It's that time of the year again where Ada County homeowners and Landlord's will be receiving their tax assessment notices. On average, we're anticipating about a 12% increase in assessed values on residential homes. Small multifamily (2-4) units will see about a 15-18% increase on their assessed values. The range for apartments is great, at 3-15% with the average only being about 5%. For 2018, single family homes are appreciating at about 1% per month while multi-family are appreciating at 1 to 1.5% per month.
Below is a summary of some of the metrics that we are traking for our leasing department. It showcases our low vacancy rate and our high renewal rate. As you can see below our vacancy for all of 2018 has been significantly lower then the national rate. It also highlights our average days on market which is 12 days. What this illustrates to our investors is that on average theior properties are getting re rented 18 days prior to the old tenant vacating. Things are still looking strong in this market with high rents and low vacancies. We will see what the busy time brings.
Narpm has published its 1st quasrter vacancy survey for the 2018 year. The rents are still increasing for both multi and single family. The overall vacancy was up just slightly from last quarter but that is pretty standard for this time of year. FRPM has a current vacancy of .8% which is recod for this time of year. There is still more demand for housing then units available so things are renting up very quickly with minimal turn time. The market remains strong and FRPM predicts that it will stay that way through the summer.
Read full report here: 1st quarter NARPM vacancy survey
Many real estate investors are aware of how critical interest rates are in the evaluation and performance trajectory of their investment properties. As a result of the 2008 financial crisis the Federal Reserve (the Fed) is taking unprecedented action and raising interest rates more frequently than they have in the past. In the past 3 years the Fed has raised short term interest rates 6 times. It has been suggested that they increase exponentially by the end of 2018.
This article also suggests that investors to run sensitivity tests upwards of 5% interest when developing pro forma on ventures.
See Full Article Below
On Wednesday the 10 Yr Treasury Yield hit a level (3.04%) not seen for the past seven years, i.e., since 2011. See chart below.
10 Yr T Yield - Past 8 Years
The Federal Reserve rate setting committee meets next week, and five more times thereafter during 2018. The Fed recent history of raising rates is not consoling. Since December 2015 through March 2018 the Fed has raised short-term rates six times.
None of us know what will happen to rates in the next 6 - 12 months. However, members of the Federal Reserve rate setting committee have been saber rattling. Some have suggested that the Fed will increase short term rates three or even four times during the balance of 2018. Looking out further into an even less discernible future, they have suggested another three rate increases in 2019.
What does that portend for long-term interest rates? Who knows? However, if you are running development pro forma on projects it would be advisable to run sensitivity tests at 5.0% interest up to 6.0% interest.
Obviously, the arithmetic of increasing rates is to drive down the amount of loan principal that can be supported by higher debt service burden. Debt Service Coverage mandates will eat into loan proceeds.
Moe Therrien with Valbridge Property Advisors recently submitted his quarterly survey. This is a very thorough report that includes, historic data on rents and vacancy by bedroom count. Additionally, it breaks down apartments from those with full amenities, Boise downtown, and Low Income Housing.
The data is supported by providing multi-family building permits, Ada County single family home prices, and employment statistics. Currently, there are just over 2,200 units within the Boise area under construction with another 3,300 proposed to start within the next 6 months. Year to date there are over 2,400 units that have been completed since 2016. The survey is conlcuded with a Boise Vacancy Report reflecting how many vacant units each project has. This report includes Rent Ranges, number of occupied units, total units, and the percent of occupied units at each complex. Boise is still growing very quickly and is projected to continue to grow and remain in high demand among renters. Please see the attached survey from Moe Therrien for additional details. Moe Therrien with Valbridge Property Advisors Survey
When I was first interviewed at First Rate, I was asked, “Who do you think is the most important; our property owners, our vendors, or our tenants?” Would they want me to say the property owners? After all, it’s the management fees that pay the bills. What about our vendors? Without them, we wouldn’t be able to maintain the rental unit. Of course, tenants are important because they pay the rent. I considered this for a moment before telling them what I thought: “they are all important”.
