Once in there, their focus shifts, to the service level and the value they are getting. The question for them becomes how easy it is to be a resident in the community, to get calls returned and things fixed,” says Miller.

For a recent national survey conducted in June and July, “Getting Inside the Head of Today’s Online Renter—Behaviors, Preferences and Implications,” SatisFacts surveyed about 85,000 residents in communities of all classes managed by 20 companies. Topping the list of what is most important to residents when shopping for their next apartment is the perception of quality customer service, the ability to pay rent or submit service requests online, and the ability to provide resident feedback. At the bottom of the list is having a community Facebook page, or the ability to rent Zipcars.

Biggest reasons for turnover

The Towbes Group boasts a relatively high resident retention rate, and its turnover rate does not exceed 45 percent, even with the recent implementation of a rent increase program. That number is 10 to almost 20 points below the average industry resident move-out rate of 58 percent to 63 percent. Jim Carrillo, vice president, residential properties, for The Towbes Group, says “communication with the residents is always transparent and two-way. Nothing of importance is kept from the residents, positive or negative.” The company also surveys other communities in the markets it serves to observe the level of service provided at its competitors’ properties. Then the company establishes a standard above that.

As a way to preempt potential move-outs, in October of 2008 The Towbes Group informed all its market-rate residents that rents would be frozen through 2009. Rents were again frozen in 2010. And the company did not participate in lease renewals, but rather, allowed all leases to convert to month-to-month after the initial 12-month lease. This led to a low annual turnover rate averaging 39 percent—in the midst of the economic recession following the financial crash. Since then, the company has implemented a renewal program that is seeing some of the first increases in nearly three years, says Carrillo.

Lowering the rent or refraining from raising it, although necessary in downturns, may be a costly way to keeping residents in communities, however. Instead, Jen Piccotti, SatisFacts senior vice president of education and consulting services, recommends that property managers pay attention to providing great service at all stages of the lifecycle of the apartment renter. SatisFacts’ research shows that residents tend to feel neglected towards the end stage of the lease cycle. “You have to show the love 365 days a year,” not just at the beginning of the lease term, says Piccotti.

“Every property has its chronic complainers. You get to know your high maintenance residents, and the human tendency is to start hiding and looking busy when you see them coming, but you have to make sure every resident feels welcome. They are, after all, paying your salary,” says Piccotti. “Keep that smile, welcome everyone, and bend over backwards every time someone walks in the door. We need to assume that as soon as they leave the office, they go to their mailbox and find a lease renewal/rent increase letter awaiting them.”

Creating an appealing environment

The visual appeal of an apartment community can also play a role in retaining residents, according to designer Rebecca Jones, ASID, principal of RD Jones & Associates Inc. “Overall, the client base is hesitant to invest in design the way it should, but clients that do are reaping the rewards,” she adds. For example, The Bozzuto Group hired Jones to design the interior spaces of The Fitzgerald in Baltimore, which garnered a 2011 MHN Excellence Award and is, according to Bozzuto, the fastest-leasing apartment community (25 units per month) in the history of Baltimore.

The Fitzgerald was designed with a boutique hotel aesthetic, reminiscent of a hot spot you’d find in New York City, such as The Gramercy, says Jones. “If you design something really cool, that sets you apart from the competition,” she adds. The fashionable design makes the residents “feel good about the space, about themselves and about their living environment.”

Self esteem is important to the sociable Generation Y, and they like to bring their friends to their trendy buildings—they see the common areas and the entertainment spaces as extensions of themselves, she says. “They want to be able to say, ‘this is my personal space that I can enjoy and use with my friends,’” Jones notes.

Don’t underestimate the role that functionality in the design plays in holding onto residents, says Jones. Flow, access and convenience are important. You do not want the garages to be in a location that is too much of a trek. And make sure there are enough elevators interspersed through the property. “We see a lot of buildings in which you have to hike a football field to get to your space,” she notes. People may express dissatisfaction with such daily inconveniences by moving.

