Arizona Rental Housing Journal April 2014 by Professional Publishing, Inc

Rental Housing Journal Arizona

April 2014 - Vol. 6 Issue 4 7. Dear Maintenance Men:

2. Understanding the Financial Music

8. Shoptalk

3. How the Internet of Things (IOT) Will Change Property Security and Monitoring

11. Exit Strategy Pt. II: Repositioning Your Real Estate Assets to Simplify Your Life

5. Three More Ways to Fill Those Vacancies

12. Storm Damage: Rights and Remedies

6. Become A Daily Learner… Today! by Ernest F. Oriente

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Oh No, Not Again! By Alan Langston Executive Director AZREIA

ent rates aren’t increasing nearly as fast as the price of existing single family homes in Arizona, especially Greater Phoenix. The price an investor has to pay to add an additional property to their portfolio is much closer to a retail price and is rising. It is difficult to predict price and if you try to predict price out into the future, you will be wrong far more often than you will be right. So, while price is “expected” to remain flat for a period of at least a few months, it is difficult to know for sure. We know is it is much more expensive to acquire a property than it was last year, the year before that and the year before that, and the year before that. The issue? When is history going to repeat itself for the rental property owner? Okay, I’ve kind of talked in circles. Here is what I’m getting at. For much of Arizona’s history, rental property rates did not fall into line with much of the country and the standard ratio of rents equaling 1% of the property value didn’t apply here. Tons of rental property was bought using high levels of leverage. Investors counted on the property appreciating and bought rental Continued on page 4 Professional Publishing Inc. PO Box 6244, Beaverton, OR 97007

New Rules for Raising Capital for Real Estate Investments By Darrel Dickson ApartmentsForSale.com

rowd funding rules for real estate changed recently and with the available technology the landscape for raising funds for real estate investments in the future will be changed. The Jobs act created an entirely new exemption from registration of the securities act which will permit companies to publicly offer and sell up to a million dollars in securities over 12 months without needing to register. There are restrictions and individual investors annual income or net worth less than one hundred thousand dollars may invest no more than the greater of $2000 or 5% of his or her annual income or net worth. If his or her income or net worth is higher than $100,000 he or she may invest no more than 10% of annual income or net worth and never more than hundred thousand dollars. A new type of broker known as a funnel portal must be used to facilitate the sale. The funnel portal will be required to register with the SEC and other organizations and to confirm the investors satisfy the investment requirements. Companies that use the crowd funding process will have to file with the SEC. Certain information of the operating companies involved in raising funds will need to be provided to the SEC: such as the business plan description, company’s capital

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structure, and intended use of the proceeds, audited financial statements will be required for offerings of more than $500,000. The Offering Company will need to file ongoing reports with the SEC based on rules yet to be determined by the SEC Crowd funding is an interesting new opportunity for syndicators to raise capital for real estate investments. Real estate operators will be able to raise capital online from groups of investors in an automated way Real estate investments typically have been illiquid. Investors have plenty of opportunities to invest in stocks and bonds but when it comes to actually access private real estate deals the process in the past has been

difficult for private investors to participate. Crowd funding will change all of that. Crowd funding eliminates the barriers that are typically associated with real estate investing such as having the time and expertise, and knowledge to invest can make investing in real estate a challenge. But pulling your money together through crowd funding you can access investment opportunities that otherwise would not be available to a busy professional to manage a property by themselves. You can have others with the knowledge and experience and the time to manage your real estate investments. In the near future, I foresee that you have Continued on page 5

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Understanding the Financial Music By Greg Burckle, USA Mortgage

t’s a given that real estate is cyclic – and knowing as much as possible about these cycles can be a significant help in maximizing values or perhaps, avoiding a disaster. In general, the four phases of every cycle are: Recession, Recovery, Expansion and Oversupply. Knowing where you are in the cycle is critical as we all found out in the fall of 2008 when commercial values fell off the table. Looking at the cycles in terms of “financing” provides further insight into the cycles and should help investors appreciate the current opportunities and predict when the music will again stop – and it will. To provide clarity – let’s take a look at the past. Just before “Recession” – Watch for this to Return At the height of the market, banks were lending to proforma numbers at 80+% of cost (since cost was always value!). Rates were ok or good but never great. Terms were 30 year amortization with three, five, or seven year fixed terms. Loan prepayments, when they existed, were reasonable and negotiable in many

cases. Large loans came from multiple government and commercial lenders. Doctors and lawyers were some of the best clients. Recession – the Day the Music Died This was ugly and few anticipated the economic collapse. In many cases, the deal was about to close and the title company had the signed documents. Title called the bank for funding and found the bank had been closed; permanently; gone under; kaput! No funding, no deal, no one got what they wanted. The music died. Music Off After the collapse we essentially had 100% down (aka cash) deals. Banks might lend 50% loan to value (value being what the last foreclosure indicated) and prices plunged into the abyss. I Hear the Music So here we are six years later and it might be faint, but I hear music. Clearly the worst is over. We are back on the upswing again. Bank balance sheets are getting better. Bad loans are virtually gone. Large loans are being done by government agencies and the smaller banks have an increased appetite for lending. Banks

want to lend again and must to make a profit. Maybe they will lend 60%, 65% or even 70% today with OK terms. Prepay penalties are not so good – but Ok for longer hold periods. I hear music that says we will be seeing 80% financing for small apartments, I hear music that says, no or small prepayment penalties. Current rates are pretty good – change that – they are really good. I have not heard of a bad appraisal in 3-6 months. Yes it’s harder to qualify, yes the appraisal is still an issue, but the music is starting to play. Apartment Owners Opportunities While the Music Plays If you own an apartment community, you are taking a deep breath. With banks back in the picture, capitalization rates have dropped and your property may be worth more than you think. Your vacancy is down, your income is up and you survived! Congratulations! But what do you do next? You have choices; what’s your risk tolerance? • Refinance; take the money and buy more apartments, let’s ride this wave up with gusto. • Sell the current apartments (you have earned that money haven’t you) and buy a larger place in a

