The Ada County Assessor's office recently hosted the 2017 Real Estate Symposium. The panelist were Mike Turner with Front Street Brokers, Tony Drost who represented both First Rate Property Management and Swope Investment Properties, and Terry Heffner with Guild Mortgage.
FRPM has reported that the new generation of renters seem to prefer renting for a number of reasons, like flexibility and not having to do any maintenance. One interesting point that Terry Heffner discussed in his presentation was that a number of college graduates with good paying jobs are having difficulty qualifying for a home loan due to large student loan debt. That information helps us better understand why we are seeing young professionals who have good income, good credit, and cash reserves, are renting versus buying.
Tony's was asked to present on: 1) 2016 rental market trends, 2) vacancy, expenses, concessions, and rental rates, and 3) Tony's predictions/corrections envisioned for 2017. We wanted to share some of the information Tony presented.
Ada County Vacancy:
The below graph shows the average vacancy for single and multi-family units regardless of bedroom count. Notice that single family vacancy is trending upward and multi-family had a spike in the 4th quarter of 2016.
Ada County Rents:
Overall, average single family rents increased by 16% from the 4th quarter of 2015 to the 4th quarter of 2016. However, average single-family rents descended the last 3 quarters. Multi-family rents increased by 14% in the same time period. However, like the vacancy averages, these average rents were based on all rentals regardless of the number of bedrooms, which prompted the next graph showing average rents for 3 bdrm homes and 2 bdrm multi-family units.
Average rents for 3 bedroom homes and 2 bedroom multi-family units:
In this graph, we only look at the rents of 3 bedroom homes and 2 bedroom multi-family units, since those are the most common. Unlike the prior two graphs, this graph actually shows a perfect rental cycle. The Boise area is a true 4 season area. Typically rents are strongest in the 2nd and 3 quarters. Where the first two graph's suggest some concern with single family rental homes, this 3rd graph suggests that they are following the normal rental cycle for this area.
Ada County 4 plex Gross Rent Multiplier:
The average GRM was 127.
Average Cap Rate for Ada County 4 plexes:
Due to strong rents, cap rates have been stable. This differs from the bubble of 2005 and 2006 where values increased where rents had not.
Single family expense data:
As a percent of gross income.
HOA Dues: 2.52%
Operating Expenses 36.86%
Debt service 59.04%
Cash flow 4.1%
Single Family Rentals (SFR):
Some data suggests that the single family market is softening. Other data shows that rents and vacancy are simply following the rental market cycle. Initially, Tony felt that we might see the single family rentals continue to soften, but after hearing the other speakers and the other factors, such as increasing loan rates, increasing home prices, and scarcity of affordable homes, perhaps this is not the case.
Outside the Q4 jump, vacancy has been impressive and rents increased by almost 14% since the 4th quarter of 2016. If population and employment continue to grow, Tony doesn't see any indications that the multi-family rental market is slowing. The amount of new construction scheduled and the timing of their completion may prove me wrong.
Each department at First Rate Property Management tracks a number of metrics and we wanted to share a few. Each department tracks these to identify potential issues and changing trends. Most of what we track is for in-house use. For example, accounting tracks the percentage of late pays. Maintenance tracks the number of days to complete a turnover. Leasing tracks average rents, etc. So without further delay, here are four 2016 metrics that we wanted to share.
Average vacancy: FRPM counts every property that is vacant, regardless if the tenants are paying rent or a lease has been signed.
Average renewal rate: This is not a retention rate, which would be in the high 90 percentile. This number represents the percentage of tenants who renewed their lease. It does not consider tenants who chose to stay, but only on a month-to-month basis, which is part of our retention rate.
Eviction rate: This rate includes court ordered evictions and does not include where tenant's comply to a property owners request to terminate tenancy, or simply not renew.
0.08%. Less than one tenth of 1 percent
Average days-on-market: FRPM begins advertising the moment the notice to vacate is processed. Additionally, we coordinate with the current tenants to show the upcoming available unit to prospective applicants. Therefore, on average, FRPM approves and selects new tenants on average 13 days prior to the current tenants even move out. Today, many property managers don't even start advertising or showing upcoming vacancies until the property is vacant and/or the turnover is complete. FRPM physically meets and shows our available properties, so for those property managers who allow tenants to access the property unaccompanied, it makes sense that they would have to wait until the property is vacant to even start showing it.
The ascending rents continue to make the local news. Below is a recent article from the Idaho Statesman. The author cited the SW Idaho Chapter of NARPM's rent and vacancy numbers and quoted a local property manager who finds low cost housing for veterans. As I mentioned in the article, If population and employment continue to grow, I don’t see any indications that the rental market will slow in 2017. The amount of new construction scheduled and the timing of their completion may affect rents. Even with an exceptional vacancy rate, newly constructed apartment complexes are 100% vacant and it is common to offer rent concessions to fill units quickly. With the possibility of several new developments and hundreds or even a thousand new units completed around the same time, those rent concessions likely will soften rents at existing and competing rental units.
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.
If you want to be added to the distribution list, please submit here.
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.
- 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
- Interest Rates and Inflation: A Mystery
- Quarter 2 Vacancy Information
- We're Calling it: Rental Market Softens
- Procedures for Inherited Tenants
- Swope Investment Properties Investor Newsletter
- Tony Drost
- Melissa Sharone
- Kristen Curtis
- Tyler Brown
- Tara Pecora
- Marie Swanson
- Lizz Loop