Arizona Rental Housing Journal by Professional Publishing, Inc

Rental Housing Journal Arizona

March 2014 - Vol. 6 Issue 3

2. Remedies After the Lease is Up

9. Market Overview Phoenix, Arizona Multifamily Housing Update 4Q13 February 2014

4. The Metro-Phoenix Apartment Market 2013 Wrap Up

14. Are You Leaving Money on the Table?

6. How To Find Property Management Super Stars…In 30 Days!

15. Tips for Rental Housing Owners

7. Dear Maintenance Men: 8. Exit Strategy - How Do You Know When It Is Time for You to Sell or Trade Up?

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Experts on Buying & Selling

ental Housing Journal sat down independently with apartment brokerage experts, Joseph Chaplik, Linda Fritz- Salazar and Greg Frick. This is the advice each gave: RHJ: What advise do you give to an investment property owner when they are considering putting a property on the market? JC: If you are considering selling, I would recommend working with a broker and brokerage firm that has the following: They should have a specific and sole expertise in the apartment market and a good history of past transactions as well as current activity. Working with the right professional is the main difference with selling correctly or making huge errors. LFS: I stress street appeal and operational health of the investment. Simple cosmetic enhancements and bookkeeping housekeeping can have a significant impact on the final sales

price. The property’s appearance is the first perception a Buyer will have. The owner that shows pride in his property is a step up from the others. From simple items, such as trimming bushes and trees, cleaning up around the dumpster and parking lot, or replacing unit numbers on front doors to touching up paint on trim, gutters

doors, window sills fences and gates will all have a positive effect on the property’s appearance. The operational health of a property can be a best foot forward by having organized books and records. Make sure all leases are up-to-date and tenant files are organized and Continued on page 5

It’s a Buyer’s Market – Is That Good or Bad for Rental Property Owners?

s we exited last year, we were trying to determine if we were headed into a buyer’s or seller’s market. It has become quite clear as we exit January and work through February, we are in a buyer’s market. Michael Orr’s Cromford® Reports Market Index re-

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flects an index of 89.3 (below 100 is a buyer’s market). As I write this article on February 16, 2014, it is clearly a buyer’s market. Others, including many REALTORS® may look at it a little differently, basing their opinion on whether more or less than 25% of the market is selling in a given

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month. Regardless of how you look at it, everyone should agree, it is a buyer’s market. Let’s take a look by price range and use the 25% baseline. The first chart includes distressed sales and inventory. The second chart is just normal owner-to-owner sales and inventory. Continued on page 3

ax time is here again and you should be aware that rental income isn’t the only way to make money when you rent a property. There are many incentives and tax advantages given to rental owners that entitle you to larger profits. Some of these money saving advantages are available monthly, and some of which are available annually when filing your taxes. Were you aware that often the entire amount of your property loan payment is tax deductible? This means that both the principle and interest payments made towards your property loan may possibly be deducted from your rental income. In addition, the interest that you pay on credit card purchases for your rental property is also tax deductible. As a real estate investor, you want the rental income to match as closely as possible to the property expenses to minimize tax liability. Some of the other common property expenses that are tax deductible include repair and maintenance costs, home office expenses, casualty or theft loss, all related travel to the property to make repairs or do regular inspections, professional fees such as an attorney or accountant, hazard insurance premiums, propContinued on page 3

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Remedies After the Lease is Up

hen a tenant moves out and fulfills the full term of his or her lease, he or she is not normally obligated to pay any additional rent to the landlord. However, an Arizona Appellate Court ruled that in some instances a landlord may be able to charge extra rent. This article will examine that case. The Arizona Landlord and Tenant Act, under Section 33-1373, does allow a landlord to charge rent until the lease expires or the apartment is re-rented when the tenant breaches his or her lease. Additionally, if a tenant who is on a month-to-month agreement does not give a 30-day notice under Section 33-1375, 30 days from the next rental period, the tenant can be charged up to an extra month’s rent. What happens when a tenant pays all the rent due under the lease and moves, but leaves the apartment damaged or so dirty it cannot be rerented until cleaned? The Arizona Court of Appeals decided in SDR Associates v. ARG Enterprises, Inc. that a tenant would be responsible for lost-rental income. Specifically, the court said a tenant’s failure to return the property to its original condition, as required by the lease, entitled the landlord to recover rent lost during the time necessary to restore the premises. In the SDR Associates case, it took the land-

can’t George cook, he can’t take the time to clean-up after each meal. At the end of six months, George Cantcook gives proper notice and moves. However, Hungry Arms Villa has to replace the food-stained carpet, repair the walls and fumigate the unit. Hungry Arms hires Peachy Keehns Cleaning Service, which takes one month to restore the unit to rent-ready condition. Hungry Arms sues and receives an additional month’s rent from the Judge Mary Gold Flower. By Andrew M. Hull Hull, Holliday & Holliday www.doctorevictor.com

lord two months to make repairs. During that period the owner was unable to lease the apartment unit. Keep in mind the law requires a tenant to return the premises in the same condition it was at the time of occupancy, normal wear and tear accepted. There is, however, no exact formula used by the courts to determine what is “normal wear-andtear.” Some factors are the condition at move-in and the length of time in the unit. Obviously, someone who lived in an apartment for four years would

have more wear-and-tear than a person with a six-month occupancy in a new apartment. A landlord must provide a tenant with a move-in inspection form so they can establish the condition at move-in. As an example, consider the following: George Cantcook rents an apartment from the manager of Hungry Arms Villa for six months. The unit is brand new with no damages listed on the move-in statement. Since George really can’t cook, he orders out for each meal. Not only

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Buyers Market ...continued from front page