better area with less headaches (different headaches at least). • Keep the current apartments and sell them to yourself (aka refinance). After all you and mama need a vacation and you could use some tax free money to do a little work on the place. The tenants are friends so let’s just stay with what we know. • Sell this place and get out of Dodge. You paid the price, you earned the money. Goodbye. So what should I do now? Stop, think, and listen to the music. This is the 4th month that the Rental Housing Journal has allowed us to provide an article on the metro Phoenix Apartment market. For the April issue, I asked my friend, Greg Burckle to give us some insight into apartment financing in relation to the real estate cycle. Greg has an uncanny ability to understand the investor’s needs and find the best lending institution for the property being purchased or refinanced. Jim Kasten, CCIM – Owner / Designated Broker Kasten Long Commercial Group (www.KLCommercialGroup.com 602 677 0655).

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How the Internet of Things (IOT) Will Change Property Security and Monitoring Wireless sensors are attractive to property managers because there’s no need to pay expensive monthly monitoring fees or to be subject to false alarm charges from the police. Once the sensor is purchased and installed, it connects to the property’s WiFi to transmit notifications. Soon, devices will be able to connect via

By: Adam Justice, Grid Connect Rental property owners and managers are always looking for ways to provide value to renters without incurring large expenses that lead to an increase in lease rates. Security is one area that managers can beef up without breaking the bank thanks to a new technology trend called the Internet of Things (IOT). The ability to connect new types of devices, such as sensors, to the Internet is core to the concept of IOT. It has created a new portable and lowcost security solution.

(IOT) refers to uniquely identifiable objects and their virtual representations in an Internet-like structure.

Traditional security without the monthly fees Using a wireless sensor, property managers can easily secure and monitor areas that should be off limits, such as maintenance areas, equipment closets and the rental office. These wireless sensors can be installed easily and configured to notify managers if an area is accessed. These notifications can be by email, phone call, text or even Twitter, depending on the manager’s preferences.

the local cel-lular network, creating even more flexibility for property managers. These sensors are especially useful for businesses without an electrical outlet be-cause they run on batteries. This is helpful for pools and other open areas with specified hours. Managers can be notified if someone is in a restricted area during off-hours, thereby limiting the

property’s liability. Monitoring preferences can be very specific. For example, the rental office sensor could be programmed only to provide notifications during non-office hours. Sensors in these types of areas can be programmed to only provide notifications during “closed” hours. Sensor portability keeps costs down Since sensors are portable, property managers can install security sensors in va-cant units and move them when the unit is leased. This can ensure that there are not breakins to vacant units, possibly causing thousands of dollars in damage and other headaches. Property managers who are looking for a low-cost way to increase renter value can install the sensors in individual rental units and allow renters to program the sensor with their own specific preferences. For example, renters could set up a security or motion sensor and program it to monitor only when they are at work. This gives renters peace of mind that their unit is secure without incurring monthly fees and provides a significant selling advantage

for the property. Beyond security Wireless sensors can be used for more than security. Since water damage can be very expensive to repair if not detected early, it is a big concern in multi-tenant units, as well as vacation condos. A small leak on the top floor of an apartment building can quickly spread to units on other floors. Wireless sensors can monitor for the presence of water, then quickly notify the building manager or maintenance supervisor, minimizing the damage. Wireless sensors also can be used to monitor temperature swings in units, which helps managers have better control over heating and cooling bills. About the author: Adam Justice is vice president of Grid Connect, a manufacturer of the ConnectSense product line of wireless sensors. He can be reached at ad-am@connectsense.com or on Twitter @adamjustice.

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Not Again! ...continued from front page property calculating breakeven on the cash flow taking into account rents and tax benefits. Quite a few were even happy with a negative cash flow because they “knew” the property would continue to appreciate. I’m not passing judgment – just stating what happened far too often prior to the housing crash. Here’s the problem. We benefited from a “best of both worlds” scenario. Significantly undervalued property, increasing demand for rental property and rising rent rates (rents

didn’t go down in the crash). Housing prices have appreciated tremendously in the past three years, from a bottom in the Fall of 2011 until now. Odds are, after taking a breather for a few months, they will head back up again, but at a more realistic rate. So, how do you buy a property as a rental, pay today’s prices and produce the cash flow without a significant down payment? You don’t. So, what’s an investor to do? A few options. This isn’t advice or even suggestion – just some (not

all) possible options or ideas. I’m not even saying they are good ones. • Become active in your local real estate investor association and learn how to acquire property well below market value in all types of markets. There is a reason transactional investors belong to REIAs. There are always REOS and Short Sales. There are always motivated sellers and there always will be. You have to know how to find them, structure the deal, negotiate the deal and complete the transaction. • Refinance or finance some of the properties you bought for pennies on the dollar and paid cash for the last few years. Use the cash out to provide additional down payment dollars to expand your portfolio of properties and ensure reasonable positive cash flow on all properties. • Take the risk. Buy with little to no cash flow and hope appreciation continues. You might be able to convince yourself that at least someone is “buying the property for me”, so at minimum my equity is increasing. • Expand your portfolio to markets that present more favorable conditions. Owning rental property in a different state has its own inherent problems, but there are

always challenges. • Hope rent rates begin to increase at a much higher rate. Demand has continued to be strong for rentals. There will need to be economic improvement. I didn’t intend the tone of this article to be so gloomy. Facts are, we have an excellent rental market across Arizona. My real intent for writing on this subject was to be sure investors seriously considered the ramification of buying income property without good positive cash flow. I really don’t want to see a return to the days when this wasn’t the case for far too many transactions. It continues to appear that we will have strong demand for rental property for the reasons we have communicated in previous articles. That is a very good thing. What isn’t as certain is, will the business case for providing additional rental housing continue to be as strong? Lately, I have seen more investment dollars waiting on the sidelines for the right deal than I have in years. This is likely due to less available supply, but also to the business case of the acquisition. Smarter investing, 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.

