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2022 Could Be When Apartment Demand Finally Cools

posted on : January 15, 2022 0 Comment

Rental office sign

Lower-waged job growth, the end of “bargain” rents, and build-to-rent single family homes could have a big impact.

Let’s talk about 2022. Apartment demand has soared the past year and is still flourishing. But RealPage chief economist Greg Willett points to several factors that could cool apartment performance next year.

RealPage analysts are anticipating that near-term demand for US apartments will remain well above the historical norm. However, it seems likely that the product absorption volume will ease to some degree from 2021’s high level. Several factors point in that direction.

First, most economists expect that many of the country’s near-term job additions will occur in industries where wages tend to be low or moderate. That growth pattern runs counter to what was seen over the past year or so, as recovery from Spring 2020’s mass layoffs registered more quickly in high-paying industry segments like professional services and the tech sector.

The addition of lower-paying jobs doesn’t fuel new household formation to the degree seen when expansion is led by the creation of jobs that pay well.

Gateway City Rents at Pre-Pandemic Levels

Second, with bargain rents now mostly in the rearview mirror in gateway metros, the demand comeback in these areas could slow. The youngest renters have played an especially big role in apartment leasing activity in gateway metros during 2021, with reduced prices spurring demand from households who previously couldn’t afford living in these locations unless they teamed up into multiple roommate households.

At this point, rents are roughly at or meaningfully above pre-pandemic prices everywhere except the San Francisco Bay Area.

Third, build-to-rent single-family homes could drain off some demand from apartments in the Sun Belt. While build-to-rent single-family home subdivisions form only a very small portion of the total rental stock now, quite a few of these communities are under construction now, mostly in Sun Belt locations where exurban land prices are low enough to make this product work financially.

“We’ll have to wait and see how demand sources for this line of product are split among those who previously rented apartments, those who previously rented older single-family product from mostly mom-and-pop landlords, and those who are downsizing from larger single-family homes that they owned,” Willett writes.

Zonda: Five Markets Most Likely to Overheat

Willett is not the only expert looking at when the apartment markets could start to cool. In September, Kimberly Byrum, Principal-Multifamily, Zonda Advisory, suggested that Phoenix, Raleigh-Durham, Las Vegas, Tampa and Denver are to be considered the most likely apartment markets to overheat in the coming months.

She said then that high occupancy is driving unprecedented rent growth in asking rents, primarily on new lease activity.

“Will it hold?” Byrum said. “Let’s see how many leases are being signed at these rates?”

Source: Globe St. 

HUD Issues New Guidelines On The Use of Criminal Records In The Rental Screening Process

posted on : January 12, 2022 0 Comment

US Department of Housing and Urban Development LogoOn April 4, 2016 the U.S. Department of Housing and Urban Development (HUD) dropped a bombshell on owners and managers of residential rental properties in the U.S.

HUD’s Office of General Counsel published a 10 page guide entitled “Guidance on Application of Fair Housing Act Standards to the Use of Criminal Records by Providers of Housing and Real-Estate Related Transactions.”

This guide essentially changes the rules as we currently know them with regard to rejecting a rental applicant based on their prior criminal history. I highly recommend that all of you read the document itself — many times in fact — as this is a very important change and this issue is not going to go away.

This Policy Is Applicable To All Landlords

HUD’s guide applies to ALL HOUSING PROVIDERS. I repeat, this new policy applies to all of you. Some landlords assume that when the see “HUD” that it only applies to federally subsidized housing and public housing. Sometimes that is true, but not in this case. HUD is the federal agency that investigates allegations of fair housing (discrimination) violations. HUD investigates discrimination allegations against all landlords not just landlords of section 8 properties. So this guide published by HUD applies to all of you market rate/conventional housing landlords as well.

Disparate Impact

In order to understand HUD’s view on the use of a person’s criminal history in the screening process you have to understand something referred to as “disparate impact”. In essence, “disparate impact” means that a landlord can have a facially neutral screening policy that is applied equally to everyone but it can still be discriminatory if its use results in a disproportionate impact on a member of a protected class.

HUD’s guide includes lots of statistics that show that across the U.S. African-Americans and Hispanics are arrested, convicted, and incarcerated at rates disproportionate to their share in the general population.

As a result of these statistics, if a landlord considers and applicant’s criminal history (arrest and/or conviction) as part of the screening process, that landlord may be discriminating against African- Americans or Hispanics based on their race and/or national origin (both of which are protected classes under Fair Housing laws).

So even if your screening policy on its face is not discriminatory and even if you are applying it evenly you may still be discriminating based on race and/or national origin, because your policy affects African-Americans and Hispanics more than others.

Substantial, Legitimate, Nondiscriminatory Interest

So does this mean that a landlord cannot take into consideration a rental applicant’s criminal background at all? The answer is both “yes” and “no.” HUD states that a landlord may not be discriminating based on race or national origin if his/her screening criteria with regard to the criminal history of an applicant can be proven to be “necessary to achieve a substantial, legitimate, nondiscriminatory interest of the [housing] provider.”

What the heck does that mean?

There is no easy definition or explanation of this phrase. Whether a landlord’s screening policy with regard to an applicant’s criminal history is “substantial, legitimate, and nondiscriminatory” will depend on many specifics. It could depend on the facts of the crime or how old the conviction is or the exact wording of the criteria or how the criteria is applied etc. etc. And it is helpful to keep in mind that one Fair Housing investigator’s interpretation of the phrase may be different than another’s. And one judge’s view may be different than another’s.