As you can see, almost every price range is clearly into the buyer’s market range. The exceptions are between $25K and $150K. One could draw a conclusion, if you are a seller, that you still have some power in this price range. Of course each transaction is different. Another way to look at the data is to think in terms of months of inventory. At 25% of the price range selling, you have four months of inventory. So, move your focus to the $800K - $1M price range and you can easily see there are 20 months of inventory based on current sales and inventory. Naturally, the buyer is in the best position. Okay, now let’s strip out the distressed properties and take a look:

Tax Time ...continued from front page

erty depreciation beginning from year two of the rented property, and even a portion of your landlord association membership dues. The government provides us these tax exemptions to encourage greater real estate investing. Real estate investing plays a strong role in the economy, from the laborers who repair and build houses, to the mortgage broker who secures the property loan. Your investment dollars help to strengthen the housing sector in many ways and these tax deductions is our government’s way of saying “thanks”. The major key to taking advantage of the available write-offs is good record keeping. A complete year-todate file of your properties income and expenses will help ensure accuracy and assist your tax preparer in capturing the largest possible tax deductions for your business. So start by organizing your credit card statements, mortgage and insurance statements, and receipts. In addition, always check with a tax adviser or the IRS about other returns, deductions, or advantages that may be available for your situation specifically. The tax laws change often, so consulting with a professional who is familiar with real estate investments will keep you up to date with what’s available to you as an investor. And don’t forget that their fee is a write-off! Also, talk to each other. Real estate investors can help one another by just sharing their own experiences. The tax rules for landlords are pretty favorable. Let us learn from our peers, and the professionals, how to only pay our fair share of taxes. Katie Poole - Hussa is a Licensed Property Manager, Continuing Education Provider and Principal at Smart Property Management in Portland, OR. She can be reached with questions or comments at Katie@SmartPM.com

The only price ranges with a somewhat seller advantage is $75K through $125K. Also, you could rather easily assume that the $25K price range will always have a lot of demand especially from investors, so the fact it shows the strongest sellers advantage than any other price range isn’t unusual. Nice data, but what does it mean for the single family rental market? Considering that most income property investors buy for the long term, our market still provides a good opportunity to expand your portfolio. No, it isn’t as good or easy as when you were buying lots of distressed property. It does provide a continuing opportunity to buy (normal, ready to rent) property where you have the advantage in the negotiations. Many indicators reflect a continuing strong rental market. We would all like to see a faster improving employment base, rising incomes and healthier consumer spending, as this would continue to fuel a strong rental market. With new home prices continuing to rise at a very fast rate, continued probable increases in interest rates and changes in family dynamics and lifestyles, being a housing provider should be an exceptional way to invest over the long term. In our current market, you need to consider the retail segment as a place to acquire good rental properties. It is a buyer’s market. One which many believe has significant price growth potential over the long haul and good rents right now. Alan Langston Executive Director Arizona Real Estate Investors Association - AZREIA 480-990-7092 www.AZREIA.org AZREIA serves its 1700+ members through chapters in Phoenix, Tucson and Prescott providing extensive market information, education, networking events and support. Rental Housing Journal Arizona • March 2014

RENTAL HOUSING JOURNAL ARIZONA

The Metro-Phoenix Apartment Market 2013 Wrap Up

am fascinated by the 2013 metroPhoenix, Multi- F amily Sales numbers. Maybe fascinated isn’t really the right word; but the numbers are interesting and very encouraging considering the last four or five years. During 2013, there were 285 sales of apartments with 10 or more units. 182 of these sales had between 10 and 99 units and 103 sales had 100 or more units. Here’s where it gets interesting: The 182 sales of 10 – 99 units amounted to $243,391,008 and 5,955 units. Pretty impressive. Wait. The 103 sales of properties with 100 or more units totaled $2,336,626,810 and 27,428 units! The charts beside show the details of the 2013 Multi-Family sales with the additional breakdown of when the property was built.

Metro-‐Phoenix Apartment Sales – 2013 (10 to 99 Units) Built 1940 to 1979 Total Sales Total/Average No of Transactions 113 Price/Unit $40,388 Price/SF $53.03 $139,493,022

Metro-Phoenix Apartment Sales – 2013 (100+ Units) Built 1970 to 1979 Total Sales Total/Average No of Transactions 23 Price/Unit $50,576 Price/SF $68.71 $339,214,500

Built 1980 to 1989 Total Sales No of Transactions Price/Unit Price/SF $91,022,986

Total/Average 63 $39,234 $52.37

Built 1980 to 1989 Total Sales No of Transactions Price/Unit Price/SF $821,440,137

Total/Average 46 $73,406 $86.45

Built 1990 to 1999 Total Sales No of Transactions Price/Unit Price/SF $3,475,000

Total/Average 1 $36,198 $35.59

Built 1990 to 1999 Total Sales No of Transactions Price/Unit Price/SF $379,720,093

Total/Average 12 $103,836 $109.26

Built 2000 to 2009 Total Sales No of Transactions Price/Unit Price/SF $12,875,000

Total/Average 5 $71,133 $79.28

Built 2000 to 2013 Total Sales No of Transactions Price/Unit Price/SF $796,252,080

Total/Average 22 $138,462 $144.43

...continued on page 9

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Experts ...continued from front page orderly. Keep a monthly “rent roll” that will show all of the particulars for each unit, not just the day and the amount of rent paid. Things like move-in date; lease expiration date, refundable deposits and non-refundable deposit information all make the potential Buyer feel secure with the records. Maintain a monthly record of all income and expense items, in detail, and keep receipts. The more organized you are, the more impressed the Buyer will be.

considering buying a property. JC: If you are considering buying, I would recommend working with a broker and brokerage firm that has the following: They should be experts in the apartment market and have the knowledge and deep resources to assist with finding the right property for sale. There should be a lot of data given to you by your broker to help evaluate the right purchases and how it compares to the rest of the market. They should also know the future potential of properties and how to protect your investment and help grow it.