Without our property owners, we have nothing to manage. We should respect what we were entrusted to take care of. Without our vendors, we can’t maintain the properties. We must cultivate a solid and honest working relationship with every business that we utilize. Finally, our tenants must be valued as well. They are the reason for the rental property existing – without tenants, where is our business?
It’s not lost on me that there is a common idea that property managers or landlords are the “bad guys.” I’ve even had that mentality myself with property management companies I’ve rented from. “They’re just here to collect a check”. I honestly believe, particularly regarding the value of tenants, and in my time here at FRPM, I have been pleasantly surprised at the mentality here at First Rate.
Since working at First Rate, I am now very aware that this is simply not the case, at least not with FRPM. From my very first week here it was shown to me that tenants are to be respected, looked out for, and treated with the same care that any employee here would want to be treated.
It’s important to remember that FRPM is entrusted to care for the place where people live. A company that does not value those they rent to are destined to struggle to rent again. And it’s not only the right thing to do; treating tenants with empathy and compassion is also an intelligent business decision.
It’s important to be a company that property owners are interested in doing business with. We want to make sure our business has the quality and integrity that owners look for when finding a company to manage their investment. The appeal to property owners, however, is just half of the equation.
With so much new housing popping up in the area and several property management companies to look after it, tenants have a nice diverse market to pick from. Speaking from a renter’s perspective, the address is only part of what I evaluate when looking to live somewhere. The moment I know who’s managing an area, I do my research and see what I can find about the property manager. All it takes is a couple bad reviews online or some negative opinions from friends for me to rethink renting from that company.
Think about when you rented an apartment or a dorm or a room in someone’s house, and think back to both the positive and negative experiences that it entailed. Take a breath, pause, and think to yourself, “How would I like to be treated if I was renting from a property management company?”
Swope Investment Properties regularly sends out a newsletter that includes good articles and listing information. In the most recent article, realtor Eric Uhlenhoff shared his perspective to rising prices. Click http://boise-rentals.com/investor-newsletter-email-sign-up here to subscribe to Swope Investment properties newsletters.
Finding Value Despite Shrinking Margins
In Shane's article in the Nov 17 newsletter, he described the buyer challenges in
the current market. Not much has changed since then, but we are seeing a bit more
inventory in the residential income space. Yes, margins and cap rates continue to
decline, and we've seen some rising interest rates too, which isn't helping our
Buyers! So, is this another bubble or what?
Back in 2007, when evaluating income properties in the Treasure Valley, using a
sensible downpayment, finding a property with a positive cashflow was like
searching for unicorns. Rents didn't support the values and yet many
buyers willingly accepted negative cashflow in hopes of feasting upon rising prices in
the future. However, in today's market, we're still seeing discerning buyers insist on
cash-on-cash returns. And of course financing with nothing down is not a thing
the way it was back in 2007, so fundamentally, this market is way different
So, where's the value for a buyer? Well, several things haven't changed. Financing
a residential income property (4 units or less) can still be done on a 30-year fixed
loan (thumbs up!) and the tax laws governing depreciation and other tax benefits
are all still in place and may have gotten better depending on individual
circumstances (two thumbs up!).
No question, the sale prices have come up, but so too have the rents. Consider
also that overall vacancy rates are historically low and with rising interest rates this
is likely to keep that vacancy low. All these changing conditions should force
change in our analysis and in this market, we should always take a solid look at
the achievable rents when doing your evaluation as many sellers are not keeping up
with the market.
Continuing to look at cash-on-cash returns and/or cap rate is still okay (and
important!). However, in this market, add in the principle pay-down and the tax
benefits, and compare these combined returns against the risks associated with a
very high stock market and rising inflation. This is both smart and necessary.