HUD has tried to further clarify this phrase by boiling it all down to the following statements:

  • A landlord must be able to prove through reliable evidence that his/her policy or practice of screening based on criminal history actually assists in protecting resident safety and/or property.
  • Merely relying on generalizations or stereotypes that anyone with a criminal history poses a greater risk than a person without such a background is not sufficient.

Prior Arrests

HUD states that if a landlord rejects a rental applicant because of one or more prior arrests — that have not resulted in a conviction — that the landlord’s policy cannot meet the burden of having a “substantial, legitimate, nondiscriminatory interest.” Translation: if you are doing this, you are discriminating.

HUD states that “the fact of an arrest is not a reliable basis upon which to assess the potential risk to resident safety or property posed by a particular individual. For that reason, a housing provider who denies housing to persons on the basis of arrests not resulting in convictions cannot prove that the exclusion actually assists in protecting resident safety and/or property.”

So landlords may no longer consider whether a rental applicant has been arrested unless that arrest resulted in a conviction.

HUD does not come out and say this but it would seem to me that by logical extension a landlord also can not deny an applicant who has a criminal case that it still pending (since there has not yet been a conviction).

So the applicant that has a pending “first-degree homicide” charge or a “sexual assault of a child” case that is still winding its way through the criminal justice system or is on appeal – cannot be rejected based on that fact alone.

I understand the whole “innocent until proven guilty” viewpoint, but do you think this will comfort your longstanding tenant that has minor children living with her when a middle-aged white guy charged with “sexual assault of a child” is allowed to move in next door to her because his case has not yet gone to trial and therefore he has not yet been convicted?

Oh just wait, it gets even better.

Criminal Convictions

HUD also states that a landlord that imposes a “blanket prohibition” on any rental applicant with a “conviction record — no matter when the conviction occurred, what the underlying conduct entailed, or what the convicted person has done since then — will be unable to meet this burden.”

Translation: If you deny any and all applicants because they have a criminal conviction you are violating Fair Housing laws and therefore discriminating based on race and national origin, even if you apply that criteria evenly against everyone.

HUD goes on to say that even if you have a more tailored policy or practice that excludes individuals with only certain types of conviction you still must prove that your screening policy is necessary to serve a “substantial, legitimate, nondiscriminatory interest.” There that pesky phrase again.

HUD recommends that any landlord that wants to consider an applicant’s past criminal convictions as part of the screening process must at a minimum consider the following:

  • The nature and severity of the crime, and
  • The amount of time that has passed since the criminal conduct occurred.

That is the only guidance that HUD has given us. The rest is for you to figure out. And if you don’t handle things properly you may get investigated or sued for discrimination.

Exception: Illegal Manufacture or Distribution of a Controlled Substance

There is one point of clarity. The federal Fair Housing Act does contain a section that states that the taking of an adverse action against a person who has been convicted for illegally manufacturing or distributing a controlled substance as defined in section 102 of the Controlled Substances Act (21 U.S.C. 802) will not be discriminatory. So a landlord is still free to deny a rental applicant if they have ever been convicted of manufacturing or distributing a controlled substance.

Conclusion

What really frustrates me about this whole thing is that landlords are now being told that they must consider a applicant’s criminal convictions on a case by case basis. For years we have been told by HUD that the best way to avoid discriminating against someone is to treat everyone the same; your screening criteria must be “objective” and not “subjective. But now HUD seems to be saying that is no longer appropriate.

Now HUD is telling landlords that they will need to become social workers and therapists and try to determine if an applicant who was convicted of a crime in the past has been rehabilitated or not.

Think of the time and effort that will be required for a landlord to travel to the courthouse to review the criminal case file to determine all of the facts surrounding the crime, all of the events that led up to the person engaging in the criminal conduct, the individual’s past, to review any pre-sentencing report to see what the evaluator thinks about the defendant etc. None of this information is available on CCAP. You will only get this information from the actual file. Or are you just supposed to listen to the applicant’s version of the facts of the conviction and believe them?

It appears to me that HUD might actually be hoping that landlords decide their is too much risk involved in denying any applicant based on their past criminal convictions (except for the conviction for manufacturing or distributing controlled substances – see above) and therefore they should all be accepted.

Landlords will now need to try and determine what convictions might be considered “directly related to the safety of your residents and your property” and hope their interpretation is correct or else risk being investigated and/or sued.

Tristan R. Pettit, Esq.

Source: petriestocking.com

Tristan is a shareholder with the law firm of Petrie+Stocking and focuses his practice in the area of landlord-tenant law representing landlords and property management companies throughout Wisconsin.

Tristan R. Pettit, Esq. 

Originally posted in AAOA

Here are 9 Disadvantages to Investing in Real Estate Syndications

posted on : January 12, 2022 0 Comment

Illustration of a self-storage facility.
Original Post By Paul Moore of Wellings Capital

“Come on. It sounds too good to be true!

You can’t tell me it’s this good. There must be some downsides.”

There are.

And don’t let anyone tell you there aren’t! Like every other investment, real estate syndications have potential pitfalls that you need to look out for before investing.