GF: Find a firm that knows how to listen. By listening to what your goals and objectives are, a good broker can help put a plan together that will help achieve your goals. Be careful of those who might just tell you what you want to hear! The person you work with should listen to you, and be willing to tell you when, given all the circumstances involved, it’s not in your best interest to sell your property. Then, when you’re sure the time is right, choose a brokerage team with the experience, knowledge and skill to implement an effective plan of action.

LFS: Before giving advice to an investor, it is imperative that we find out what the investor wants and/or what he/she needs. Wants are wishes and I, as much as most, understand unless you have a wish, you will never have a wish come true, realize needs are where we should start. Many investors come to our market and say they want an 8 or a 9 CAP, only to realize they need cash flow to cover the debt, if they need to borrow, and they need to put some money in their pocket after all expenses are paid. That’s not necessarily an 8 CAP purchase, initially. It doesn’t mean a 6.5 or 7 CAP property at time of purchase can’t get there.

RHJ: What about buying? What words of wisdom do you have for prospective investor when they are

A second piece of advice or piece of the puzzle to match is to find out what the investor plans to do for management. Many owners prefer to self-manage, staying very “handson” and involved. Conversely, many have no interest in this facet of ownership and will gladly let someone else take care of the broken toilets and leaky faucets. Management plays a large part in the success and profitability of multi-family ownership. I do not want to overlook, perhaps, the most important piece of advice and that would be to find a broker who is experienced, not only in selling apartments; but ownership, management and the ongoing success of the investment. GF: In addition to the above, you need to have someone working for you with the expertise to analyze the properties in terms of valuation and operations. In any transaction, it’s “surprises” that come up that prevent a sale. You will be best served by working with an expert who can identify potential surprises and find solutions in advance. You’ll also want to work with someone who is not afraid to tell you whether what you’re hoping to find is in line or out of line with the market. Portland metro multifamily properties typically are not trading

at cap rates above 7.5% and above. A buyer coming into this market sometimes needs to be educated on whether their expectations in terms of return and pricing are realistic. Look for a firm that doesn’t push you into a deal because it benefits them. Find someone who does what’s right for you. A client can get the most out of a broker/client relationship when they are acting in sync over the long term. Brokers are always on the front lines of what properties are coming to market. The more they know about you and your investment goals, the more great opportunities will come knocking at your door. Joseph Chaplik is President of Joseph Bernard Investment Real Estate. Joseph Bernard Investment Real Estate is headquartered in Portland and has offices in Washington and Arizona. They consistently complete more apartment transactions annually than any other Oregon firm. www.josephbernard.net Linda Fritz- Salazar is Associate Broker at The Kasten Long Commercial Group. KLCG has specialized in apartment brokerage in metro Phoenix since 1998. Agents have brokerage more than 1,000 communities with gross sales in excess of 1 billion dollars. The company ...continued on page 7

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How To Find Property Management Super Stars… In 30 Days! by Ernest F. Oriente, The Coach {Article #215…since 1995}

ould you like to learn the secrets for finding SuperStars to join your property management company…in 30 days? Are you tired of placing ads and wondering why it takes months to fill a vacant position? Have you looked at your budgets for this year and considered how a few key SuperStars could impact your compensation bonuses? Follow the three steps in this article and your dream of having a powerful property management team will be 30 days away! Recruiting internally: Begin your internal recruiting for SuperStars by paying a recruiting bonus to your current employees if they find a new candidate who becomes an employee of your property management company. A typical recruiting bonus of $250-$1000 could be earned for each new employee hired. 50 percent of this recruiting bonus could be paid to the referring employee on the day the new employee begins and the remaining 50 percent of the bonus could be paid after the new employee has worked six continuous months for your company. Next, include a classified ad in the

E-newsletter that is sent to the residents of the properties you manage. If your residents really enjoy living at your wonderful apartment community, imagine the asset they will be on your property management team. Lastly, consider using the services of a temporary employment agency to fill short-term positions and vacation days, while using their service to find potential future employees. Tip From The Coach: Temporary employment services will want you to pay a recruiting fee if you want to convert one of their temps to full-time status with your property management company. Remember, their fees are negotiable, especially if you discuss your hiring plans with them in advance or show them the significant amount of money your company has paid them over the past years. Of course, the best SuperStar recruiting comes from making internal promotions, which raises team morale at the same time. Recruiting externally: Begin your external recruiting search by looking at the people employed by competitive property

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management companies. Since these companies employ individuals in the multi-housing industry, this is a targeted place for recruiting SuperStars. Trade shows and apartment association meetings are also a great place to network and meet these potential candidates. Next, consider the vendors who serve the property management company, as these vendors spend the majority of their day working with companies just like yours, and their expertise and industry knowledge can be a great asset when it comes to looking for help with your recruiting efforts. Lastly, try using employment placement agencies that specialize in the property management industry or place your employment advertisement in the magazine or E-newsletter published by your local apartment association. Tip From The Coach: Have you considered doing a hiring seminar to recruit new employees for your property management company? If you can imagine the normal hiring process, which typically takes two to four weeks, and would like to see this process condensed into two hours, send an E-mail to ernest@ powerhour.com asking for details. Recruiting using current technology: If your property management company has a website, add “job opportunities” to your main web page. To see some examples of this idea, go to www.aimco.com or www.riverstoneres.com or www.pinnacleams.com. Next, try placing your hiring ads at websites specializing in employment opportunities like Monster or Career Builder or LinkedIn, just to name a few. Lastly, on your company E-mail system, add job opportunity information so it appears in the “signature” file at the bottom of every E-mail that is sent. Tip From The Coach: Recruiting using today’s technology is fun and fast. More importantly, have you seen the demographics of the type of people who are online? Still wondering how to find property management SuperStars? Try more online recruiting and watch to see the world-class candidates who begin to apply for positions with your company. In addition, use behavior and values assessments to numerically evaluate and benchmark key success factors such as intensity of ambition, people skills, economic drive and sales skills.

