Arizona Rental Housing Journal - July 2015

Rental Housing Journal Arizona

July 2015 - Vol. 7 Issue 7

2. Are Businesses too Timid with their Growth Plans?

10. Ask the Secret Shopper 11. A Tax Strategy for Investment

3. Apartment Security, What Can You Do? 7. Dear Maintenance Men

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Landlord’s Liability

1Q15 Market Overview Multifamily Housing Update

By Andrew M. Hull

T

Payroll Job Summary Total Payrolls 1,896.4m Annual Change 56.8m (3.1%) 2015 Forecast 66.4m (3.6%) 2016 Forecast 82.9m (4.3%) 2017 Forecast 82.4m (4.1%) 2018 Forecast 79.6m (3.8%) Unemployment 4.9% (Apr.) (NSA) 1Q15 Payroll Trends and Forecast

Payroll job formation in the first quarter surged to the fastest pace since 2006 as Phoenix establishments hired at a 56,800-job, 3.1% annual rate, up from 4Q14’s 43,100job, 2.3% performance.

Construction, retail trade and employment service companies set the pace, adding workers at a 19,100 (4.9%) rate, 170% of 4Q14’’s 7,100-job advance.

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...continued on page 5

he Arizona Residential Landlord and Tenant Act imposes a legal responsibility on a landlord to control the conduct of his or her tenants. This applies to contact with the landlord, on-site employees, vendors and other renters at the apartment community – and in certain situations, to neighboring properties. In the 1993 case of Klimkowski vs. De La Torre, the Arizona Court of Appeals ruled that the landlord knew or should have known of the tenants’ recklessness with regard to gasoline and incendiary devices on the rental property. Therefore, the landlord was liable for damage caused by an explosion on the rental property. This article will review this case.

Normally, if a landlord receives a complaint regarding a resident, it comes from another resident at the property, the landlord would give the offender the appropriate legal notice to either cure the problem or continued on page 8

Housing Market Becoming More Favorable for Renters Than Buyers According To Latest Buy Vs. Rent Index

T

he latest national housing market index produced by Florida Atlantic University and Florida International University faculty indicates it is becoming more favorable for renters than buyers in terms of wealth accumulation.

The Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index attempts to answer one of the toughest questions American consumers face: Is it better to rent or buy a home in to-

day's housing market? The quarterly index is designed to signal whether current market conditions favor buying or renting a home in terms of wealth creation over a fixed holding period in a particular market relative to historical market conditions and alternative investment opportunities. It examines the entire housing market in the United States and isolates the markets of 23 key cities.

According to the latest BH&J In-

dex, as of the end of the first quarter of 2015, the housing market in the U.S. and all cities in the index are trending either closer to renting being the superior option or strictly favoring renting over purchasing a home.

Three cities (Dallas, Denver and Houston) are clearly in rent territory, with property pricing clearly outpacing rents, meaning buyers should continued on page 9

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RENTAL HOUSING JOURNAL ARIZONA

Are Businesses Too Timid with their Growth Plans?

Corporate Development Expert Says CEOs & Entrepreneurs Shouldn’t Sell Their Vision Short

V

ariety in business is generally good, but when it comes to profit and revenue, an entrepreneur’s expectations should be fairly singular – go big.

That’s according to business development expert Cameron Herold, who drove 1-800-GOT-JUNK’s growth from $2 million to $106 million in a handful of years. Otherwise, he says, you’re probably selling yourself short.

“If you’re a CEO or entrepreneur and you do not plan on doubling your profit and revenue within the next three years, you may be lacking focus,” says Herold, author of “Double Double” (www.DoubleDoubleBook.com).

“It’s within your grasp to increase your business drastically within a few years, but you need to make several smaller goals in order to do so. It all starts with a vivid vision.”

Herold discusses how to cultivate that vision.

• Get out of your office. A vision needs perspective, and if you’re waiting for inspiration to strike at your desk or the boardroom conference table, you’re bound to get dragged into the daily routine. You need to allow your mind to drift into the future, but at the office you will get

pulled back into specific constraints.

Go somewhere that allows you to forget metrics, daily tasks and obligations. Great locations to set your mind free include the ocean, a forest or a place in the mountains. Or, simply lie down in a hammock in your backyard and start sketching ideas.

• Turn off your computer. Computers are notorious for sucking you into the vortex of daily emails and tasks. Instead, put pen to paper.

There’s magic in just writing it all out by hand first.

“I got a sketchpad with unlined paper,” Herold says. “Initially, I

had trouble thinking abstractly because I’m so left-brained. I turned my sketchpad sideways, ‘landscape mode,’ and ideas for how my company would look in three years began coming to me.”

• Think “where” and not “how.” continued on page 10

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RENTAL HOUSING JOURNAL ARIZONA • July 2015

RENTAL HOUSING JOURNAL ARIZONA

Apartment Security, What Can You Do?

By Cliff Hockley and Heather Hill, Bluestone & Hockley Real Estate Services

P

roperty security is an aspect of property management operations often overlooked and not budgeted for. Properties typically need security for: transient removal, trespassing, illegal dumping, vandalism, theft, alarm response, illegal camping, and criminal issues on site (like drug dealing for example).

Property owners and managers can choose to implement a variety of strategies to improve property security.