My Dad taught me a valuable lesson when I was a youngster.  He asked me if I had mowed the lawn as asked.  I replied: “No…but I’m thinking about it.”  He said:  “Well now…thinking about something is a step, but not a very big one.  And now we’re talking about it…an even further step, but still not very big.  To sink a long putt you have to take your time, read the green and envision your success.  But at some point you have to actually strike the ball.  Planning improves success, but without action planning is useless.”  I went out and mowed the lawn right away.   I’d like to tell you that I learned the lesson my father offered me immediately, but like many 14 year old kids it took the message a few weeks to sink in.  Of course, now the message is clear: ” Words and thoughts take a back seat to action.”

“The best time to make an offer on a building is while the firemen are  still moping up.  After its rebuilt the price will go way up.  The multifamily market has taken some hits over the past few years…but I feel now is a good to start a portfiolio…or to expand one. Take action now…call Rick Bean at 503.577.1034 or email me at rick@rosecitycre.com.

Years ago a bright and energetic fellow as running around Eugene with a waffle iron in his trunk trying to get folks interested in a new type of shoe that was designed for running.  The waffle pattern was purported to offer superior traction and performance.  Someone I love and admire was made the same offer given to so many around town:  “Give me $20,000 and I’ll sell you 10% of my new shoe company.”  Today that slice of Nike is worth considerably more than the original offering price.  Many thought about it, few acted.

My question to those that are thinking, talking, and considering investing in apartments is this:  “Will your story 10 years from now be that you thought about investing in multifamily?”  To paraphrase my father’s wisdom: “You are in no danger of making a profit on the good investments you don’t make.”

Take action! Contact Rick M. Bean at Rose City Commercial Real Estate today: 503.577.1034 or rick@rosecitycre.com.

The Coming Rental Housing Wave

I have been forecasting a “new golden age for multifamily” for some time.  My opinion: six months or a year from now will be a great time to get in…but not as good as today.  Prices will rise and “great yields” will turn into “very good” yields.  Act now by calling Rick Bean at 503.577.1034 or email: rick@rosecitycre.com.

 

 

“It’s an exciting time to be in this growing sector where it is projected that $1 trillion in capital and 10 million additional apartment units are needed in the next 10 years as more individuals turn to apartment living,” said Freddie Mac Multifamily Senior Vice President David Brickman. 

Renters now make up more than 40 million households – about one-third of total U.S. households, according to Brickman. For every 1% that the current homeownership level of 66% decreases, one million individuals become renters. 

The changing demographics also show a significant increase in immigrants, 20-34 year olds, and baby boomers entering the rental market. 

“The bottom line is that the multifamily market is poised for growth due to strong demand, healthy fundamentals, and limited supply,” Brickman said. “These trends have renewed interest in the sector and investors are returning as evidenced by an increase in acquisition and refinancing activity.” 

Another 1.4 Million Renters This Year Alone

Through the 12 months ending mid-2011, the Census Bureau reported a net increase of 1.4 million households that moved into rental housing, a 4% rise in the number of tenant households in just one year. 

The U.S. homeownership rate has fallen about 1.5% over the past year (from 66.9% to 65.9% during the second quarter of 2011) with owner rates falling by 4.4% (to 21.9%) for those under 25 years of age and by 7% (to 34.7%) for those aged 25 to 29 years. 

Apartment rents, which had been flat to falling in many projects during the 2008-2009 recession, have begun to rise, albeit slowly, Freddie Mac reported. 

New construction starts of apartments in buildings with at least 20 dwellings have picked up this year and in the second quarter were the highest since the end of 2008. 

“New construction starts are slowly picking up and multifamily lending appears to be rising as well with this year’s origination volume stronger than 2010′s,” said Frank Nothaft, Freddie Mac, vice president and chief economist. “In part, the rise in originations is related to the low-level of mortgage rates, improving apartment-sector economics, and the return of traditional lenders that had curtailed activity during the recession.” 

Apartment Development Ramps Up as Demand Swells

After a surprising delay, the increased demand for rental housing has finally led to a considerable uptick in multifamily construction, the National Multi Housing Council (NMHC) reported in its latest Quarterly Survey of Apartment Market Conditions. 

The pace of development activity has increased in most markets. Two-thirds (67%) of respondents noted considerable activity, either in the planning stage or actual new construction. 