ing tips and 37 employment recruiting websites will be shared! Author’s note: Ernest F. Oriente, a business coach/ trainer since 1995 [31,500 hours], serving property management industry professional since 1988--the author of SmartMatch Alliances™, the founder of PowerHour® [ www.powerhour. com ], the founder of PowerHour SEO [ www.powerhourseo.com ], the live weekly PowerHour Leadership Academy [ www.powerhourleadershipacademy. com/pm ] and Power Insurance & Risk Management Group [ www.pirmg.com ], has a passion for coaching his clients on executive leadership, hiring and motivating property management SuperStars, traditional and Internet SEO/ SEM marketing, competitive sales strategies, and high leverage alliances for property management teams and their leaders. He provides private and group coaching for property management companies around North America, executive recruiting, investment banking, national utility bill auditing, national real estate and apartment building insurance, SEO/SEM web strategies, national WiFi solutions [ www.powerhour.com/propertymanagement/nationalwifi.html ], powerful tools for hiring property management SuperStars and building dynamic teams, employee policy manuals [ www.powerhour.com/ propertymanagement/employeepolicymanuals.html ] and social media strategic solutions [ http://www.powerhour. com/propertymanagement/socialmedialeadership.html ]. Ernest worked for Motorola, Primedia and is certified in the Xerox sales methodologies. Recent interviews and articles have appeared more than 8000+ times in business and trade publications and in a wide variety of leading magazines and newspapers, including Smart Money, Inc., Business 2.0, The New York Times, Fast Company, The LA Times, Fortune, Business Week, Self Employed America and The Financial Times. Since 1995, Ernest has written 225+ articles for the property management industry and created 400+ property management forms, business and marketing checklists, sales letters and presentation tools. To subscribe to his free property management newsletter go to: www.powerhour.com. PowerHour® is based in Olympictown…Park City, Utah, at 435-6158486, by E-mail ernest@powerhour.com or visit their website: www.powerhour. com. For leading trends about property management, surf www.powerhour.com

Want to hear more about this important topic or ask some additional questions? Send an E-mail to ernest@ powerhour.com and The Coach will E-mail back to you a free invitation to be a participant on a TeleForum conference call. For those who join this TeleForum, a bonus of 17 recruit6

Rental Housing Journal Arizona • March 2014

RENTAL HOUSING JOURNAL ARIZONA

Dear Maintenance Men: By Jerry L'Ecuyer & Frank Alvarez

By Jerry L’Ecuyer & Frank Alvarez Dear Maintenance Men: When the bathroom faucet was new, turning off the hot or cold water knobs would cut the flow of water immediately. Two years later, upon turning them off, the faucet weeps a bit of water. Is this a sign the knob isn’t working? Can a clogged spout screen be fixed? With all these problems, do I need to buy an entire new fixture? Paul Dear Paul: Most types of faucets are repairable with standard tools and a rebuild kit. Note the brand and style of the faucet and find a corresponding repair kit at the local plumbing supply house or home improvement center. Repair kits often come with the specialized tool you may need to repair the faucet. The faucet screen can be cleaned and is housed in a removable assemble at the end of the spout. These can be spun off and the screens cleaned and replaced. Keep in mind the cost of repairs may rival the cost of replacement. If the cost of repair is more than fifty percent of the cost of replacement, we recommend the faucet be replaced with

new modern fixture. Dear Maintenance Men: We have a vacancy and are currently upgrading the units as they became vacant. We are looking for an inexpensive way to upgrade our rental units. In other words, spiffy them from the normal. Hans Dear Hans: A great way to update older and modern units is to upgrade the cabinet knobs, interior door knobs and hinges. Typically apartment or builder grade knobs and hinges are rather utilitarian in nature. They get the job done and that is about it, nothing fancy. That missing certain “je ne sais quoi” in a remodeled unit can be found in the choice of knobs and hinges you install. A wise choice is a lever style knob. They come in many different finishes and colors and they not only look attractive and modern, they are user friendly for any disabled or older residents. The use of solid brass knobs adds a bit of weight to a door making it appear rich and sophisticated. Stainless steel knobs and pulls can make an older unit look more modern. Check at your local home improvement center for ideas along with these brand names to look for:

Westlock, Hamilton Sinkler, Schlage, Baldwin, Kwikset. Dear Maintenance Men: We have a one-handle adjustable faucet in our kitchen. It has been in use for about seven years. At this point, it seems to not turn off well after use. It’s loose. Sort of like a car’s stick shift that won’t engage. At this point, is it simply worn out and needs replacement? Just what is the typical life cycle of such a faucet given typical use in the kitchen? Bryan Dear Bryan: The typical life time of a good quality single handle faucet is between five and ten years. Because of the many different faucets on the market, it is difficult to give an exact diagnosis. A loose handle as described can be repaired with a valve repair kit available at any hardware store. The faucet handle can be removed by loosening a set screw at the base of the handle which will expose the faucet valve. Using the repair kit, replace the faucet’s internal parts and reassemble. The new parts will bring the faucet back to its original tolerances and should tighten up the handle operation.