I’ve just entered my third decade as a full-time real estate investor. So I’ve seen a lot. Though my firm, Wellings Capital, and I could participate in numerous opportunities to make money in real estate – we prefer investing in private real estate syndications.

But we know the risks. We look out for the pitfalls and invest accordingly. My goal in this post is to give you a peek behind the curtain to consider what could go wrong…and where you could get burned.

#1 OVERHEATED MARKET

I don’t know when you’ll read this. But as I write this, in the Fall of 2021, we are in an unprecedented bull real estate market. Appreciation has gone longer and higher than any time in living memory. Even a pandemic didn’t put the brakes on this crazy market.

Some of you may be turning to syndications because you can’t find a home to flip or a rental property to acquire. But keep in mind that these same forces are affecting the commercial real estate market.

A well-known syndicator just confided in me that he’s selling all his multifamily properties acquired before this past year. Buyers (both hungry and foolish) are overpaying for commercial assets by up to 20% or 30% in some cases. They are either miscalculating the numbers, gambling on appreciation, or satisfied with low returns.

Do you want to be in a deal like this when the music stops? Sure, it’s possible inflation will continue to cover these sins. But do you really want to count on that?

A potential solution…

At this stage of the cycle, we only invest with operators who have a documented edge. This secret sauce may come in the form of a repeatable arbitrage opportunity. For example, a syndicator I know buys land at its market value and harvests the timber. But he also knows how to utilize new carbon offset rules to create a cash flow machine on this property for decades…while new timber grows back.

Or the secret sauce could be an inside track on tax abatements. Or an acquisition team skilled at finding mom-and-pop deals with substantial meat on the bones in the form of untapped income and appreciation opportunities that the previous owner didn’t know or care about.

#2 SYNDICATORS MAKE MONEY EVEN IF INVESTORS DON’T

Syndicators typically get acquisition fees, loan fees, annual asset management fees, disposition fees, and other fees not related to performance. Many of these fees are payable whether the investors make money or not.

This is a potential misalignment of interests. And it will likely go unnoticed in an era of a rising tide that raises nearly every boat. But every market is cyclical. Trees don’t grow to the sky. But as Warren Buffett says, these clocks have no hands, so we have no idea when that time will come. Not all of these fees are bad, you just want to understand what fees are paid and in what order. We like to see a balance of up front, ongoing, and performance related fees. It’s hard to tell what fees are egregious until you start comparing and contrasting what’s out there.

A potential solution…

Look for syndicators who go out of their way to put investors first. Try to find managers who have a history of paying investors to their own hurt when things go poorly. Compare and contrast PPMs (Private Placement Memorandums) to understand fees fees and see which operators best align with their investors.

#3 OVER-ALIGNMENT

Though this is uncommon, it is possible for syndicators to be too aligned with their investors. How? If the syndicator offers cumulative preferred returns (the hurdle rate that cash investors receive before syndicators get a profits interest) that are too high, and cash flow is delayed, it’s possible the investors’ deferred cash flow will be so far behind as to discourage the syndicator from passionately making continued efforts to fix the problem.

For example, if the annual cumulative preferred return rate is 8%, and an asset averages cash flows of 5% for five years, the investor will be 15% behind on his cumulative return (5 years times 3% preferred return).

But if the syndicator sets a preferred return rate of 12%, and the asset cash flows at zero for five years, he will have to pay investors the first 60% in cumulative cash flow before he gets his share of profits. If this seems too daunting, and the syndicator has other, better opportunities, he may become discouraged and turn his attention elsewhere, where he is more likely to make a profit. And he may fall behind in marketing and needed capital improvements, which could exacerbate the problem.

A potential solution…

Misalignments “in the investors’ favor” often come about as the result of overconfident syndicators with cocky growth projections or ground-up deals with higher risk. Look carefully at the track record, team, and asset class of the deal you’re considering. It’s not all about ROI. It’s about the risk you take – the potential loss – to get this return. Review the whole picture carefully before wiring your funds.

#4 LOSS OF CONTROL

Many investors like real estate for the tax benefits, predictable cash flow, and historical appreciation. But some have an additional reason: controlling one’s destiny. Look at the increase in self-directed IRAs. And consider it’s often the desire for control that drives these decisions.

If you’re a control freak, you may want to think twice before investing in real estate syndications. Because you’ll be handing your hard-earned capital over to someone you don’t know that well. And you’ll be trusting them to make the very best decisions to protect your back and grow your wealth. Will they do everything you would do if you were in their shoes? Maybe not.

And except for extreme circumstances, you probably won’t get a vote on a syndicator’s decisions. You won’t want to vote. Because voting usually means something has gone terribly wrong with the syndicator or the deal. And voting means you’ll be at the whim of a potentially angry majority who doesn’t have the skill or experience to make these calls.

A potential solution…

If you have the time, talent, and desire, you may want to stick with small rentals or flip houses. Though there are significant risks and hassles that come along with those investments, at least you can keep your hands on the controls. If you lose money, you’ll only have yourself to be angry at.

You can also partner with someone to syndicate your own deals. This takes significant experience, skill, and a seasoned team.

#5 DILUTION FROM OVER-RAISING

It’s tough to find cash-flowing deals these days. Investors are accustomed to getting 5-8% CoC in the first year of operations, and the fact is that these deals are less common these days.