My crystal ball is far from clear when looking out beyond what I am having for
lunch. Real estate investing should be for the long term and when time permits,
allow the Swope Team to help analyze and advise a strategy... cuz there's value out
Read full Newsletter here: February 2018
2 months in to the 2018 rental year we are still seeing low vacancy. FRPM vacancy right now is 1.12% which is slightly higher than our rate in January but still low compared to the national average. We are seeing lots of activity on the rental side with increased amount of phone calls and property inquiries. The market trends and vacancy are still allowing for rental increases. FRPM predicts that this low vacancy trend and higher rates continues as we approach Spring/Summer, which is the peak season for rentals in Boise area.
Recently Forbes Real Estate Council posted an article, titled, Four Trends that Will Impact Rental Markets in 2018, and we have included the full text below. The article below seems to be written by Nathaniel Kunes with AppFolio, which is a property management software. We enjoy comparing national trends to what we are seeing here in the Boise and surrounding areas. One thing for sure, Boise seems to fit their #2 and #3, which are population shifts, affordability, and hot markets.
1. Occupancy Rate Fall and rent Growth Slows:
Even though we don't consider Boise a major metropolitan area, we're still finding the Boise market to be hot. This article talks about most areas within the US, especially single family rentals, slowing with falling occupancy rates. We must admit, that January has been a very slow month for single family rentals here in Boise, but we do not believe this is due to any negative market trend. Historically Boise rentals, especially single family rentals are much more difficult to rent in the winter months. When it comes to single family homes, it's best to have leases expire outside the school year. People just don't like to move while their kids are in school. Click here to view the SW Idaho Chapter of the National Association of Residential Property Managers 4th quarter rental market update.
2. Population Shifts and Affordability Reshape the Landscape:
According to this article, there are two things that drive the rental market - population shifts and affordability. Boise's population and job growth continue to climb and although home and rent prices also continue to rise, their still considered very affordable in comparison.
3. Hottest Market Opportunities:
Boise fits their definition of a hot rental market because of the job and population growth. According to this article investors looking to expand their properties should consider regions like Boise.
4. Tech Disruption:
Technology was late to getting to property management, but it's here now and moving at a rapid pace. It will surely play a role. Let's be real, technology is expensive and unfortunately I think we'll see further considaton of property management companies which I think long-term, will hurt the non-institutional investors.
Nathaniel Kunes, Forbes Councils
As we embark on 2018, there is a multitude of changes and trends in the real estate market that will impact all aspects of the rental industry, and it’s important for real estate professionals to explore them. From investors keying into market growth areas to property managers making adjustments to meet tenant expectations, creating strategies that align with market trends will lead to greater success in 2018 and beyond.
1. Occupancy Rates Fall And Rent Growth Slows
Rent demand, while hot in major metropolitan areas, is actually slowing in most areas of the United States, especially in single-family rentals. Where we’ve been seeing 6–8% growth in rental prices in years past, we’ll see that trajectory stall out, eventually nearing historical rent growth average (around 2%). Much of that may have to do with falling occupancy rates, which often result from increased supply in some cities as construction catches up. There is also a pent-up demand for moving as many people have been in their current rental much longer than historical trends.
With less demand, property managers will need to get more aggressive about attracting and keeping renters.
To attract residents, smart marketing is critical. Investing in automated vacancy posting syndication and moving marketing spend to areas with the highest returns are sure-fire ways to be certain posts gets attention, and quickly.
It’s also important to differentiate when trying to fill vacancies. Through unique perks or amenities, property managers can not only attract more renters but also target specific segments of renters through the amenities they offer. For example, if in a market that caters to younger generations, property managers should consider adding common areas throughout a building to inspire a sense of community, something that millennials and Gen Z value.
However, cool amenities alone won’t keep the renters. Retaining them requires meeting tenants’ needs and expectations. Having systems and the appropriate technology in place to handle maintenance requests immediately can dramatically change tenants’ perceptions of their living situation and make them more likely to renew a lease. Offering excellent and quick service is essential in keeping renters happy.