TIP: When replacing a sink or shower/tub valves and cartridges, use plumber’s grease to lubricate the internal moving parts. QUESTIONS? QUESTIONS? QUESTIONS? We need more Maintenance Questions!!! To see your maintenance question in the “Dear Maintenance Men:” column, please send submission to: Questions@BuffaloMaintenance.com Please “Like” us on Facebook.com/ BuffaloMaintenance Bio: Please call: Buffalo Maintenance, Inc for maintenance work or consultation. JLE Property Management, Inc for management service or consultation Frankie Alvarez at 714 956-8371 Jerry L’Ecuyer at 714 778-0480 CA contractor lic: #797645, EPA Real Estate lic. #: 01460075 Certified Renovation Company Websites: www. BuffaloMaintenance.com & www. ContactJLE.com www.Facebook.com/BuffaloMaintenance

Experts ...continued from page 5 also provides weekly updates (by e-mail) on apartment sales and publishes the Metro Phoenix Apartment Owner’s Newsletter on a quarterly basis – past issues are available on the company’s web site (www.KLCommercialGroup.com). Greg Frick is a partner at HFO Investment Real Estate. Founded in 1999, this apartment-only brokerage firm has

handled transactions on over 15,000 units valued at $1.84 billion throughout Oregon and Washington. Greg works with both private market and institutional clients and can be reached directly by phone at 971-717-6332 or email greg@hfore.com. For details about apartment listings and services visit www.hfore.com.

We are the apartment experts. Apartment Brokerage | Wealth Building | Asset Management

Now serving Phoenix, AZ Joseph Chaplik President / Designated Broker

480.305.5600 | www.josephbernard.net Interested in joining our award-winning brokerage team? Please call or visit our website for more information. Rental Housing Journal Arizona • March 2014

RENTAL HOUSING JOURNAL ARIZONA

Exit Strategy How Do You Know When It Is Time for You to Sell or Trade Up? By Clifford A. Hockley, President Bluestone and Hockley Real Estate Services Investment goals, do you have them? Crazy as it may sound, most investors drive blind. They don’t have investment goals, they don’t have a monthly or annual review of their investments, and they don’t have an investment strategy. When you are looking to get off your investment plan you’ll need an exit strategy. Unless you can predict the future you’ll need to know where you’re going to get off on the right exit. How do life’s obstacles change our investment strategies? Many of us invest in real estate, because our friends or family invested or we read a book making it sound simple. Often we think of it as a way to diversify our investment portfolios, hoping that if stocks go down real estate will go up. In any case we are looking for a profitable way to invest, but don’t have solid goals and a long-term plan. If we are fortunate

we make money on our first deal and we are off to the races, but more often than not investment success comes after years of smart decisions and maneuvering around life’s obstacles. Typically when we start contemplating investing in real estate, we think of paying for college for the kids or retirement (which is so far off). Maybe we have a chance to read Richard Kiyosake’s book “Rich Dad Poor Dad” and want to retire on the income generated by our real estate investments. We are thinking of “getting into the game”, not about a path to success or an exit strategy The strength of real estate investing revolves around knowing where you are going, and that can easily change throughout out life. When you are in our twenties you typically don’t have as much money to invest. Maybe you are getting married and focused on buying a home and having kids. The last thing on your mind is putting money aside to purchase a real estate investment. Suddenly you are turning thirty five. Your kids are in elementary school and you realize you need to

save for college for your kids; can you do that and save for retirement as well? A real estate investment might do the trick for you and, as luck would have it, your grandparents pass away and left you their home. Instead of moving in you renovate the house and make it into a rental. You are one of the fortunate ones, because you are starting out with zero debt. . The house is in good condition and you have long term tenants and not too many worries. You start figuring and you find out that college for each one of your two kids will be forty thousand dollars a year, for a total of about three hundred and twenty thousand dollars. The house is only worth $120,000 today, and if you are lucky will be worth $240,000 in ten years. It’s a limited amount and you aren’t sure if you want to sell the house to pay for the kids college education. Don’t forget that once you sell all the money you had planned on helping you through retirement is now for your kids’ future education. You are doing ok and banking about $800 a month or $9600 a year so that

could help with tuition. But should you use that money to buy another investment? You are forty five. The kids are now about to graduate high school and your wife is going back to work to help out with the bills. At the same time your parents are getting older and need more help, so they decide to move in. In order to do that you might have to sell the house because your home is not handicapped accessible. You turn fifty five, the parents are in assisted living and the kids are done with school. You managed to keep the rental and buy one more house, but you never really planned for your retirement. You’re not as energetic as you once were. You are making good money but barely keeping up with the new car payments and the wedding your daughter wants to have. (She wants you to spend $40,000. She is the apple of your eye.) As sixty five beckons, you are tired of those tenants and the constant property repairs. Although the properties have been a good source of incontinued on page 11

Rental Housing Journal Arizona • March 2014

RENTAL HOUSING JOURNAL ARIZONA

Market Wrap Up ...continued from page 4 A few interesting details include level with near-term future growth that 56 of the 182 sales of 10 to 99 being greatly reduced; 2. The lowunits were “flips” - resales of prop- priced, value-add opportunities are erties purchased in the past few pretty much gone; and 3. There is an increased concern with ARIZONA the effect of years. Also, in the 100+ segment, 21 VALLEY, METRO, of the 103 sales were sold by Equity new apartment construction. We remain very optimistic. Every Residential, after they made the decision to relocate their MF portfolio to day brings positive news regarding Coastal Cities. both business and people moving to 2013 was clearly a very good year the Valley. JOBS are being created for Multi-Family sales but we did and we expect Arizona to regain its notice a slowdown in the 4th quarter position as the State with the fastest Feb, Apr, Jun, Aug, Oct, Dec and we are monitoring that closely. growing population in the US. Our There were several obvious reasons weather is certainly more attractive for this slowdown: 1. Investors per- than shoveling snow and the fundaceive our area as having reached a mentals for the MF market are strong:

occupancy is high and rents are increasing. We expect the strongest markets to be in the B and C Class properties as tenants look for well kept, secure, well-located properties. APT. NEWS