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Three More Ways to Fill Those Vacancies

New Rules

...continued from front page

By: by Marc Courtenay PropertyManager.com a Service of AppFolio

ere are three ideas from my upcoming article series titled “50 Ways to Fill Your Vacancies”. Like you, I’m fired up about the idea of having as many marketing tools as possible to manage properties effectively. As a property owner and/or manager, you may already have many successful ways to quickly fill your vacancies with well-qualified new residents. My hope is that I can add a long list of intuitive and counter-intuitive suggestions that have worked and will keep on working. So here are three more suggestions that can insure that the rental income stream keeps flowing to your clients and yourself. 1. Go to the restaurants you frequent the most. Ask the owner or manager to allow you to display a tastefully crafted “take one” box at the check-out counter or hostess table. Make sure it clearly displays the message that a gift certificate for that restaurant will be given to the indi-

vidual who takes one of the special display cards and gives it to a prospect who becomes a resident. A variation of this is to tell the restaurant owner, manager or hostess that if someone rents one of your units, you’ll buy a gift certificate from the restaurant and give it to a

new patron who has never been to their restaurant. It will generate a fresh batch of regular customer for the restaurant and a repetitive source of referrals to you. You’ll be amazed how many restaurants will love the idea as they’re always looking for ...continued on page 9

an opportunity to browse different investments from your computer looking at opportunities in different metropolitan markets throughout the country. Real estate is becoming more efficient with sites like Zillow and others providing incredible amounts of data to real estate investors. You are going to see more efficiency in the private real estate investment market. Because of the change in security laws more investors are going to have crowd funding opportunities and it is going to open up opportunities for not only accredited investors but also with the jobs act crowd funding rules will see retail investors participating in the future. Before September 23, 2013 it was illegal for real estate investment operators to publicly advertise that the private company was seeking funding. The new rule change allowed operators throughout their fundraising efforts to market to persons on Facebook or twitter or other social media outlets. Different real estate investment websites will be developed to raise money on line in the near future. It will be fun to watch which companies become the leaders in this new frontier of raising capital for real estate investments.

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Rental Housing Journal Arizona • April 2014

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Become A Daily Learner…Today!

by Ernest F. Oriente, The Coach {Article #213…since 1995}

ur economy and your success in the property management industry is based on knowledge. Gone are the days when you could graduate from high school or college and never again pick up a textbook or attend another class. Ready or not, your lifetime of learning has already begun, no matter how reluctant or scared you might be. In addition, sophisticated technology, business acquisitions, new products and significant regional or national competitors will continue to require your full attention. Ready to become a daily learner? Let’s get started! Staying current with your profession: Begin your learning journey by subscribing and reading the industry publications, E-newsletters, blogs and LinkedIn groups that serve the property management industry, such as your local apartment association magazine, UNITS Magazine, The Journal of Property Management and Multi-Housing News…just to name a few. These are great waysfor keeping you in touch with local, state, regional and national trends. Next, consider investing the time and money to upgrade your professional certifications as this says to your peers and colleagues that you are serious about your property management career. In addition, research the one day seminars delivered by Career Track {800-780-8476} or SkillPath {800-873-7545}, as their programs can advance your specific business skills in a short amount of time and with minimal investment. Lastly, search the Internet for industry websites such as MultifamilyBiz [ http://www.multifamilybiz.com ] that serve the property management industry and register for their E-mail newsletters, read their industry news or participate in one of their live and dynamic webcasts, to experience an engaging form of distance learning. Tip From The Coach: Start each year by reserving the property management seminars and trade show workshops you will be attending. Then, schedule your company meetings and training that is planned and budgeted. Now, look at

your calendar and reserve the time and dates you are going to schedule for the professional and personal learning that will best serve you. More specifically, consider budgeting $50-$150 per month for your continued education. This small investment today will pay large dividends in the near and distant future…The Coach says so! Using technology: Technology has created many new time saving, cost-efficient ways to enhance our professional and personal lives. But of course, you need to learn how to best maximize your technology tools to receive the highest return on your learning investment. Let’s start with the basics. Learn and master the software used by your property management company. Learn the shortcuts for creating professional looking correspondence, presentations or proposals. Understand the power techniques for using a spreadsheet or preparing your property budgets. Research social media websites and related software as powerful marketing engines. Tip From The Coach: Start with what you already know about technology tools and take it one step further. Not 10 or 100 steps further…just one step at a time. If you push yourself too far or too fast, you might be in a situation where you will not have the resources to succeed. Instead, take one step at a time, master your new skill, then take another step. For many, hiring a private business trainer or coach, can rapidly accelerate your learning curve around technology. For others, just reading two or three pages of their software user manual each day, is enough to gain incremental knowledge with technology tools. Helping your team to learn: In addition to your daily learning, it will be equally important that your property management team continues to grow and learn at a comfortable pace. Property management companies around the world are finding a direct connection between learning and company performance. In fact, many companies are now measuring

both performance goals and learning goals on an individual basis. These learning goals are focused on areas such as: resident satisfaction, increased asset performance, maximizing technology and team-building skills. Tip From The Coach: When helping your team with their learning skills, ask them to help you answer this question, “Learning __________ will help me __________ so that I can __________.” Asking this question is key, because the people that work for your property management company will be eager to learn if they have a hand in structuring their own industry and professional training. Remember, whenever you include your team in the planning of their future, you raise their motivation to succeed and reduce turnover at the same time. In closing, today’s success comes from yesterday’s learning, while tomorrow’s success comes from what we learn today. 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 you a free invitation to be on a PowerHour conference call.