2. Population Shifts And Affordability Reshape The Landscape
There are two things that drive the rental market — population shifts and affordability. As affordability becomes a more pressing issue for many Americans, we will see the government, especially state governments, stepping in more frequently to offer affordability programs and tax credits. There already exist laws in many states that require a certain ratio of every new residential building to provide affordable housing. Additionally, for people who work in expensive residential areas but cannot afford housing there, we’re starting to see local movements and initiatives working to help those people afford to rent or buy housing. In San Francisco, the city is spending $44 million for a teacher housing initiative, enabling teachers to live and work in one of the most expensive cities in the country.
The biggest trend in affordable housing is the shift away from public housing to housing choice voucher programs. This will privatize much of the affordable housing stock and require a greater number of property managers to understand and be able to manage affordable housing programs. There is also a lot of compliance involved in both affordable and rent-controlled housing, so, if not an expert in this type of housing, investors should look to a specialized property management company to manage this kind of property.
Demographic shifts will also reshape parts of the real estate landscape. An increasing trend for baby boomers and the empty nester population is to actually move out of the suburbs and into urban environments, often choosing to rent instead of buy. This has dramatically changed the profile of the modern renter to one that spans age demographics. It’s important for property managers and investors to take into account both the older demographics and the youngest demographics (Gen Z) when determining the most appealing spaces, amenities and how to align service with tenant expectations.
3. Hottest Market Opportunities
While we have all heard about the popularity of moving to cities like Nashville — the entire Southeast, in fact, and the Northwest are becoming a popular living destinations for many. After all, hot rental markets tend to follow job and population growth. Investors looking to expand their properties should consider these regions.
Other, non-geographic opportunities are senior housing, affordable housing and commercial. Senior housing, in particular, will be a huge market segment. The population of U.S. adults 65 and over will more than double by 2060, reaching 98 million. That will be nearly one-quarter of the population, a number that reinforces a strong need for senior housing. Taking multifamily complexes and converting them into independent 55-plus communities could be a smart choice for developers and investors, depending on their local senior housing needs.
4. Tech Disruption
The use of intelligent systems, machine learning and AI applications in software will, increasingly, be a huge agent of change in the real estate industry. This disruption will alter everything from property valuation all the way to property management — an area where the use of AI and chatbots can offer tenants better service and automate maintenance workflows.
Consider this scenario: A tenant finds a toilet leaking and can alert management via text. They then receive an automated response from a chatbot communicating next steps, and the tech automatically creates a work order for the vendor.
Voice technology will also become huge in property management, potentially even allowing renters to pay rent by voice and make maintenance requests.
Tech disruption even changes the game in real estate marketing, letting agents use virtual reality to offer prospective tenants a tour of the inside of a home or apartment unit without ever meeting in person.
Ultimately, real estate professionals who are able to act on some of these emerging changes will find greater success. They’ll make more strategic business decisions that align not only with the ever-changing variables of the real estate landscape but also with the evolving set of modern-day tenant expectations, giving them an edge with market competition.
As of January 1, 2018, there are some major tax changes that small businesses and property owners can get excited about! To start the list off is the new Pass Through Tax Deduction. This new deduction, if eligible, can reduce your passive taxable income by 20% right off the bat, and you can take this deduction whether you itemize your deductions or not! There are new rules pertaining to the Section 179 Deduction, as well as decreased tax rates for some brackets. This article does a fantastic job of laying out these new, big changes that are happening in the tax world. Take the time to read it and save some money this coming year!
See Article below and also the link:
How the Tax Cuts and Jobs Act Affects Landlords
The new tax law has some major changes in store for landlords.