In particular, 20% said developers are breaking ground on new projects at a rapid clip. The other 47% reported an increase in pre-construction activities-acquiring land, lining up financing, getting building permits-but not much actual construction yet. 

Even with this increased activity, more than half (54%) think new development remains considerably below demand. 

“Powerful demographic trends, along with changing attitudes about homeownership and tighter mortgage underwriting, continue to drive a shift toward renting, which is fueling a ramp up in new construction,” noted NMHC chief economist Mark Obrinsky. “While some survey respondents expressed concern over sporadic overbuilding, others noted that the lack of construction financing may prevent some developments from actually breaking ground.” 

Rents, Vacancies Benefiting from New Demand

Preliminary third-party data for the third quarter of 2011 suggest that the vacancy rate for institutional investment-type apartment properties has fallen and asking rents have now likely risen for six consecutive quarters, according to Fannie Mae. 

Vacancy levels are firmly back to historical norms at an estimated 6.5% for the third quarter of 2011. Asking rents also likely rose again in the third quarter of 2011 by 1% quarter-over-quarter. It appears that full-year 2011 national average asking rent growth remains robust and on track to reach 4%, with effective rents perhaps reaching 5%, or even 6% annualized growth, Fannie Mae said. 

While the strength of declining vacancy levels and increasing rental rates will vary by metro area, on a national basis the multifamily sector should continue to see steady improvement for the remainder of the year, Fannie Mae said. It expects average asking rents to experience an annualized increase of 4% and the vacancy rate to stay fairly stable, perhaps declining to 6.25% by the end of the year. 

States with Opportunities

CoStar Group senior real estate economist Erica Champion has been tracking the changing housing attitudes during and following the Great Recession. 

“For those of us with a special interest in the multifamily sector, we are chomping at the bit to find conclusive answers to questions that have been plaguing us since the collapse in the housing market,” Champion said. “Has apartment demand really been that strong? Yes. Are there really that many more people renting apartments? Yes.” 

With the newest U.S. Census data issued this year, Champion has found some answers. 

” ‘Robust’ is definitely the word for the rise in rental demand that took place over the decade from 2000 to 2010. In line with the drop-off in homeownership that started in 2006, 4.5 out of every 10 households added during the first decade of the new millennium are renters. This is compared to an average rental propensity of 34% in 2000,” she said. 

The trend has not been evenly apparent from state to state, she said. 

“Of the states that added renter households at a faster rate than the national average, some are not a surprise. California and Nevada have been poster children of the housing bust and they remain top-ranking states in foreclosure activity, with rates twice the national average. Investors and developers that have been in love with North Carolina and Oregon can congratulate themselves for jumping on the right bandwagon,” Champion said. 

“The other states are surprises because they are not necessarily the top-of-mind locations for apartment development or investment,” Champion added. “Developers and investors may have overlooked some areas with promising demand fundamentals. States such as Ohio, West Virginia, Pennsylvania, and Alabama saw enormous gains in the number of renters – more than six of every 10 households added over the decade were renters. Kentucky, Kansas, Indiana, Missouri, and Oklahoma adding more renters than the national average are also surprises. And there is no evidence to suggest that this boom is driven primarily by the housing bust. The foreclosure rate in West Virginia, Pennsylvania, Alabama, and Kentucky remains one-third the national rate. The rest are on par with or below the U.S. average,” she said. 

“With one in every two new households renting their homes, these surprise states may present an opportunity worth pursuing to build in a hidden gem location and, in some, to exercise a first-mover advantage,” Champion state. 

Unmet Demand for Middle Aged

Where Champion sees geographic opportunities, CoStar Group’s senior real estate strategist Michael Cohen sees opportunities in an overlooked group. 

Few concepts are tossed around more frequently at apartment conferences than the fact that younger households have the greatest propensity to rent, Cohen said. 

However, while true, “researchers (and investors) who focus exclusively on the potential impact of the Echo Boomers, are missing a substantial piece of the overall apartment demand story,” Cohen said. “The total number of middle-aged households in the U.S. – 35 to 64 years old – outnumbers households under 35 years old by three to one. In turn, 20 million, or half the total number of renter households in the U.S., can be found in this middle-aged demographic.” 