ON-SITE-NW SEATTLE

Salsbury Industries (Should you wish to receive our

weekly and quarterly apartment market updates, please contact me (602 759-1204, Linda@ KLCommercialGroup.com.) Linda Fritz-Salazar, Assoc. Broker Kasten Long Commercial Group 2821 E Camelback Rd. #600 Phonix, AZ 85016 Linda@KLCommercialGroup.com

The Kasten Long Commercial Group has specialized in apartment brokerage in metro Phoenix since 1998. Agents have brokerage more than 1,000 communities with gross sales in excess of 1 billion dollars. The company also provides weekly updates (by e-mail) on apartment sales and publishes an apartment market update on a quarterly basis – past issues are available on the company’s web site (www. KLCommercialGroup.com).

1010 East 62nd Street, Los Angeles, CA 90001-1598 Phone: 1-800-624-5269 • Fax: 1-800-624-5299

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Rental Housing Journal Arizona • March 2014

regionalaz.com

RENTAL HOUSING JOURNAL ARIZONA

Market Overview Phoenix, Arizona Multifamily Housing Update 4Q13 February 2014 By RED CAPITAL GROUP

harvest since 2006. The RCR payroll model finds that 4Q13 Payroll Trends and metro growth is highly influenced by national employment and home Forecast Year-on-year payroll growth price trends. These variables are extrends decelerated for the second pected to moderate, causing metro consecutive quarter, slowing to an job creation to slow to about 30,000 annual run rate of 41,800 (2.3%) (1.6%) this year. Gains should reacjobs in 4Q13, down from 44,700- celerate in 2015 to the 40,000-job and 45,200-job performances in range. 3Q and 2Q, respectively. The drop was largely attributable to the construction sector, where hiring fell to a 3,900-job, 4.3% pace, down from 7.4% (3Q13) and 11.8% (2Q13). Skilled service sectors, by contrast, gained momentum. Financial, business, education and health care service head counts advanced at a 21,400-job, 3.2% rate, up from 17,500 jobs in 3Q13. Seasonally-adjusted data told a contrasting story. This series indicates that Phoenix establishments hired a net of 23,500 workers Oc- 4Q13 Absorption and tober to December, accounting for Occupancy Rate Trends more than one-half of the year’s Tenants continued to fill aparttotal net. Indeed, if valid, the met- ment space at a brisk clip. Renters ric stands as the largest one-quarter occupied 1,611 vacant units (Reis)

in 4Q, the highest single-quarter net absorption recorded in two years. Supply pressures remained relatively mild as developers completed only 735 units, allowing occupancy to increase 30 basis points sequentially and 90 bps year-on-year to 94.9%, the highest metric recorded in 13 years. Axiometrics surveys of 587 large properties found a 93.2% 4Q13 occupancy rate, up 40 bps y-o-y and unchanged sequentially on a same-store basis. Average occupancy (94.1%) and sequential quarter growth (70 bps) were highest among class -A properties. The class-B (93.7%/+20 bps) and class-C (91.0%/-50 bps) segments followed. RCR’s inventory model forecasts that supply levels are likely to increase gradually over the next three years, reaching about 5,000 units in 2015. Demand is likely to lag the pace, sending average occupancy to the high-93% area. Reis forecasts are consistent, seeing slower absorption causing occupancy to decline to 93.7% by 2017.

cording average $7 (0.9%) and $25 (3.5%) sequential quarter and yearon-year advances, representing in each case the strongest gains in six years (Reis). Axiometrics surveys uncovered similar results, recording average effective rent of $789 and 3.4% same-store growth. Axiometrics same-store data indicate that the class-C segment posted the strongest annual gains, rising 4.2% over-the-year to $547. Class-A ($1,084/3.7%) and class-B ($794/3.1%) assets followed. West Mesa (7.1%) recorded the fastest trends among submarkets, followed by Glendale South (6.7%), and South Scottsdale (5.3%). Four submarkets advanced less than 2%: East Mesa; Goodyear; North Glendale; and South Tempe. RCR’s Phoenix rent model finds that metro job, income, supply and home price growth are the principal exogenous determinants of rents. Each is constructive through 2016. But the model suggests that supply pressures and competition from homeownership may depress rents after 2016.

4Q13 Effective Rent 4Q13 Property Markets Trends and Total Returns Owners enjoyed constructive Trade in Phoenix assets continpricing power during 4Q13, recontinued on page 11

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RENTAL HOUSING JOURNAL ARIZONA

Market Overview ...continued from page 10

Exit Strategy ...continued from page 8

ued at an upbeat tempo during the fourth quarter as private equity and investment fund players sought to increase allocations to the Valley of the Sun. By the same token, bank owners ramped up REO sales in response to firmer pricing, especially for high quality assets built during the last decade. In all, 21 properties valued at $5 million or more exchanged hands in single-property trades, up from 19 during 3Q. Proceeds totaled about $600 million and the average unit was valued at $81,013. There data compare to $463mm and $92,737 during 3Q13. Cap rates for institutional quality properties hovered in the low5% region. Class-B assets were exchanged at 5.5% to 6.5% yields. For valuation purposes, RCR maintain a 5.75% going in cap

come they take time and the bills are increasing. You sell both your rental houses and buy a single tenant NNN investment property. A regular check is what you want. No hassles please.

rate assumption. Employing a derived 6.4% exit cap assumption and model generated occupancy and rent forecasts, we estimate that an investor would expect to achieve a 6.2% annual IRR over a five-year hold, constrained by the soft outyear rent and occupancy forecast.

continued on page 12

You must plan to build your real estate empire As you plan to build your empire you need to decide how much risk and leverage you are comfortable with. If you leverage your investments at 25% or 30% down you have more risk than if you put 50% down. I have found that younger investors are more willing to use leverage. As investors grow older, have more assets and have survived the economic down turns and high vacancy issues, they tend to move closer to a 50% leverage position. In any case the options are clear: • Set a goal of real estate and equity you want to reach • Set a goal of income you want to have and plan to reach it. You can: • Sell and trade up using a 1031 exchange • Refinance and buy more real estate • Get other cash to buy more real estate • Invest with others (family , friends, professionals.)