The solution, for some syndicators, is to raise extra capital to pay investors until cash flow catches up to projected returns. We have seen more and more syndicators doing this, especially newer syndicators raising money from those new to private real estate investing. You will often find two classes of investor shares in this structure: one with a fixed-rate return and one with a greater profit participation upon sale. This assumes rents will continue to rise, and expenses are held in check. At best, this dilutes investor returns because it spreads the same amount of cash flow over more investor equity. At worst, it could be ruled illegal (though I’ve never heard of a ruling in this regard).

A potential solution…

Ask the syndicator hard questions. Review pro forma projections. Have them confirm (in writing) that they are not using raised capital to pay investor returns and ask them to defend their rising income projections. Check to see if their track record supports their projections and if their references confirm their history.

#6 A RISING TIDE MAKES EVEN NEWRUS LOOK GOOD

“What’s a newru?” you ask. As I said, this has been an unprecedented run. Combine this bull market with loosened restrictions from the 2012 JOBS Act (that opened the door to Regulation D, 506(c) syndications), a plethora of coaching programs, and a rapid increase in social media and crowdfunding, and we’ve got an explosion of new syndicators.

These syndicators have never seen a down market. And some believe “things are different this time.” Even worse, they are better promoters than operators, and some have even set themselves up as gurus instructing others. New gurus. Newrus.

They’ve made insane amounts of money over the past 5-8 years. Their investors have made countless millions. And with the rise in inflation, they may continue on this path. I wish them all the greatest success.

But I worry that in some cases, they have turned a stable, predictable, cash-flowing investment…into a Las Vegas-style speculation. Speculators make a lot of money – when they win. But they also risk losing everything, including their projected cash flow and their invested equity.

A potential solution…

You may be OK with speculation—more power to you. But if you want to truly invest, look for predictable deals from syndicators who have a long track record owning and operating their asset class. Operators who have provided stable returns to their investors from the same asset class for a long time.

These deals may be less glamorous and promise lower projected returns. But don’t forget Mr. Buffett’s first and second investing rule: “Don’t lose money.”

Speaking of losing money…

#7 RISKY DEBT

Dave Ramsey famously hates on debt. But he’s speaking to an audience primarily consisting of consumers who get in trouble with debt. Real estate investors know that safe debt (leverage) is the key to equity acceleration and wealth creation.

America’s top real estate investor, Sam Zell, says that the use of fixed, low rate debt was one of the keys to his massive wealth accumulation. And he was referring to debt in the 7% range! Of course, inflation was in the double digits those days.

It’s not only consumers who get in trouble with debt. Over-zealous syndicators find multiple ways to get in trouble with debt. And their investors may end up picking up the tab. How does this occur?

  1. High LTV. High loan-to-value ratios can significantly accelerate the return on equity. A commercial asset’s value = Net Operating Income ÷ Cap Rate.

    So, for example, increasing rents by 20% can increase profits (NOI) by 30% or more (assuming expenses don’t rise accordingly). Increased NOI of 30% leads to asset appreciation of 30% (assuming equal cap rate). 30% is a great return. But the bankers don’t share in this return. Add in 75% debt, and the equity appreciation is roughly 120% (30% * (1 minus .75) = 120%).

    This is irresistible for most investors and operators. But realize this can work against you as well. Drop rents by 25%, and income drops by 25%. Asset value correspondingly drops by 25%. Equity value, with a 75% LTV, may go to zero. Not a fun day. (And note this could make it impossible to refinance without injecting additional equity.)

  2. Short-term debt. Many bridge loans and interest-only loans have relatively short terms. Syndicators often get high LTV, low rate, short-term loans to increase early investor returns. They usually assume they can improve income enough to refinance into a fully amortized loan soon or that cap rates won’t expand (driving prices down). And they assume bankers will be eager to make high LTV loans when the term is up.

    This has all kinds of potential for risk. Syndicators who used this type of debt in the years leading up to 2008 found themselves bankrupt, and their investors lost a lot of equity.

  3. Floating rate loans. Most of the loans mentioned in #2 above have floating interest rates based on the current treasury. Syndicators assume rates won’t go up. But if they do rise, it may cause double trouble. First, this will increase their monthly debt service. Second, it will likely mean a higher rate when they refinance into permanent debt. And it could mean a lower appraisal at that time.

    If the operator doesn’t increase property income to compensate for these factors, he could have big problems. As a passive investor in a deal like that, you may be getting a worried call to send along more capital. And you could end up throwing good money after bad.

A potential solution…

Invest with syndicators who utilize debt responsibly. Ask them to stress test their debt and prove it works in poor economic conditions. Carefully analyze their track record and their reasoning for using this type of debt. It may be a home run…or a disaster in the making.

#8 MINIMAL OR ZERO SKIN IN THE GAME

When looking for alignment between syndicator and investors, there is no substitute for this. Syndicators may put thousands of hours into a deal, but when their cash is at risk, this somehow makes things feel different. They react differently to trouble. They are now both the general partner and a cash investor in the deal.

I know one or two syndicators who don’t put cash in their deals. I know a few who take an acquisition fee at closing and reinvest that as their skin in the game. I don’t think either of these is wrong necessarily. But we don’t invest with any operator/syndicator/sponsor who doesn’t have their personal cash in the deal on the same terms as other LPs.