Author’s note: Ernest F. Oriente, a business coach/trainer since 1995 [31,800 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 Olympic-town…Park City, Utah, at 435-615-8486, by E-mail ernest@powerhour.com or visit their website: www.powerhour.com

Rental Housing Journal Arizona • April 2014

RENTAL HOUSING JOURNAL ARIZONA

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

Dear Maintenance Men: How can I add more storage to my utilitarian type bathrooms? The residents complain that they need to store their toilet paper in the hallway! Please list a few suggestions on what to do? Robert Dear Robert: It does seem bathrooms are sometimes designed as an afterthought. Sink, toilet, bath and that is it. A modern bathroom will take into consideration the need for storage, electrical devises, personal hygiene etc. The first item that comes to mind is installing a bath sink cabinet. An old style cabinet might only have a set of doors under the sink. We find this is not adequate and a cabinet should have drawers along with access to under the sink. The drawers can store hair dryers, and all manner of personal bath items. A unique system we like utilizes the space between the studs in the wall. Cabinet doors or mirrors can be used to cover storage in the walls. The wall storage is perfect for toilet paper, rolled up towels, tooth brushes, and most oth-

er small items. Install multiple towel racks on the back of the bathroom door for additional towel storage. The space above the toilet can easily accommodate an overhead cabinet for larger items. Reversing the swing of the bathroom door from inward to outward will greatly increase the usable room and make the bathroom appear larger. Dear Maintenance Men: My building is clad in aluminum siding and it is looking very dull. The siding has its original finish and I was wondering if it can be painted? If so what is the procedure to insure a long lasting finish? Joann Dear Joann: Painting aluminum siding is not a problem. Good prep work will be time well spent for a long lasting finish. The biggest issue with old aluminum siding is the chalking of the surface. To check for chalking, rub the siding with your hand and if your hand picks up any color, that is chalking. Paint will not stick to the chalk. Check at any home improvement center for aluminum siding cleaner or use TSP Cleaner and scrub

the siding using a soap bucket and a brush. Don’t forget to remove any mold or mildew as well. An alternative is to use a pressure washer to clean the siding. The pressure washer is much faster, but be careful about water intrusion. Be sure to rinse the siding with clear water to remove any cleaning chemicals before painting. We recommend using a good quality oil based primer if the siding is bare aluminum. (Acrylic primers may react with bare aluminum over time.) After priming or if the siding has been previously painted, top coat with an acrylic paint and only primer the bald spots. Use a satin finish for best results. Dear Maintenance Men: I hear the term “Aging in Place” and wondered as an apartment owner, what I could do to market to this growing segment of our population? What should I do to make my property more “Aging in Place” friendly? Sanford Dear Sanford: Baby Boomers are 25 percent of the population and the first of the Boomers turned 65 in 2011 and the

last will turn 65 in 2029. We heard on the radio the other day that 85 is now the new 75 and so on down the line. That is a large healthy aging group! They are not going to go quietly into a nursing home which means as apartment owners & managers; we need to prepare for this group. Aging in place means bigger showers with wider doors, taller toilets, grab bars and bath sinks that will accommodate wheelchairs. This does not mean turning our units into institutions; there are many stylish accommodations to fit a number of needs. For example a grab bar capable of supporting 250 pounds does not need to look like it came out of a hospital. Grab bars come in a variety colors and designs. Many will double as towel bars and be virtually invisible to their primary purpose unless needed. A larger shower stall also will look opulent and practical at the same time. Replace old two handle faucets in the kitchen and bathroom for single handle or touch faucets. Consider installing anti-skid flooring in the bathroom and tub/shower area. A few other items might be contrasting color edging for the counter ...continued from page 12

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he value of setting up appointments from telephone inquiries has been clearly established. Yet, it seems that the number of callers being converted into visitors is not always producing a high percentage of rentals. A recent question submitted by a manager of a large apartment community may

shed some light on this subject: Q: I know it’s important to set appointments from my phone contacts, but does it really matter who ends up giving a tour when the client arrives? I manage and lease out of a busy office and we all work together, but sometimes I wonder if we would

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have a higher closing ratio if each of us helped our own clients. What do you think? I think there is a lot to be said for the environment of “teamwork” that you have created. Those managers who work side by side with their leasing staffs, will keep them motivated and excited about renting apartments. However, in working too closely as a team when it comes to leasing, some of the “personalized” service can be lost. If a prospective renter is helped by someone else when they arrive for an appointment, it can give them the impression that their initial contact wasn’t genuinely interested in helping them. Also, any “rapport” that was personally created by you, or another member of your staff over the phone, is lost if they have to “start from scratch” with someone else. Not to mention the inconvenience to the client if they have to repeat their needs and preferences all over again to someone else. Many times it’s the personality, sales skills and knowledge of the employee on the phone that “sells” the client on making an appointment in

the first place. Once a relationship is established in the initial phone contact, the prospective renter is expecting to meet with the same person when they arrive at the community. It can be a real let down to learn that the employee they connected with from the phone contact is unavailable. Worse yet, no one else in the office even knew they were coming in. For leasing consultants whose primary role is renting apartments, careful planning and scheduling can make it possible to keep most of the appointments they set. For managers and other office staff who end up answering the phone, but who are not available to keep appointments, it might be best to resist answering the phone on the days you are unavailable. This will give your leasing staff the ultimate opportunity to sell and close the deal. Remember: Working as a team means some players will spend time “on the bench” while other members of the team are out on the field. If you assemble your team before the day begins, then you can decide which employees are best equipped and available ...continued on page 9

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Rental Housing Journal Arizona • April 2014

RENTAL HOUSING JOURNAL ARIZONA

Three More Ways ...continued from page 5 new ways to increase their clientel. 2. It may seem old-fashioned in this age of digital, mobile media, but creating a full-page, colorful, glossy hand-out that lists all of the benefits, accoutrements, and features of your available rental still works. Make sure you show some photos of how nice the vacant unit looks, and when you take the photo “stage it” with a few perky pieces of furniture or wall furnishings. List any extra features like a new dishwasher or free Wi-Fi and provide information about the local area, bus routes, schools, laundry and conveniently popular shopping venue. You’ll be providing a valuable service that few property managers take the time to offer. Let your prospects take your hand-out and tell them to call you if they have any questions.