By Stephen Fishman, J.D. Share on Google Plus Share on Facebook
The Tax Cuts and Jobs Act (H.R. 1, “TCJA”) has been passed by Congress. Landlords are among the biggest winners under the new law. Virtually all landlords will save money--many, to quote our President, will save “bigly.” Enjoy it while you can.
The main provisions of the TCJA affecting landlords are discussed below. Except where otherwise noted, all of these provisions take effect on January 1, 2018, so they will not affect your 2017 taxes.
New Pass-Through Tax Deduction
For landlords, the most stunningly good provision of the TCJA is a new tax deduction for owners of pass-through businesses. This includes the vast majority of residential landlords who own their rental property as sole proprietors (who individually own their properties), limited liability companies (LLCs), and partnerships. With these entities, any profit earned from the rental activity is “passed through” to the owner or owners’ individual tax returns and they pay tax on it at their individual income tax rates.
Example: Alice, a single person, owns a duplex she rents out. In 2018, she earns a total profit of $20,000. Alice is a sole proprietor. She reports her rental income and expenses on IRS Schedule E. She adds her $20,000 rental profit to her other income and pays tax on it at her individual tax rates. In 2018, her top tax rate is 24%, so she pays $4,800 in income tax on her rental profit.
The TCJA creates a brand new tax deduction for individuals who earn income through pass-through entities (new IRC Sec. 199A). If your rental activity qualifies as a business for tax purposes, as most do, you may be eligible to deduct an amount equal to 20% of your net rental income. This is in addition to all your other rental-related deductions. If you qualify for this deduction, you’ll effectively be taxed on only 80% of your rental income. Thus, the effective rate for taxpayers in the top 37% tax bracket is 29.5%.
This extremely complex deduction goes into effect in 2018 and is scheduled to end on January 1, 2026. All the ins and outs of the deduction have yet to be made clear by the IRS; however, it basically works as follows:
Taxable Income Below $315,000 ($157,500 for Singles)
You qualify for an income tax deduction equal to 20% of your rental income if:
you operate your rental business as a sole proprietor, LLC owner, partner in a partnership, or S corporation shareholder, and
your total taxable income for the year from all sources after deductions is below $315,000 if you’re married filing jointly, or $157,500 if you’re single.
Example: Assume that Alice from the above example had $100,000 in taxable income in 2018. Since she was a sole proprietor, she may take a pass-through income deduction of 20% x $20,000 rental income = $4,000. This saves her $960 in income tax.
This deduction is phased out if your income exceeds the $315,000/$157,500 limits. It disappears entirely for marrieds filing jointly whose income exceeds $415,000 and for singles whose income exceeds $207,500.
This is a personal deduction you can take on your return whether or not you itemize. However, it is not an “above the line” deduction that reduces your adjusted gross income (AGI).
Income Above $415,000 ($207,500 for Singles)
If your annual taxable income is over $415,000 if you’re married filing jointly, or $207,500 if you’re single, you are still entitled to a pass-through deduction of up to 20% of your rental activity income. However, your deduction cannot exceed:
50% of your applicable share of the W-2 employee wages paid by your rental business, or
25% of your share of the W-2 wages paid by your business, PLUS 2.5% of the original purchase price of the depreciable long-term property used in the production of income—for example, the real property you rent.
Since most residential landlords have no employees, the 25% plus 2.5% deduction will be of most benefit to them.
Example: Assume that Alice from the above examples earned $250,000 in total taxable income during 2018. She has no employees in her rental business. Thus, her pass-through deduction is limited to 2.5% of the purchase price of the long-term property she uses in her rental activity. This consists of her duplex, which she purchased five years ago. Her depreciable basis in the duplex (purchase price minus value of the land) is $100,000. Her pass-through deduction is limited to 2.5% x $100,000 = $2,500.
The 2.5% deduction can be taken during the entire depreciation period for the property, which is 27.5 years for residential property. However, it can be no shorter than 10 years.