#9 KEY MAN RISK

I think there are a lot of downsides to investing on Wall Street. But one advantage is the depth of the bench at large corporations. So if their CEO drops over or gets hit by a bus (why is it always a bus?), the board can usually hire a star replacement. Even Apple’s replacement for Steve Jobs has gone quite well these past eight years.

Investing with many syndicators carries the risk of losing the star player. Many syndication companies are built around a big personality with a lot of talent and experience. Their deals may suffer if they’re suddenly out of the picture.

A potential solution…

Check out their organizational chart and succession plan. Ask hard questions about who will take the wheel if they aren’t there and how they are training up the next generation of leaders. From what I’ve seen, most of the best operators have a dedicated, cohesive team of A-players with a long track record. This is ideal. A lone ranger with a bunch of contractors is typically not.

Summary

As usual with my articles, this list above is not exhaustive. If you’re passively investing in commercial real estate, find a great syndicator. Try to minimize the downsides I laid out in this article. Look for significant upsides as well. Meet them in person if practical to get a gut feel for their character and truthfulness. Meet their team. Study their track record. Check their references and Google them in detail. You’ll learn a lot.

Please reach out to us if you’d like to discuss this article or learn more about passively investing in commercial real estate. Our team will be glad to assist you with any questions you have about any deals you’re considering or one of our offerings in particular.

If you have further questions, please email Paul at invest@wellingscapital.com.

Happy Investing!

As with all financial matters, please do your own research, draw your own conclusions, and seek professional advice. The information contained in this article is for informational purposes only and is not intended to provide investment advice. Investors should consult their own tax, legal and accounting advisors before engaging in any transaction.

Property Maintenance: 6 Items to Troubleshoot in Your Crawl Spaces

posted on : January 11, 2022 0 Comment

Crawl spaces are great for storage, but because humans don’t frequent this area of the house, they can also provide a great home for rodents, mold, asbestos, and other fun things. Conducting a DIY inspection of your rental property crawl space can be a good way to keep tabs on the area, but bringing in a pro will give you the full picture.

Because lists are always helpful, let’s start with a general list of what to focus on while performing an inspection of your crawl space (in no particular order):

No. 1- Ventilation

A lack of airflow is a problem for several reasons. Mold and other types of moisture damage can become much worse and spread faster without ventilation. This is especially true here in the Pacific Northwest.

No. 2 – Foundation Cracks

Cracks in the foundation can be very bad news (especially horizontal cracks), or not a big deal at all (vertical cracks). Horizontal cracks usually mean ground forces are causing the foundation to bow – not good. Vertical cracks are common and not a cause for concern. Vertical cracks are usually caused by precipitation putting pressure on the foundation, but stability remains.

No. 3 – Electrical

We recommend having an electrician come in to evaluate the situation. What you want to be wary of is any electrical wiring or equipment near moisture build-up. Knob and tube wiring is common in the Puget Sound region and it should be replaced or at least inspected somewhat regularly.

No. 4 – Mold

Per the Environmental Protection Agency, every type of mold can cause some health effects. Three types of mold typically occur in crawl spaces: black, white, and yellow. Mold can cause serious allergic reactions and should be dealt with as quickly as possible. Again, unfortunately in the Northwest, mold is common. Black mold (sometimes looking grey or greenish) is the most dangerous. White mold is still dangerous (often looking fuzzy) but not as bad as the black variety. Yellow mold occurs on organic material (wood) and can cause decay and destruction of the material it inhabits. Vapor barriers can be installed on your crawl space floor and up the walls to prevent mold.

No. 5 – Pests

Insects and little critters love these areas in a house. Termite damage is easy to spot and mice/rats/squirrels leave their droppings everywhere. It’s best to get ahead of these issues and they’re pretty easy to fix (call a pest-control company); doing so just requires some diligence and the occasional inspection.

No. 6 – Asbestos

Another really bad one, along with the black mold. With many, many houses in the Puget Sound region being built before 1980 (when asbestos was used frequently) this is a point of concern for homeowners. Asbestos can be in the walls, ceilings, floors – virtually anywhere in a crawl space. When this material is destroyed the toxic fibers go airborne and can seriously contaminate the air, possibly making a home unlivable. If you haven’t had a professional out to your house to check on this, please do!

In conclusion, crawl spaces can be a source of property maintenance headaches for a landlord. It’s best to have a look in this area at least a couple of times a year.

Source: Rental Housing Journal

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How to Improve Tenant Retention in Your Rental Property

posted on : January 4, 2022 1 Comment

As landlords, we know it is impossible to keep our best tenants forever, but it’s certainly worth trying! Some tenants only stay a short while. Be it new to the area and not sure what part of town suits them best, a recent change in relationship, or maybe they are saving to purchase a home of their own, but some tenants prefer to rent for the long haul. Below are some landlord tips on how to improve tenant retention in your rental property.

Tenants come and go, but if we treat them well, they might think twice before deciding to move on. Along with having a solid lease and doing regular inspections, we recommend the following tips to create a professionally run rental property business that makes tenants feel secure and confident about living in your property long term.

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HOW TO TRANSITION FROM SINGLE FAMILY TO MULTIFAMILY INVESTMENTS

posted on : December 19, 2021 0 Comment

This article written by Jen and Stacy Conkey
Founders: Warriors of Wealth Coaching

Featured in RENT Magazine Q4, 2021, provided by the American Apartment Association.

