Rental Housing Journal Colorado
March 2014 - Vol. 6 Issue 3
www.rentalhousingjournal.com • Professional Publishing, Inc
DENVER • COLORADO SPRINGS • BOULDER
Monthly Circulation To More Than 7,000 Apartment Owners, Property Managers, On-Site & Maintenance Personnel
Are You Leaving Money on the Table? By Cliff Hockley CCIM President, Bluestone & Hockley Real Estate Services
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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. 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
Experts on Buying & Selling
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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 re-
placing 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 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-refund-
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able 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. 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 Continued on page 3
Tips for Rental Housing Owners
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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. Professional Publishing, Inc PO Box 30327 Portland, OR 97294-3327
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
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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, re-
alistic 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, Continued on page 4 Get Social With Rental Housing Journals
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RENTAL HOUSING JOURNAL COLORADO
Money on the Table ..continued from front page is the key to managing long term rental increases. Tenants will not be 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 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 in-
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creases 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. Understand 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
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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 could have agreed on rent increase 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. 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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Rental Housing journal Colorado • March 2014
RENTAL HOUSING JOURNAL COLORADO
Experts ..continued from front page 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. RHJ: What about buying? What words of wisdom do you have for prospective investor when they are 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. 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. 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.
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 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 VALLEY, METRO, ARIZONA directly by phone at 971-717-6332 or email greg@hfore.com. For details about apartment listings and services visit Joseph Chaplik is President of Jowww.hfore.com. seph Bernard Investment Real Estate. Joseph Bernard Investment Real Estate is headquartered in Portland and has offices in Washington Arizona. TheyAug, Oct, Dec Feb,andApr, Jun, consistently complete more apartment transactions annually than any other Oregon firm. www.josephbernard.net
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Rental Housing journal Colorado • March 2014
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Tips for Owners ...continued from front page
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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 insurance 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
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Rental Housing journal Colorado • March 2014