Increased and Expanded Section 179 Expensing
A provision of the tax code called Section 179 enables rental business owners to deduct in one year the cost of personal property used in a rental business, such as furniture and appliances. During 2017, the maximum amount that can be deducted under Section 179 is $500,000. Starting in 2018, the Section 179 maximum is increased to $1 million. The $1,000,000 amount is reduced (but not below zero) by the amount by which the cost of property placed in service during the year exceeds $2,500,000.
One significant limitation on Section 179 is that is has never been available for rental property owners to use to deduct the cost of personal property used in residential rental units. In a major victory for landlords, the TCJA eliminates this restriction starting in 2018.
100% Bonus Depreciation Through 2022
Currently, business owners may deduct in a single year up to 50% of the cost of personal property they purchase for their business. The TCJA increases this amount to 100% for property acquired and placed into service from September 27, 2017 through December 31, 2022. Moreover, 100% bonus depreciation would apply for the first time to both new and used property, instead of new property only. The bonus depreciation amount will be phased down in 2023 and later years as follows:
80% for property placed in service during 2023
60% for property placed in service after during 2024
40% for property placed in service during 2025
20% for property placed in service during 2026
0% for 2027 and later.
Bonus depreciation may not be used for real property, except for real property improvements such as landscaping or grading, and other components that have a depreciation period of 20 years or less. Thus, landlords may not use it to deduct the cost of their rental buildings or major building components. However, landlords can use bonus depreciation to fully deduct in one year the cost of personal property they use in their rental activity, such as appliances, laundry equipment, gardening equipment, and furniture. But landlords can often do this already under existing provisions in the tax law—for example, the de minimis safe harbor enables landlords to fully deduct in one year any personal property that costs $2,500 or less. Section 179 can also now be used.
Listed property must be used over 50% of the time for business to qualify for bonus depreciation. Listed property includes cars, and entertainment property like televisions and cameras. Computers were classified as listed property as well, but the TCJA removes them from this classification starting in 2018. Thus, bonus depreciation may be used to deduct computers used less than 50% of the time for a rental business.
Landlords Will Not Be Required to Pay Self-Employment Taxes
As you probably know, people who own their own businesses are required to pay Social Security and Medicare taxes on their net business income, as well as income taxes. These taxes are commonly referred to as self-employment taxes. One of the nice things about owning rental property is that rental income is ordinarily not subject to self-employment tax, only income tax. However, there is one exception for landlords who provide substantial personal services to their tenants and are effectively running a bed and breakfast business or hotel, not a normal rental operation.
The House version of the TCJA contained a provision that removed the rental income exemption from self-employment taxation. However, as many tax experts expected, this was dropped from the final version of the bill. Thus, landlords who do not provide substantial personal services to their tenants remain exempt from having to pay Social Security and Medicare tax on their rental income.
Lower Individual Tax Rates
As mentioned above, almost all residential landlords pay income tax on their rental profits at their individual tax rates. The TCJA reduces these individual rates. Starting 2018, the individual tax rates are as follows:
Married Filing Jointly
$0 - $19,050
$0 - $9,525
$9,525 - $38,700
$77,400 - $165,000
$38,700 - $82,500
$165,000 - $315,000
$82,500 - $157,500
$315,000 - $400,000
$157,500 - $200,000
$400,000 - $600,000
$200,000 - $500,000
These rates are scheduled to expire after 2025.
No Deductions for Not-For-Profit Rental Activities
The vast majority of rental activities qualify as businesses or investment activities. However, rentals that are not profit-motivated must be classified as not-for-profit activities, also called hobbies. Under prior law, expenses from a hobby could be deducted as a personal itemized deduction on IRS Schedule A to the extent the exceeded 2% of the taxpayers adjusted gross income. However, such deductible hobby expenses could not exceed hobby income. The TCJA completely removes the personal deduction for hobby expenses. This means that while the income from a rental activity classified as a hobby must be reported and tax paid, no expenses may be deducted.
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