Ask for their contact info so you can follow up. 3. Ask your current residents, clients and “happy campers” for a glowing testimonial of what it’s like to be a resident in one of your wellmaintained and thoughtfully managed buildings. Let your prospects know ahead of time how much current and past residents appreciated your services. Ask for as many testimonials as possible, and use them to attract more owner-clients as well as prospective renters to fill your vacancies. There you have three more ideas on how to fill your vacancies as fast as possible. Keep in mind that if you haven’t tried these ideas lately, you can’t objectively know why they work or how they work. These ideas derive from my prop-

Shoptalk erty manager colleagues and my own experiences. Together we have many decades of management and marketing expertise and that’s why I literally have at least 50 of these tried and tested tools. They’re based on the principles that if you’re willing to do what few property managers are willing to do, you’ll have the kind of success that few will enjoy and experience. Also, your clients and residents don’t really care how much you know until they know how much you care. So get busy and show them!

...continued from page 8 to lease apartments that day. With your strongest players on the front line and everyone “passing the ball” (clients) to them, you will score more rentals every time! If you have a question or concern that you would like to see addressed next month, please ASK THE SECRET SHOPPER by making contact via e-mail. Your questions, comments and suggestions are ALWAYS welcome! ASK THE SECRET SHOPPER Provided by: SHOPTALK SERVICE EVALUATIONS Phone: 425-424-8870 E-mail: joyce@shoptalkservice.com Web site: www.shoptalkservice.com Copyright Shoptalk Service Evaluations

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Exit Strategy

Pt. II: Repositioning Your Real Estate Assets to Simplify Your Life Cliff Hockley, President Bluestone & Hockley Real Estate Services

s Baby Boomers age, they realize that things may need to change with how they handle their real estate investments. First of all, they may be tired of dealing with the details that are involved with the day to day operations of real estate investments; secondly, they start having to come to grips with their mortality and may not want their spouse or family to have to deal with those investments. Finally they may be concerned about the tax implications involved with selling their assets; inasmuch as the direct sale of a property could cost forty percent or more of the capital return. Making decisions regarding the future of existing real estate investments is much like selling a business. Typically, most real estate investors spend a lifetime [40 – 50] years building a retirement vehicle, poured blood, sweat and tears into their investments to build a legacy. They are now faced with decisions on how to maintain a sufficient cash flow during their lifetime and transitioning their assets either to their spouse, children, grandchildren or charitable organizations. There are many different directions baby boomers can choose to reposition their real estate investments to prepare for retirement and / or to reduce the time and energy needed to manage them. These include: 1. Selling their real estate investments 2. Family succession planning 3. Selling to partners 4. Contributing to a charitable organization 5. Repositioning your portfolio 6. Using a 1031 exchange to invest in an UPREIT (Umbrella Partnership

Rental Housing Journal Arizona • April 2014

Real Estate Investment Trust) 7. Tenant in Common Investments 8. Hiring a property manager Sale of the real estate investments Typically when investors choose to sell their real estate holdings, they are faced with the following costs, taxes and possible prepayment penalties: 1. Federal Taxes Federal capital gains: 20% Federal Medicare tax: 3.8% 2. State capital gains (depends on state) 9.9% (Oregon) 13.3% ( California) RED FLAG: Depending on the number of 1031exchanges involved with their holdings, the state’s revenue departments (tax collectors) will come after the investor to recapture taxes one may have put off paying in the past closings. Should you die before the the state gets its share, the beneficiaries basis in the properties received from the decedents estate is valued at the properties Fair Market Value at date of death or 6 months later. (The estate has an option regarding the valuation date.) 3. Real Estate Transfer Taxes** (state and county) See below for examples: **Washington State collects 1.28% and Clark County collects .5%, equaling a total of 1.78% of the sale of transfer of ownership of real property. **Washington County, Oregon: The current rate is $1.00 per $1,000.00 of consideration. The transfer tax in Washington County is customarily divided equally between the seller and the purchaser. ** Go to this chart to decode the transfer taxes in California. http:// www. chicagotitletransfertax.c om/

funds via a 1031 exchange. 5. Federal depreciation recapture, which is 25% of the depreciation written down over the life of the ownership of the property. RED FLAG This could be a huge number depending on the number of 1031 exchanges one has closed to get to the final exit sale since with each 1031 the property basis is typically adjusted , though you can avoid those taxes at death. Upon death, property basis is “stepped up” to Fair Market Value at date of death or 6 months later. 6. Prepayment Penalties: Many properties have underlying financing issues the most important being the prepayment penalty. With Commercial Mortgage Backed Securities (CMBS) loans, an investor may have yield maintenance clauses and with other loans there may be percentage payoff between 1 and 5 percent of the outstanding loan balance, which might last over ten years. These penalties are a significant issue and need to be calculated into the costs of sale as one makes the critical decisions to sell and exit the real estate investment marketplace. These

significant expense hits (Tax and prepayment penalties) frequently make real estate investors uneasy, so they tend to look at other ways to exit or reposition their real estate holdings. Family Succession Many investors dream of leaving their hard built real estate “nest egg” to their families. Unfortunately there are many challenges with this plan. Most important is that one will need to find a family member who is mature enough, has an interest and wants to learn about the family’s existing real estate investments. This typically proves very difficult to do. Real estate investors tend to forget that they made many mistakes building their portfolios. They expect the next generation to make the “right” decisions, just like they did. This is an unrealistic expectation. The next generation needs to be mentored and educated; patiently, over time. Decisions need to be discussed. An investor might request their successor(s) to take real estate and/ or finance classes to prepare them for their future decision making. They should be involved in the baContinued on page 13