HOW TO TRANSITION FROM SINGLE FAMILY TO MULTIFAMILY INVESTMENTS

Like many people, the idea of owning rental property is a dream – one you think about for years before finally pulling the trigger. Then you finally do it. YES! First rental property is in the books. A nice little single-family home that produces some cash flow.

Then maybe the next year you get another, then another. And you start realizing that it’s pretty cool to be able to say you own real estate. YOU are taking care of your future, not leaving your survival up to the government or an employer’s pension management company. You feel empowered.

But you start realizing that the cash flow is marginal at best. You start looking around and notice Facebook groups that seem to focus on multifamily real estate. Hmm, more doors under one roof. On a per unit basis, they’re actually less expensive.

So, you start looking into it and realize that there’s a significantly higher amount of cash flow when you start adding multiple units under one roof. But you’re not really sure how to make that transition from single family home investing to multifamily investing. You seek knowledge and information from various sources – podcasts, YouTube videos, and articles.

It can feel pretty overwhelming and confusing. Then add in the prospect of moving into 5+ units, which is now considered commercial real estate and you really start worrying about whether you can make the transition. It’s an entirely different ballgame when you start investing in apartments.

 

MAKING THE TRANSITION TO MULTIFAMILY INVESTING

In this article, I will help you evaluate your options for transitioning from single family home investing to multifamily investing so that you can get into action and truly start scaling your portfolio.

For starters, let’s begin by describing the most common scenarios for single family home investors, some of which may apply to you, some of which will not.

When many people start investing, they buy a house where they live. They advertise it for rent, take all the calls, do all the showings, prepare the lease, collect the rent, deal with evictions (when needed), do the unit turnover. It sounds like you thought you were buying an investment when in reality what you did was buy yourself a second job.

It’s still better than what 99% of people do to build wealth – which is nothing. But that kind of investing can exhaust you to death. Then you’re going to buy another one? Oy.

But that’s what is most common. I was lucky as a new investor. I lived in an area that had really become too expensive to own for the purpose of cash flow, forcing me to seek other options. I learned about investing remotely.

So, can I do all that management myself? Absolutely not. It required me to develop a new skill of leading a team remotely and using third party property management.

It’s funny, because I remember being a new investor and being sold on the idea of “passive income.” Close on the property and just sit on the beach, sipping margaritas while collecting all that “mailbox money.”

Ah-hem. The reality couldn’t be further from that scenario (particularly if you’re doing the business the way I described above). But even with investing remotely and using third party management, you can never just check out. Nobody will ever care about your assets, your cash flow or your retirement plans more than you do.

What does that mean? It means you need to keep your eye on the prize. Even though you’re not managing your property yourself (thank goodness), you absolutely must pay attention to what is happening with your assets. In a previous AAOA article, I talked about managing your property manager. It’s not like it’s a LOT of work, but it still does require you to stay engaged by knowing what is happening, reviewing monthly reports, asking questions, etc.

If you ever want to scale significantly from single family to multifamily, you must make the transition from self-management to third party management. Just like you probably leveraged the bank’s money to buy your property, you must start to leverage your time in order to create space to (1) learn and (2) buy more assets.

There is a learning curve in transitioning from single family to multifamily.

How much of a learning curve? It depends on what type of multifamily real estate you want to transition into. There are two categories of multifamily. One is small multifamily (2-4 units) and the other is apartments (5+ units).

It also depends on where you live and whether it’s a cash-flow market. If you’re like many investors, where you live has prices that make it impossible to buy for cash flow. This means your learning curve will include learning how to be a project manager instead of a doer. You’ll have to learn to invest remotely, which is a lot easier than it sounds, once you wrap your mind around what is involved.

Okay, putting that one piece aside, let’s begin by discussing the difference between small multifamily and apartments. Both are multifamily, but they are very different.

FINANCING

Small multifamily is going to be very similar to what you already know. Why is that? Properties that are 1-4 units are considered “residential” for the purpose of financing. When lending money, most banks will look first at the borrower and secondly at the property. This means they want to make sure you make enough money to pay for all of the expenses of the property plus the mortgage payment if all of your rents don’t come in.

Apartment buildings (5+ units) are considered “commercial” for the purpose of financing. When lending money, banks will look first at the property and how it performs. They will want to see that regardless of your existence, the property pays for itself and then some. For example, there is something called Debt Service Coverage Ratio (DSCR). If a bank has a minimum DSCR of 1.25, they’ll want to see that the Net Operating Income (income minus operating expenses) is at least 1.25 times the debt service (principal and interest payment). That is their primary concern. The borrower is secondary, and make no mistake, they’re still looking at you, but they’re not qualifying the property based on how much YOU make. It’s based on how much money the property makes.

 

VALUATION

Another significant difference between the two types of multifamily properties is how they are valued. Residential properties (2-4 units) are valued the same way single family homes are – based on comparable sales. Lenders will be looking at the income of the property but that doesn’t impact the value. On the opposite end of the spectrum, with apartments, the value of the property is based on the Net Operating Income of the property divided by the market cap rate. That means that the more net income the property is producing, the more it will be worth to a buyer.

So, what do these differences mean for you? Well, nothing really.