Summary There is no “one size fits all” exit plan. You need to customize your plan to your life; your income and you need your spouse or significant other on board. Life will try to derail your investment strategies. Do your best to plan around this while keeping your goal directly in front of you? You need to be organized and understand all of the costs of the real estate decisions you make. I would recommend preparing a net sheet – what is it really costing you when you sell one property and buy another? Understanding your monthly reports and your annual income and expenses is critical to planning a successful exit strategy. Accounting is important- the back of a napkin does not cut it. Review your thoughts with your advisors on an annual basis (Real estate agent, Property Manager, CPA, significant other). Flexibility and nimbleness are keys to successful investing. You need to be willing to change direction while keeping your goal in mind if things are not going according to plan. If you don’t have a plan don’t feel bad, you can always make a plan today. If you want advice or want to create an exit strategy I am happy to help.

Visit us at www.re ntalhousingjournal.com RHJ ARIZONA FREE SUBSCRIPTION

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Market Overview ...continued from page 11

NOTABLE TRANSACTIONS Property Name (Submarket) Ninety Degrees (Chandler/Gilbert) Villamora Apartments (Chandler/Gilbert) Barossa at Paradise Ridge (No. Scottsdale) Indigo Palms (Central Phoenix South) Scottsdale Springs (South Scottsdale)

Property Class/ Type (Constr.)

Approx. Date of Transaction

A / MR (2009) B+/GLR (2001) A+/GLR (2009) B / GLR (2000) B / GLR (1979)

2-Nov-2013 2-Nov-2013 25-Nov-2013 29-Nov-2013 30-Dec-2013

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Total Price / <Appr. Value> (in millions) $51.0 $32.9 $31.1 $40.0 $53.7

Price / <Appr. Value> per unit

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$151,335 $113,841 $152,206 $92,596 $83,307

5.3% 5.0% 5.3% 6.4% 5.6%

... continued on page 13

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Market Overview ...continued from page 12 SUBMARKET TRENDS (REIS) Submarket Effective Rent 4Q12 Central Phoenix North $596 Central Phoenix South $686 Chandler / Gilbert $804 Deer Valley $661 East Mesa $722 Glendale South $591 Goodyear / Avondale $836 Maryvale $539 North Scottsdale $932 North Tempe $789 Northeast Phoenix $693 Paradise Valley $649 Peoria / Sun City / Surprise $748 South Mesa $623 South Scottsdale $777 South Tempe $819 Sunnyslope $626 West Mesa $593 Metro $714

4Q13 $632 $709 $850 $686 $742 $612 $841 $559 $977 $816 $704 $675 $768 $644 $844 $837 $647 $613 $739

Change 6.1% 3.4% 5.6% 3.8% 2.7% 3.6% 0.5% 3.8% 4.9% 3.4% 1.5% 3.9% 2.7% 3.2% 8.6% 2.2% 3.3% 3.2% 3.5%

Physical Vacancy 4Q12 9.2% 6.7% 4.2% 6.1% 3.6% 7.5% 5.2% 10.1% 3.8% 4.8% 6.0% 4.2% 5.1% 6.2% 3.4% 4.4% 5.6% 7.4% 6.0%

4Q13 8.1% 5.8% 5.5% 4.4% 2.5% 8.8% 3.3% 7.2% 3.5% 4.9% 4.9% 3.6% 3.5% 5.6% 5.4% 3.9% 4.5% 5.2% 5.1%

The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party

Rental Housing Journal Arizona â&#x20AC;˘ March 2014

Change -110bps -90bps 130bps -170bps -110bps 130bps -190bps -290bps -30bps 10bps -110bps -60bps -160bps -60bps 200bps -50bps -110bps -220bps -90bps

sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held respon-

... continued on page 15

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RENTAL HOUSING JOURNAL ARIZONA

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derstand their business and business goals, their staffing and their success at your location. Most importantly while they are renting from you. Fix repairs that are required by your lease, and fix them quickly. Show your tenants you appreciate them by treating them how you would want to be treated, otherwise they will blame you and possibly hold back rental payments, do the repairs themselves or, worse yet, move out. Last year there was a client who took two months to repair the air conditioning units on a newly leased space. It was wintertime and it was raining; the tenant was livid and hired an attorney to preserve their rights under their lease. The landlord wanted absolutely the lowest price for the repairs and getting the lowest price took over 30 days of negotiating with vendors. The tenant almost moved out because it took so long, and alternative cooling systems needed to be provided. The experience drove them to become a hostile tenant and we aren’t sure if they’ll renew their lease when the time comes. These bad feelings could have been prevented and we • Logos are provided on the CD in all three forms: could have agreed on rent increase