4. Local city and county business taxes Note: (in the City of Portland, Multnomah County, Oregon, the sale of a property could trigger a 2.2% city tax plus a 1.45% county tax, if one does not reinvest the

RENTAL HOUSING JOURNAL ARIZONA

Storm Damage: Rights and Remedies By Andrew Hull

the diminution in the fair rental value of the dwelling unit.

s we all found last summer, Arizona is not immune from storm damage. When these unforeseen occurrences happen, what are the rights and remedies of landlords and residents? The Arizona Residential Landlord and Tenant act addresses this question. A.R.S. Section § 33-1366 states:

B. If the rental agreement is terminated, the landlord shall return all security recoverable under A.R.S. § 33-1321. Accounting for rent in the event of termination or apportionment is to occur as of the date of the tenant vacates all or part of the dwelling unit.

A. If the dwelling unit or premises are damaged or destroyed by fire or casualty to an extent that enjoyment of the dwelling unit is substantially impaired, the tenant may do either of the following:

What is casualty damage? Normally, it is the result of some unexpected event in which neither the landlord nor tenant has any control. Examples include a fire, earthquake, tornado, or hurricane. Your lease should require that your tenants have renters’ insurance to cover their personal property. Failure to have such insurance is possible negligence on the part of the renter. The landlord, however, should make every reasonable effort to have the repairs completed as quickly as possible. A.R.S. Section § 33-1366 is one of the few parts of the landlord-tenant law that allows the resident to 1.) Either break the lease and move or 2.) Deduct from his or her rent the

1. Immediately vacate the premises and notify the landlord in writing within fourteen days thereafter his intention to terminate the rental agreement, in which case the rental agreement terminates as the date of vacating. 2. If continued occupancy is lawful, vacate any part of the dwelling unit rendered unusable by the fire or casualty, in which case the tenant’s liability for rent is reduced in proportion to

diminished rental value of the apartment. What remedy the tenant may use depends on the extent of the damage. If the apartment is a total loss, the resident may vacate and is only responsible for rent up to the date he or she leaves. The landlord may have to return rent paid for the period after the resident vacates plus all refundable deposits. If the premises are partially livable but the tenant is trying to deduct rent for portions he or she claims are unusable, the landlord immediately should inspect the apartment. Document the extent of the diminished rental value with photographs and witnesses.

Maintenance Men ...continued from page 7

tops along with rounded edge and corners. Replace all door knobs with lever handles for ease of use. This is a small sample of the things you can do to stay competitive in a growing market while not making changes that younger generations would objectionable. 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

Rental Housing Journal Arizona • April 2014

RENTAL HOUSING JOURNAL ARIZONA

Exit Strategy Pt. II ...continued from page 11 sics: Property inspections, financial reviews, attorney meetings, refinancing and purchasing decisions. Finally they should draft long and short term plans on paper to insure a record of their plans. Use this process as a road map for family leadership. Remember that over time one needs to relinquish control, if the transition is going to be successful. This does not mean relinquishing control of your income, just planning and decision making. Yes, mistakes will be made. Consider relinquishing control a small step at a time so that your successor(s) can learn in a controlled environment. At the same time, if there are numerous “stakeholders”, children, grandchildren, nieces and nephews, create a reporting relationship that is reasonable. Decide who is going to make the decisions. Create dispute resolution processes. Don’t let disagreements in the family ruin your investments. Have a plan B in place in case your next generation manager gets ill and can no longer serve in his or her role. Most important is that you, as the owner of the investments, understand the next generation’s needs. In every generation there is most likely one of the following: • A thrifty spender

• A very risk oriented investor • A very sophisticated investor • Someone that does not get along with the others • Someone who needs cash to pay for the kids college • Someone who needs cash to retire or make their house payment • A child with a disability or a mental illness (a conservator needs to be appointed to protect their interest) • Someone that has no interest in real estate at all and is willing to opt out of all decision making • A son or daughter in law that have different ideas from the rest of the family. One needs to plan ahead with your estate and real estate attorney to build a Trust structure that addresses the needs of the next generation. Remember also that at some point in time (with the exception of those of you that have property in Alaska) that these real estate trusts that you build, will not last into perpetuity. Note: Whichever option you choose, have a designated person to manage your real estate in case you are hit by a car or suddenly become incapacitated.]

• A very conservative investor Sale to partners

This is the easiest one to accomplish, if you planned ahead. In other words you added a buy sell agreement into your other partnership agreements. Of course this is dependent on how your partnership was formed. If one has planned this in advance, you most likely crafted a partnership agreement or more likely formed an LLC. In that agreement you addressed the terms of your partnership. If on the other hand you had been operating on love and trust alone, now is the time to draft those agreements and spell out everything, including how to value the real estate assets once you exit. You will want to sit down with your CPA and attorney to review the tax implications of this decision and plan out if it is possible to defer or avoid some of the income taxes on the sale of your shares of the property. Note: Minority partner discount (fractional interest): Sales or partnership interests are generally valued at Fair Market Value (FMV). The FMV of a third party arms-length transaction may include a discount for owning a non-controlling minority interest. That is a matter between the buyer and seller. The IRS has accepted up to 30% value discounts in the valuation of fractional interests. Transfers to trusts for estate plan-