But it’s important to know the game you’re preparing to play. If you are more conservative in nature, I’d venture to say that starting in residential multi-family real estate (2-4 units) will provide a nice steppingstone to allow you to get to know multifamily. You will use the experience you’ve already gained through your single family home investing but with the benefit of having more units and more cash flow. Not much else is different.

Although it’s only a one-unit difference between a residential 4-plex and a commercial 5-unit, it’s a completely different game. One that can reward you greatly when you can successfully identify and analyze opportunities for raising the income. And at the same time, one that can punish you horrendously when you make a mistake related to the Net Operating Income. Because whether you’re driving the NOI up or down, you’re changing the value.

You really have to get educated about it before jumping in whereas stepping into small multis, you can pretty much just decide and go. The analysis is the same.

The first thing you have to decide is which direction you’re going to go. The next thing you have to decide is which market (or markets) you’re going to invest in.

Next, you start reaching out to realtors and/ or brokers to describe what you’re looking for. The more succinct you can be with this conversation, the more likely you are to receive properties that match your strategy.

For example, do you like the idea of buying something that is already performing and has an established cash flow? Or do you prefer to increase the value and do a “forced appreciation” play by rehabbing (for 2-4 units) or increasing NOI (for 5+ units)?

For small multifamily, the forced appreciation strategy is the BRRR strategy. You may have heard of it before – Buy, Renovate, Rent, Refinance (and of course, repeat). For apartments, the strategy can involve a lot more pieces – the ultimate thing you’re doing is increasing the Net Operating Income.

Sometimes increasing the NOI involves some rehabbing but not always. Sometimes, it just involves recognizing that the previous owner missed all sorts of opportunities to maximize the NOI, such as keeping up with market rents, offering value-added services to tenants that bring extra money to the bottom line, or having an effective management team in place that manages the income and expenses properly.

Be crystal clear in your mind before getting on the phone. Also practice (out loud) explaining what you’re looking for multiple times before you make the call. You’ll come across as more confident and seasoned if you’re not stumbling over your words (super common when you’re doing a new thing).

TIP: If you’re really worried about it, pick some random market that you have no intention of investing in and make those calls to get live practice. Sometimes you have to do your own hacks to get through a difficult part. But with some practice, you’ll sound like a seasoned pro.

Also remember, you are ALREADY investing. So be confident in stating you’re an experienced investor looking to expand into a new area. Speak boldly and clearly – and above all, talk like the CEO you’re on the journey to becoming. Now, get out there and start making stuff happen. YOU are the one that will take care of you and yours, not the government, not your employer. You can do this!

 

Jen and Stacy Conkey have a combined 20+ years as entrepreneurs and real estate investors. Through their diverse real estate experiences, Jen and Stacy Conkey know what it takes to identify deals and make offers on properties that will build a long-lasting wealth portfolio. With over a decade of experience sharing knowledge with other investors, Jen and Stacy have taught thousands of people across the globe on what it takes to succeed in real estate investing, with actionable strategies that make cashflow real estate fun and easy.

How the Calif. Deck and Balcony Law Affects Your Rental Property

posted on : December 14, 2021 1 Comment

Effective September 2018, California enacted Senate Bill 721, the Deck and Balcony Law.   This law came about after six college students died from a dry rotted balcony collapse in Berkley, California.   The following information pertains specifically to California rental property owners.  However,  deaths and injuries from unsafe decks and balconies are happening everywhere and ALL landlords should be aware of the standards and how the Calif. deck and balcony laws affects your rental property, regardless of what state it resides in.

California Landlords Whom This Law Pertains To

California rental property owners with

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What Are Tenant Preferences In Single-Family Build-For-Rent?

posted on : December 5, 2021 0 Comment

Tenant preferences in the single-family build-for-rent space are now backed up by some solid research.  Here is an article from John Triplett regarding information recently learned by John Burns Real Estate Consulting.

Burns says that “we now have concrete data to back some of the multi-million dollar decisions that single-family rental developers make.”

“Our New Home Trends Institute group (you really should join if you haven’t yet!) surveyed nearly 1,200 single-family renters with rent budgets of $1,000+ to figure out what matters most in a single-family rental home. We paired the results with our homeowner survey findings and DesignLens™ database” to come up with the following conclusions about tenant preferences.

Those preferences fall into four major categories:

  • Pet decisions
  • Finish and materials decisions by room
  • Home office decisions
  • Amenity decisions

Spend the money on some pet-friendly home designs

Burns says in the report that being pet friendly is key.

“Pet friendliness is the third highest ranking reason that single-family renters choose to rent a home over an apartment, falling below a private yard (also important for pets) and having no one living above or below. Thoughtful niches dedicated to pets (like the one below) are very appreciated by pet owners without alienating those who don’t have pets, since they can use the space for storage.”

Don’t spend on pet services

Don’t bother offering services like dog walking for an additional fee. Only 15% of renters would even consider opting into them. Single-family renters would much prefer paying extra for lawn or interior maintenance services.

Also owners and landlords don’t spend on pet services like dog walking for an additional fee. “Only 15 percent of renters would even consider opting into them. Single-family renters would much prefer paying extra for lawn or interior maintenance services.”

 Spend extra for a fabulous kitchen

Higher quality finishes mean more to tenants.  A great kitchen can make a huge difference when tenants are choosing a build-to-rent property.