• No other colors are acceptable for use for the log

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their real estate. Just as with residential investments, they must consider the condition and location of their investment. Commercial landlords need to have a long term plan in place that keeps rent increasing on an annual basis If you make a concession regarding a starting rent to get a tenant in, plan to step it up to market value within three years. Aim for a minimum of 21/2 % to 3% in annual increases based off the pre-negotiated step increase or percentages that increase on the basis of a business’ success (typically used by retail businesses). I am not a huge fan of CPI (consumer price index) increases because the government has too much control of those numbers. Don’t permit expense caps unless you can stay ahead of the expenses, regardless of the caps. Landlords and their property managers should not automatically cave into very low or zero rent increases at lease renewal time, even if the tenant threatens to move out. Run realistic scenarios regarding the cost of re-tenanting. Include vacancy rates, leasing commissions and tenants improvements in these calculated scenarios. Consider also, the moving costs an existing tenant will face. Un-

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Rent Increases Residential: Multifamily or single family investors have the opportunity to increase rental income at least once a year through the annual budgeting process. This process starts with an annual inspection, followed by a local area renewal rate review (rental comparison survey). Keeping your property well maintained is the key to managing long term rental increases. Tenants will not be

ost real estate investors tend to operate their properties with a simple rule in mind: If money appears in their checking account by the end of the month, their property is healthy. As long as they see the same amount every month they’re happy. However this rule inevitably leaves money on the table. Sophisticated investors know that they need to plan for their properties to be successfully operated. They need to buy the right property and operate it with a vision in mind. That vision should include an annual focus on rent increases and tenant relations.

as hesitant to pay more if you treat them with respect and keep the property looking well maintained. A clean property with great looking landscaping, a current paint job without any mold or a refinished roof will net you more rent. Yes it will cost more to maintain, but in my opinion the payback will be in the form of higher rent, longer tenancies and lower turnover costs. Don’t forget, tenants want to be appreciated just like you do. If you have a property manager you work with, have them help you draft an annual budget and forecast the annual increases. Think into the future; plan your rent increases and capital expenses two to three years ahead so you can better control you long term destiny. Commercial: Owners of office, retail or industrial buildings need to think through the same process. They need to develop a plan that lasts through the initial lease term and includes details regarding the tenant’s options to renew, (since commercial tenants tends to stay for 3-10 years, even more planning is involved in controlling the costs and the rental increases). Annually, property owners need to review the comparative position of their property. They need to be realistic regarding the value of

By Cliff Hockley CCIM President, Bluestone & Hockley Real Estate Services

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RENTAL HOUSING JOURNAL ARIZONA

Tips for Rental Housing Owners

esearching frequently promoted tips for rental housing owners brought up a plethora of topics related to the functioning and financial survival of properties. Ultimately I want to narrow in on three different factors that I feel make the biggest impact on a smoothly operated building. Three business mannerisms which have been around forever but are now requiring methods of modern improvement are documentation, exceeding customer expectations and obtaining insurance coverage. Documentation has been a funky transition from literally having everything hand written, to the invention of the telephone and now to the endless possibilities of internet communication and email. Everyone communicates on the phone and in a lot of ways it is the most direct and efficient way of getting the job done. However, how many times have things slipped through the cracks or been mis-communicated because the original message is lost in translation and memory? I can’t hear our property managers reiterate enough to their resident managers the need to follow up on phone calls with an email summary. It saves so many steps and provides a great back up

when controversy arises. Along with always having documented evidence, the old business tactic of under-promising and over-delivering will never cease to be relevant. There always comes a time when business operators have wishful thinking and want to deliver sugar-coated hopes and dreams to their clients. But this is where dreams and reality need to have a fine, realistic line carved right down the middle. As the intelligent American author Ernest Hemingway once said (more profoundly): “the most essential gift for a good writer is a builtin, shockproof, crap detector.” This applies to a businessman as well. In order for your property to function, you have to be straightforward with everyone involved in the functioning of the property. That way when it comes time that you do have the flexibility for extra efforts, building perks, rental incentives, etc., they’re that much more appreciated. This isn’t encouraging putting out minimal effort for the greatest return, but altogether continuously exceeding customer expectations. One of the many ways to exceed customer expectations is by always being prepared. Obtaining building insurance and requiring renter’s in-

surance not only helps when disaster strikes but the reassurance of its benefit in situations of necessity facilitates the functioning of other day-today tasks at your property. Making insurance a high priority and establishing solidified restrictions and requirements upon move-in will avoid any mishaps that may come up in a time of chaos. Ultimately there are many tips that should be utilized in order to maintain a well-run building. The foundation of business practice objectives that owners should follow is made up of thorough documentation, providing exceptional customer service and ensuring that you are insured. These are some of the many steps owners can take to make the most of their investment. By Lauren Ginder, Pacific Crest Real Estate Contact info: Lauren can be reached at 206-812-9144 or via email at: ginderl@pacificcrestre.com · www.pacificcrestre.com

Market Overview ..continued from page 13

sible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors. For more information about RED’s research capabilities contact: Daniel J. Hogan, Director of Research djhogan@redcapitalgroup.com 614.857.1416 James P. Hensley, Senior Managing Director Head of Mortgage Origination jphensley@redcapitalgroup.com

Money on the Table...

continued from page 14

and lease renewals with this tenant if the landlord would have allowed the property manager to be more proactive. Note: Typically property managers have vendors they work with that are reasonably priced who respond quickly; but they may not be the absolute lowest period.

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Conclusion Inevitably, attention to detail, future planning, a current understanding of the marketplace and a fair and realistic approach to taking care of the properties will yield higher returns for real estate investors. A key component to profitability is a focus on current and future rental incomes. Sticking to the basics with an annual planning process and taking care of your tenants will increase your annual yield and keep reliable tenants in your properties.

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w w w.wi n ston cont ra ct . com Rental Housing Journal Arizona • March 2014

RENTAL HOUSING JOURNAL ARIZONA

Rental Housing Journal Arizona • March 2014