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Exit Strategy Pt. II ...continued from page 13 ning purposes may also be valued at a lesser amount – minority discount. The issue here is reduction of the gift/estate tax upon demise of the property owner. Contribute to Charitable Organization You can always donate all or part of your properties to a charity via a charitable remainder trust (CRT). The advantage to doing this is that the size of the tax deduction is based on the then current market value of the property, not its cost basis. If structured properly, the CRT can pay you an annuity (income for the balance of your life, or for a specified term, and then distributes what is left over to the charity.) As a tax exempt entity, the CRT can sell the real estate donated tax free and reinvest the proceeds in income producing assets (that are typically more liquid than real estate). You do have to pay income taxes on the distributions you receive, but each payment may include a combination of ordinary income, capital gain and tax free return of principal. The charity can also buy an annuity in your name from the proceeds of the sale of the real estate investment. Critical tax potholes you need to sidestep: 1. Substantiate the value with an appraisal as part of the donation process. Don’t just estimate a value; the IRS might disallow the donation. For properties over $500,000 you must attach an appraisal to your tax return. 2. If the charity sells the property within three years of the donation ( most do in the first year), and the property sells for less than the appraised value, the IRS will most likely challenge your deduction. 3. Donating properties that are free and clear is a cleaner process than donating one with a mortgage still in place. According to Attorney Peter Lennington of the Lennington Law firm PLLC, St Paul Minnesota, you might end up recognizing taxable income for some of the outstanding mortgage’s value. 4. Don’t prearrange the sale of the property before it is donated to the charity. If you do the IRS will disallow the donation and you will have to pay capital gains taxes. A simple summary on charitable real estate donations is available at:

http://lennington.com/global_pictures/ Shouldyoudonaterealestatetocharity. pdf or go to the Oregon Community Foundation’s Website at http:// www.oregoncf.org/donors/ give. Giving real estate to a charity is not easy. Many charities are not geared to accepting real estate; they want cash or stocks etc. If they take real estate they have to figure out how to manage it and sell it, not always an easy task. Most charities prefer donations without a mortgage because of the complicated tax implications. It is not unusual to have a home donated to charity with a life estate attached also known as a “Gift of a Remainder Interest with a Life Estate”. This donation process takes time and has to be planned in advance. For more info see this link: http:// www.weikellaw.com/newsstory/ should-i-donate-my-housecharitypart- 4-donating-your-houseandreserving- life-estate. Repositioning your real estate portfolio One way to simplify your real estate portfolio is to reposition your assets. Assuming you have a multifamily portfolio, you might want to transition out of those assets and trade into quality triple net (NNN) investments, with longer term leases. There are tradeoffs in making this decision, primarily as the market changes you can typically adjust your rents with multifamily tenancies. Commercial long-term leases don’t have the same flexibility and the rents with national AAA tenant leased properties, which typically only increase 10% over a five year period with adjustments coming at the lease anniversary mark. On the other hand they are triple net leases and the tenants are picking up almost all of the costs in taking care of their buildings. Though it bears remembering that critical to a successful investment in a NNN property are a great location and a financially strong tenant. This may mean that you trade a higher yield for a lower yield but the benefit is a long term tenant and an easy monthly check with no midnight calls for maintenance. Note: Single tenant investments exist with medical, re-

tail, industrial and office tenancies. It pays to do some research before you decide on a tenant and an industry group. Use of 1031 exchange to an invest in an UPREIT (Umbrella Partnership Real Estate Investment Trust) Basically to take advantage of an UPREIT, you sell your property on the open market using a 1031 exchange and then using your 1031 proceeds you invest in a REIT. Then, by virtue of a 721 exchange, the assets are traded into shares of the REIT. It is possible to just trade your investment into a REIT, but that rarely happens because UPREITs want to be able to choose their own property focus.

• Allows diversification of real estate holdings (i.e., OP Unit Holders have an interest in a portfolio of properties instead of just one).

It looks like this: The first step is selling the relinquished property and structuring a 1031 Exchange. However, instead of searching for suitable replacement property, the investor identifies and acquires a fractional interest (tenant-in-common interest) in real estate that the REIT has already designated. This completes the 1031 Exchange portion of the transaction. The second step is to contribute the fractional interest into the operating partnership after a holding period of 12 to 24 months as part of a 721 Exchange (tax deferred contribution into a partnership). The investor receives an interest in the operating partnership (OP) in exchange for his or her contribution of the real estate and is now effectively part of the REIT. http://www.exeter1031.com/ article_upREIT_1031_721.aspx Benefits of an UPREIT The benefits of an UPREIT are numerous, most importantly they deliver a tax deferral strategy to the holder of the real estate. In trade for your property, you receive a return on your investment and someone else is managing it for you. The real estate investor just has to cash the quarterly check and does not have to pay capital gains on the sale of the real estate asset.

• Can provide professional management and expertise in capital markets.

To summarize an UPREIT: • Provides a viable tax deferral/ avoidance exit strategy to property owners facing significant capital gain tax liabilities on the sale of appreciated property with a low tax basis.

• Gives one potential to convert liquid‚ long-term assets (i.e.‚ real estate) into more saleable securities (i.e., OP Units → REIT Share → Cash). • Eliminates or reduces property management responsibilities or concerns. • Provides quarterly income distributions. • Provides potential to recognize unrealized gains as earnings.