“Interestingly, as we begin a new wave of apartment construction as evidenced by a steady increase in multifamily starts, I wonder whether developers truly understand the contours of their renter base,” Cohen said. “After all, is it the 22-year-old fresh out of college at the leasing office inquiring about stainless-steel appliances and granite countertops? Quite the contrary: more likely than not (well, at least 50% of the time), it’s a middle-aged household.”

Optimizing multifamily profitability is a bit art and a bit common sense.  Two areas where underperforming will impact cash flow are: 1. Failure to work renewals proactively, and 2. Poorly managed “Make Ready” costs.  Below is an article by John Wilhoit Jr. with some great pointers on both.  Click on the title to go to his site for additional great articles…he’s the real deal.

Multifamily Make-Ready’s Made Easy

by John Wilhoit Jr. on October 18, 2011

Following the passage of Measure 5, Oregon State transferred its property tax appeals from the Dept. of Revenue to The Courts.  A whole new system had to be created including rules, laws, procedures and the appeal process itself.  The Chief Hearings Officer for the State of Oregon, Scott Phinney, was one of the co-creators of the Magistrate Court and much of the current property tax appeal system.  Since then Mr. Phinney has spent 2 decades in private practice expanding his sphere of excellence to include property tax appeals in Oregon, Washington and California.  He has worked on successful property tax appeals on single assets and multi-billion dollar portfolios for a “Who’s Who of Big Business”:

• US Bank
• FDIC
• Hilton Hotels
• Marriott
• Rite Aid
• Met Life

Mr. Phinney’s talk will cover the broad strokes of the Oregon Property Tax Appeals system; I will use CCIM type techniques to quantify the potential short and long term values of appeals.  We’ll also show how real estate and accounting pros can promote appeals as a client development tactic.  We will also dispel misconceptions and bust myths about Oregon Property Tax appeals:

• “It’s not possible to win a property tax appeal in Oregon” (Wrong.)
• “You have to get the Market Value down to the Assessed Value to earn a compression refund.”  (Wrong.)
• “You just can’t win apartment appeals.” (Wrong.)
• “There is no system to appeal personal property assessments. (Wrong.)
• “I have to pay lots of money upfront to appeal my property taxes. (Wrong.)

Time permitting Scott will also talk about the most frequently overlooked property tax break that is missed by over 80% of the qualifying projects.  In one case Scott found overpayments of $506,000 on a single project.

Please contact Rick M. Bean at 503.577.1034 or rick@primeptn.com for pricing and details.

Next week I’ll be testifying as an expert witness in a property tax appeal case for an 120+ unit multifamily asset in Salem, OR.  Part of my research is to interview the on-site property manager.  I was very impressed with how well she knew her area, the asset she managed, historical vacancy rates, concession rates…she was a pro.  Some people have an innate talent for property management and she is clearly one of them.  Others may need some top notch training to fulfill their potential.  I am an unabashed fan of Grace Hill Training for multifamily pros.  They offer low and no cost programs that your management staff will benefit from.  Multifamily management is not easy.  One asset owner I talked to thought training was over rated.  I responded:  “You’ve got a highly motivated  person willing to put in long hours on your behalf to help you optimize the profits on a $10 million dollar asset.  Give them tools so they have them the greatest chance to create positive outcomes on your behalf.”

The next GracHill Offering has that FREE pricepoint that value conscious owners like:

GRACE HILL & MproTV PRESENT LET’S TALK TRAINING - In their second episode of Let’s Talk Training, you’ll discover new and innovative ways to keep your maintenance teams trained and motivated by using new methods of learning.  They will discuss challenges and benefits of several methods:

• Online training
• Hands on training
• On the job training
• Training facilities
• Videos/podcasts
• Outsourcing

If you are an owner, trainer or supervisor, join them on Wednesday, October 12, 2011 at 2:00 PM ET for Maintenance Team Training and Motivation.  Click here to reserve your spot now.  Let’s Talk Training is always free of charge, so it will fit nicely into your training budget!

When you think of top notch multifamily training, think of Grace Hill.  To optimize your multifamily portfolio contact Rick Bean of Rose City Commercial Real Estate at: 503.577.1034 or rick@rosecitycre.com