Social media is an amazing and unpredictable platform. We never know what posts will go flat or actually go viral. The FRPM Facebook page consists of highlights of our blog posts, shared relavant posts, and fun and more personal posts. By far, the fun and personal posts get the most attention on Facebook.
Our blog focuses on relevant industry information but they too create some unique and interesting comments. Recently it was suggested that we re-post our top ten blog posts. The criteria we used to determine the top ten were the amount of views, shares, and comments.
In part 1 of this blog series, Melissa explained reported rents are not effective rents. There could be back-end concession or other facts that overstate rents. Landlords should always have their property manager provide a market analysis before considering changes.
In part 2, I want the property owner to determine what their goals are and some considerations and potential costs before looking to maximize rents.
Goals: Most investment properties are intended to be held for a number of years and therefore decisions tend to support the long-term, such as maintaining market rents. Maximizing rents by choosing rents at or above the very top of the market range tends to be more of a short term goal, like the example we used in part 1 with the builder selling the newly constructed multifamily building.
Bad will: Many landlords feel increasing rents at lease renewal should be expected and are not personal whatsoever. I can tell you that a good portion of tenants take it personal. They really do associate rent increases to poor performance, which is not the case. Some get defensive. Others fight back.
Goodwill: By showing a tenant what market rents are and offering a renewal lease within the middle of the market range, the landlord and/or their property manager can show some goodwill. Additionally, by offering a renewal incentive like free carpet cleaning is a nice way of saying thank you.
Tenant performance: Do not increase rents because the tenant is regarded as a bad tenant. If the tenant has a history of lease violations and other performance related issues that are of real concern, just give notice to terminate. Then you can focus on maximizing rents once vacant.
Market Data: Know the actual market rent range and be able to identify differences between comparable rentals, to include amenities. Know the market and current occupancy rates.
Market Seasons: Identify the peak and slow seasons and know that being aggressive in the slow seasons can result in extended vacancies. With multi-family rentals, be consistent throughout your property.
Improvements: How recent and to what degree has the interior and exterior of the property been updated. Additionally, what improvements have been made in the area that makes it a “destination” location?
Like many parts of the county, the Boise area is seeing record high rents and low vacancies. Rents within our own management portfolio grew well over 10% on average this year. At some point, the rental market should stabilize. In the meantime, it is not unreasonable for landlords to want to maximize rents.
However, it is advisable that Landlords determine if their goals for the property are short or long term, and understand the potential costs and considerations needed to make the best decision. These costs and considerations are really important, but in part 1, I really want to address other factors that can miss-guide some landlords.
Over the next two blog posts, what we really try to communicate is that just because the media says rents are breaking records, doesn’t mean you should go raise rents to some inflated number. Get the data, understand the pros and cons, and make a plan.
Rents: When it comes to rents, what you see may not be what you get. So just because you see some amazing rent being reported at a property, don’t take it as the gospel. Reported rents may not be market rents and market rents rarely are the effective rent. Effective rent, for the purpose of this post is: gross rent, less vacancy, less any rent concessions, and less some expenses related to rent.
Don’t assume that properties within close proximity of another should get the same rent. In fact, FRPM manages 4 plexes in a community with multiple owners and managers where the buildings are exactly the same, but some landlords have their tenants pay water and sewer in addition to electric and gas, where others do not. Anyone making decisions without knowing the differences could really cause themselves some issues.
Also, don’t forget, a landlord and even other property managers that have zero to very limited tenant screening criteria tend to get higher rents but their effective rent tends to be much lower.
Concessions? Yes, even with record low vacancies, huge rent concessions still exist. A large rent concession can help a builder who is selling a newly constructed multi-family building in several ways. 1) reduces the initial rent-up period, by reducing a tenant’s move-in costs and effective rent, 2) the reported rents support the builder’s asking price, 3) reported rents are safeguarded when it comes time to renew. Another example of rent concessions still occurring today are when filling vacancies near colleges in the middle of a semester.
Vacancy: Vacancy can affect perceived rents as well. For example, some landlords are absolutely fine with an extended vacancy as long as they get the magic rent number. So once again, the reported rent is not market rent and the effective rent could be 25% less than what is reported.
The cause of a vacancy will be one of the items on our list of considerations. Vacancies can be the property owner’s largest expense when considering turnover costs, marketing, lost rent, and utility costs. For these reasons, we recommend that our owners only consider maximizing rents for vacancies caused by force or by natural attrition. Evictions and rehabs are examples of forced vacancies. Examples of vacancies by natural attrition are: tenant buys home, space requirements, or as the tenant’s needs change, such as location, budget, etc. This now leaves us with vacancies caused by the landlord’s decision to legally change the terms of the lease, such as increasing the rent. This really is the whole purpose of this blog series. We want owners to determine their goals and understand the costs and other factors to consider before giving tenants notice to increase rents.
Jack Harty is a Boise based commercial mortgage broker that every once in a while, shares his wit and humor by sending out market updates. This month he timely ties it into the football bowl selection process and Boise State's selection for the Cactus Bowl.
While this is the season when bowls are the topic of interest among football fans, the words “interest” and “bowls” are also linked in matters that have nothing to do with football bowls. The trend of interest rates suggests that at this holiday season, the cheap money punch bowl has been cancelled, i.e., it is being yanked off the table.
November 2016 was the worst month for Treasury bonds since December 2009. December 2016 is starting off with the same upward momentum in 10 Yr T Yield. As of mid-day 12/1/16 the 10 Yr T Yield traded as high as 2.49% and closed at 2.44%.