“Premium kitchen finishes and energy efficient appliances are huge draws for single-family renters. 42 percent considering them a top influence for choosing a home above others. Don’t forget about ease of cleaning, which is a top pain point among owners and renters alike.”

Spend less on premium flooring, healthy home certifications, and smart tech

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5 Ways to Show Tenants Kindness During The Holidays

posted on : November 30, 2021 2 Comments

The holiday season is upon us!  Where this is a busy time of year, it’s always nice to remember those who rent from you.  Isn’t the true meaning of the holiday season to share the spirit of community and humanity?  Whether you have one single family home rental or several multi-family units, here are 5 ways to show your tenants kindness during the holidays:

  1. Remind them about options for package delivery

Between Black Friday and Cyber Monday your tenants may be getting a lot of packages delivered.  If you have a leasing office and packages are delivered there, have your staff create a quick email/text template to let tenants know their package has arrived and is waiting for them to pick up.

If packages are delivered straight to their doorstep, maybe send an email prior to the holidays reminding them that theft is on the rise and to consider asking a neighbor to grab them if they will not be home soon, sending them to a friend or someone with a secure doorstep who will be able to bring them in to safety on their behalf.  Another option is to recommend them using a shipping locker that is available at most grocery stores.  The company sends them a code to scan when they pick it up and the locker opens up with your package safe and sound.

  1. Maintain icy walkways and parking lots

With increased package delivery and guests visiting this holiday season, consider providing your property with a service or the tenant with the proper tools to remove ice where someone can slip and injure themselves.  If using a de-icing product, choose pet and environmentally friendly options.  This shows them you care and let them know they have nothing to worry about should they have a 4-legged friend living with them.

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Keeping Rental Property Documents Organized

posted on : November 16, 2021 2 Comments

Part of owning any business is keeping your paperwork in order.  For rental properties, it is imperative to know where every document is located.  It does not matter if you prefer paper trail or electronic files.  What does matter is keeping your rental property documents, photos, and records organized.

Documents You Need For Each Unit

We have one file for every tenant.  In this file, we keep:

  • All documents used to process their application.
  • Signed lease copy with addendums.
  • All maintenance requests. Plus notes on who, what, and when maintenance was performed.
  • Papers and notices served.
  • Inspection reports, photos, notes on conversations with the tenant about lease violations found.
  • ALL documented correspondence between you and the tenant, including emails, text conversations, and notes written about personal conversations.
  • Photos: before move-in, inspections, all maintenance requests, and final move-out inspection (or link to digital file)containing these.
  • Move-out security deposit disbursement papers with the tenant’s forwarding address.

If you keep a combination of paper and electronic files on each tenant, make sure you notate the location of electronic files (photos, scanned leases, etc.), plus passwords in case someone else needs to take over management unexpectedly.

How to Organize Documents For Each Property

Tenants come and go, but keeping your rental property documents organized is an essential business practice.  With that said, it is also important to have separate, organized files that pertain to each property you own.

If you prefer the paper file method, choose a file drawer/box or accordion folder and create monthly files for receipts.  Include receipts for all expenses like completed contractor work, paid utility bills, and maintenance supplies specific to THAT property.  The organization of your expenses will make your bookkeeping at the end of the year much more manageable.  If receipts pertain to items specific to a tenant (repairs made they must reimburse for), make a photocopy and place it in their file as well.

Good Options for Electronic Receipt Filing

We have found Expensify or SmartReceipts are most highly regarded for electronically storing and organizing receipts, especially when on the go.

Expensify is great on the go.  You can snap a photo of the receipt with your phone, and it will pull out the vital information needed (Business name, date, amount, etc.) and save it in your cloud.  You can also link it with your credit card for easy downloads of receipts and bookkeeping software like QuickBooks.

SmartReceipts is another convenient option for turning your phone into a scanner.  Here are the top benefits of this app:

  • Customize PDF, CSV, or ZIP format reports you can export
  • Free and open source
  • Take receipt photos or import them from your photo gallery
  • Tag receipts you’ve captured with metadata to help you find them later
  • Track your mileage during travel
  • Sync your receipts and reports with Google Drive
  • It has an OCR feature to recognize text from your scans

Included with your receipts, you should have a copy of your rent roll.  This tool is a monthly statement of what rent and income you earn per property.  Typically your bookkeeping software provides this, or you can create a spreadsheet to track it.  Having all of your income and expenses in one place makes it easy to evaluate the value of the property and the returns on your investment.

For documents and items that have no time stamp, consider using a binder to store:
  • Warranties on machines.
  • Maintenance logs (to record when you serviced appliances last)
  • List of all makes and models for appliances and HVAC units.
  • Back-up keys for units, mailboxes, gates, garages, etc.
  • Copy of the updated declarations page for your liability insurance.

If you are more electronically inclined and prefer access to your files from any device, we recommend creating a Google Doc or using Evernote to store the above files in the cloud.  The ability to share these files with maintenance personnel from anywhere is worth it.  Back-up keys may be an issue, but many units are switching to an electronic key entry, so needing key copies may no longer be a consideration for some.  Are you beginning to understand why keeping your rental property documents organized is an important business practice?

Businesses should have Operations plus Policy and Procedures manuals.

An Operation Manual

This manual describes all of the essential practices for operating your rental property business. Additionally, it should explain the following:

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