• Avoids risk of negative cash flow. • Establishes estate simplification. • Allows the owner to dispose of property in a way that maximizes its value. • Can improve cash position through potential leveraging of OP Units. More information through this link: http://www.broadstone.com/ realestate- services/upreit/ UPREITs can help you restructure your real estate assets and make it easier to give away or inherit after your death. If structured correctly, ownership in UPREITS might not result in a taxable event until the shares are sold; however when doing business with another company you must carefully vet the strength of the company, its history and its future goals, as well as the experience of the officers running the REIT. Additionally, remember they are trying to make a buck as well. It is very important to understand all of the costs that are involved with investing with an UPREIT and the ups and downs of the stock market as well. Note: Fore more details regarding the definition of an UPREIT, see (http://www.exeter1031.com/ article_upREIT_1031_721.aspx) from the Exeter 1031 website ... continued on page 15

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Rental Housing Journal Arizona • April 2014

RENTAL HOUSING JOURNAL ARIZONA

Exit Strategy Pt. II ...continued from page 14 TIC investments: Tenant in common investments were a common real estate investment vehicle before the market downturn in 2008. Then the short term mortgages that many of them were financed with needed to be refinanced and financial institutions were loath to refinance, because vacancy rates had increased and income had declined. Many investors lost significant assets due to the so called “TIC Meltdown”. All was not as advertised and the SEC decided that these were securities and needed to be sold by stock brokers with securities licenses vs real estate agents. On the other hand, out of this challenge a few companies in Utah, Rockwell and Realty Net Advisors, decided that they could mitigate investment risk by taking investors 1031 returns and place then into NNN investments where no loan was needed. In other words 100 % of the purchase price for a single tenant investment came from 1031 proceeds that investors placed in the pool. They also focused on very small investments in the $1,000,000 range, possibly to avoid securities regulations. This means less risk for the investors, because the worst thing that could happen to the investors is the loss of the tenant, resulting in an empty building they have to retenant. They cannot lose the building to a financial institution since there is no loan in place. In addition, the TIC sponsors mitigate this risk, by only choosing high quality national tenants. They keep it simple. They collect the rent, charge a management fee, inspect the property and then send a check to the investor, {Note* There is no loan in this scenario so no mortgage to pay off, this helps with upside on the yield for the property.). Average returns are in the conservative but steady 5-7% range. This also means though that you don’t have help from Uncle Sam in this kind of transaction i.e. an interest expense write off. Additionally, in this kind of a transaction don’t get the benefit of leverage which could increase your returns. The downside is that you are in a type of a partnership and when you want to exit from this structure, you have to live by the TIC agreement. Basically in this structure, much like the UPREIT structure, you have ceded control of the investment to a third party. If the third party mismanages your property/ies, you may lose all of the return from your investment. For more on the downside risk see this link: Note: don’t forget that when you complete a 1031 exchange you also have to replace the debt, if any, you have in place in the replacement property. For more details follow these links: http:// www.securitieslawyersblog.com/2013 /10/30/ tenants-common/ www.realtynetadvisors.com/ www.rockwelltic. com/ Hire a property/asset manager Many investors hate spending money to have their properties managed, but a good property manager is worth his/ her weight in gold. Life Rental Housing Journal Arizona • April 2014

is simplified. You can travel, work and enjoy your family and not have to pay daily attention to your property, though you still need to be involved with your property. In preparing for retirement, you can have a property manager manage your assets for you and for the next generation as well. Annual or semiannual property inspections, reviewing financial reports and involvement in capital expense decisions are still on your required list of things to do. These are things that your spouse/ life companion can also do, should you be unable to due to an illness or other incapacity. If you have significant assets, you might hire an experienced real estate professional in the form of an asset manager who makes all of your decisions for you, from acquisition to disposition, from long range planning, to holding property managers accountable. They typically are paid a fee for services. In some cases banks have trust departments that also can manage properties for you either with their own staff or through the use of property managers; they would perform this in an asset management role, much as they manage stocks and bonds for their clients. Conclusion So how do you best protect yourself when you are ready to retire from active real estate investing? Which one of the exit strategies do you use? 1. Selling your real estate investments 2. Family succession planning 3. Selling to partners

earned money to protect the rest of the corpus. Seek out specialists in estate planning and real estate. I recommend that you do not have your employment attorney tell you what to do. The real estate attorney, who is an expert at evictions, is the wrong person. You need to talk to someone that understands all of the exit strategies. Interview and meet many people. If your gut tells you that you are over your head, trust your gut. You will find the answer that is right for you; it just may take some time! Plan ahead! Don’t let the tail wag the dog, understand all of the tax implications (estate tax and real estate capital gains taxes) first before you make a final decision. *The Richest Man in Babylon - The Success Secrets of the Ancients, by George S. Clason. Publisher - Signet / First published in 1926 Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company. Founded in 1972, Bluestone & Hockley’s staff totals nearly 110 employees, including 20 licensed brokers. The company’s property management division serves commercial buildings, apartments, condominium associations and houses in the Portland/Vancouver metro area, while the brokerage division facilitates both leasing and sales of investment properties throughout Oregon and Washing-

ton. Cliff earned a degree in Political Science from Claremont McKenna College and holds an MBA from Willamette University. He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM). Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM). Cliff is a member of the Institute of Real Estate Management and was named Certified Property Manager of the year in 2001 and 2003. Cliff is a frequent contributor to industry newsletters. Bluestone & Hockley offers customized brokerage, property and asset management, as well as maintenance services to property owners and investors throughout the Portland/Vancouver metro area. The company’s full-service approach benefits busy property owners and investors, who know they can count on Bluestone & Hockley for high quality real estate services start to finish.

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4. Contributing to a charitable organization 5. Repositioning your portfolio 6. Using a 1031 exchange to invest in an UPREIT (Umbrella Partnership Real Estate Investment Trust) 7. Tenant in Common Investments 8. Hiring a property manager In the end your own personal situation and personal preferences will dictate or influence your decisions. I always fall back on the thoughts of George S. Clason and his book published in 1926, The Richest Man in Babylon.* Some of his key points were as follows: “Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling. Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep. Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.” Bottom line is that you need to carefully investigate all of your investment strategies. You should hire advisors you trust. Hire experienced CPA’s, Attorneys, and real estate advisors. Spend some of that hard

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RENTAL HOUSING JOURNAL ARIZONA

Rental Housing Journal Arizona • April 2014