In comparison, on Election Day (11/8/16) the 10 yr T was at 1.88%.
The historic low point for 10 Yr T Yield (by historic I mean the lowest yield ever offered since the First US Congress authorized issuance of bonds in 1790 to pay for the Revolutionary War) occurred recently (7/5/16) when the 10 yr T Yield dropped to 1.37%.
The following chart tells it all:
10 Yr T Yield - Past 6 Months
Anyone who locked [their] rate on any day prior to today is better off than had they locked [their] rate today. Currently the 10 Yr T Yield is >100 basis points higher than its historic low point in July. It is 56 basis points higher than where it stood on Election Day - a mere three weeks ago.
For those who long for a return to historically low interest rates, the best strategy is to pray for economic problems to be perceived by market participants as threatening in Europe, China or the rest of Asia. If that occurs, then the US Treasury bond can re-assume its traditional role as the perceived “safe haven” to perceived economic problems elsewhere. Pray for bad economic news if you intend to lock [your] rate in the near term.
HARTY MORTGAGE ADVISORS
121 N. 9th St. - Ste 402
Boise ID 83702
Direct: 208 514 4766
Main: 208 344 4141
Below is the most recent copy of the Swope Investment Properties newsletter. Their newsletter is all informative and full of good information regarding the residential investment market. This month's newsletter included an article from First Rate Property Management's Maintenance Coordinator, Tara Pecora. In sales, realtors put a lot of emphasis on the appearance of the front door. In Tara's article, she too focuses on the front door, but in a tenant and property safety viewpoint.
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I have attached two articles related to multifamily housing. The first article is from the Idaho Business Review. That article confirms that the current demand to rent is high, but will the demand meet the supply? I tend to agree that we are at least a year from knowing.
The second article, "Tipping Point: Are apartments racing toward a peak or will the boom continue?" is from CCIM that addresses the concern on the national level. Within the article, they provide some great data and charts. One chart shows actual cap rates as well very low projected cap rates for 2016-2018.
Bottom line, I advise my clients to evaluate projects based on a conservative rents and vacancy. I don't recommend buying based on "pie-in-the sky" numbers. I suspect at some point, we will see a correction in rents when our record low vacancies start to climb. I just don't know when. Because of the length of time during the planning and construction, I do believe builders will continue to push through the tipping point. The data that I analyze on a monthly and quarterly basis should help identify any changing data trends. Meanwhile, the data continues to show strong rents and low vacancy.
Last week I attended a meeting where Arla A Kester, CPA with B.A. Harris, LLP was the speaker. Below are links to the handouts which include: The CPA Client Tax Letter, a Tax briefing outlining Trumps plans on tax law changes, and the 2016 tax rates, schedules, and contribution limits. I found all of these to be very interesting and helpful.
Some of Trump's tax plan include changes to: individual income taxes, estate and gift tax, and childcare tax benefits. Again, I found all of it to very interesting.
Stacy McBain who is an agent with Swope Investment Properties, sent us a link to this inforgraphic that was produced by Appfolio, who is a leader in cloud based property management software. The infographic can help Landlords decide whether they should consider hiring a professional property manager to manage their rental property. They state that it really depends on the property owner’s needs and expectations. They admit, some Landlords manage their own properties without any stress, while others find it to be quite a headache. Appfolio states, “One thing is for sure: to successfully manage [rental] properties efficiently, time and energy are essential. Do you have what it takes, or should you hire a pro?"
In a recent article that was recently written, The Z report by Zelman & Associates, it talks about the rental market trend and where they see the future of rental income housing. They forecast an increase of market rentals due to the fact that young adults are leaving the rental market and going towards new homes. They say there will be an increase of real estate investment properties almost triple from last year’s growth. This new demand in rental housing will also drive a market rent that is higher than normal. Those renewing their leases will have the decision of paying rent or buying and moving to the newer homes that are being built.
They predict that over all there will be a steady growth in the availability of urban housing since the younger adults are leaving for single family housing. The housing that is on the market is selling quick, creating a void for the rental market pushing the urban living lifestyle to be more viable. If you are interested in owning or have rentals read this article and decide what the best option is for you.
Below is a link from a blog posting from Mike Hambright with Flipnerd.com. I found the first few paragraphs to be very good for those investing or looking to invest into rental properties. After that, the article moves away from what I see with my clients and my own investment portfolio.
The author lists some pros and cons of owning rental properties. He lists self-managing as a con and I got a chuckle when he stated, "I know some really good property managers, and even THEY don't like the management side". It's true, even professional property managers have discouraging days. Another con listed was the influence on changing laws and taxation relative to rental properties.
He also got into financing, but again, what he is describing doesn't fit my clientele as most have under ten rental homes and the others are using cash or commercial financing, which has completely different guidelines.
- Boise Area Real Estate Market
- Boise Area Rental Market
- Property Management
- Boise Real Estate Market
- Boise and Idaho in the News
- Deferred property maintenance
- Rental Property Maintenance
- Fair Housing
- Swope Investment Properties Investor Newsletter
- FRPM 1st Quarter Vacancy
- 1st Quarter Vacancy Results
- Economist predict strong rental market
- Are we building too many apartments- UPDATE
- Tony Drost
- Melissa Sharone
- Kristen Curtis
- Tyler Brown
- Tara Pecora
- Marie Swanson
- Lizz Loop