Screening Property owners assume that onsite managers are responsible for property security. Many years ago we took over management of a low end mobile home park which had many drug dealers onsite (something we did not know when we agreed to manage the property.) The onsite manager and his wife were exceptionally large and had used their size to discourage obvious crime and keep the tenants in line. We were fortunate that the FBI and DEA arrested the worst tenants. In any case, once we took over management of

especially in the parking areas to discourage car theft or break-ins. To save energy, motion sensors can be installed that illuminate a space only when a large moving object is present. This has a dual benefit of scaring away trespassers and relieving tenants who might find constant lights too bright in their windows at night.

Overgrown landscaping can proCommunity Building Community organizing is an im- vide easy cover for criminals. Make portant tool for crime prevention. sure that bushes or trees don’t obOnsite managers can work with scure property windows, entries, neighborhood police officers to fos- and/or lighting systems. When ter positive relationships with law planting bushes near access points enforcement at the property. Events like windows, choose thorny yet orsuch as the National Night Out draw namental bushes such as holly, hawattention to police partnerships that thorn, or roses as these are more difcan get communities aware of their ficult to climb over. These plants can role in making neighborhoods safer. also serve as a natural fence. If the This is not an easy task. It will take a property has a problem with passlot of work to get community mem- through traffic, for example, corner bers involved. A good onsite man- properties or those adjacent to a reager who understands the benefits tail area where pedestrians might of community building will put the choose to cut through the property extra effort into this and help ten- to shorten the walk to another street, ants get to know each other, through you can plant thorny bushes to dismonthly parties, events and newslet- courage this practice. Criminals find properties with only one in and out ters. point of access less desirable than those with multiple escape routes.

Lighting and Landscaping Issues Crime rarely takes place in open These steps require the cooperation areas under spotlights. Make sure of the owners, the managers and the the property has adequate lighting landscape team. and that all lamps work at night, Cameras As the cost of technology has plummeted, it has become easier to install security cameras and DVRs to track the data. Many commercial and some residential buildings have cameras to observe access and help security personnel and property managers track activity at their properties twenty-four hours a day on their smart phones.

At one of our commercial properties we were having a problem with transients sleeping in the entryway of a vacant space. We installed a camera with remote access. This enabled the property manager to catch the transients in the act and call local police to arrest them. We did press charges. The security camera worked. the property, we were able to use improved tenant screening techniques to select better tenants and create a safer environment. More importantly, we were able to reposition the property (over a period of seven years) to enable the ownership group to sell the property for a profit.

v i si t u s at www.rentalhousingjournal.com

Like good lighting, even the very presence of security cameras can deter crime, however owners and managers should keep in mind that they have limited capabilities when it comes to helping convict criminals after a crime has taken place. The quality of camera images vary greatly, and without adequate lighting, some are virtually useless for night imaging. Most exterior cameras are effective for collecting evidence such as a car make and model and a general height, clothing, build or sex of a perpetrator, but fail to capture essential details such as license plates and facial features.

Also, external cameras must be maintained like any other structure on the property that weathers the elements. Water, dirt, dust and insects can find their way into the camera housing, obscuring the view. Make sure any external cameras are clean to maximize their value. Again, just as the resolution differs from camera to camera, the quality of the housing differs as well. Vendors who specialize in electronic security can advise you on the best options for your situation.

Access Controls Some buildings are designed with common area central access, which allows for the use of access controls.

Typically, tenants are issued cards, fobs, special keys or codes that make it hard for non-tenants to access buildings. Tenants can then allow access to their guests through the use of audio or video communication to their front or back door entries.

Like camera systems, access control systems require some upkeep to sustain their effectiveness. Property managers should understand their role and responsibilities to control access in their buildings. First, cards/ fobs, like keys, should be tracked and accounted for. Order new cards or fobs from the same vendor to make sure they are not duplicated. Missing cards/fobs should be immediately removed from the system, and alcontinued on page 9

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Market Overview ...continued from 1 Expansion among other service industries also was robust, accounting for 33,600 (3.7%) new jobs over the year, a 15% increase from the prior quarter.

Seasonally-adjusted data were not entirely consistent. This series reported a 9,100-job net gain in the January- March period, down from 4Q14’s nine-year high 24,500- job performance. Moreover, the data show net cuts in March and April totaling -8,200 jobs; representing the first sequential month losses recorded since 2010.

The RCR econometric forecasting equation for Phoenix employs U.S. payroll and U.S. and metro personal income growth as independent variables to achieve a 97.8% adjusted R2. The model produces a very optimistic projection, foreseeing sustained growth in the 3%-4% annual range throughout the forecast, yielding annual job growth in the 70,000-85,000 range.

RCR have a downward logical bias to this forecast as it would require home construction growth that is unlikely in today’s climate

Occupancy Rate Summary Occupancy Rate 95.4% (Reis) RED 50 Rank 28th Annual Chg. (Reis) +0.6% RCR YE15 Forecast 94.2% RCR YE16 Forecast 93.6% RCR YE17 Forecast 93.5% RCR YE18 Forecast 92.8% 1Q15 Absorption and Occupancy Rate Trends Tenant demand for Phoenix apartment space during the first quarter was the strongest since 2011 as renters net leased a total of 1,761 units, up from 1,616 and 1,557 units in the prior and year-earlier quarters, respectively. Supply delivered to market (848 units) was less than onehalf of supply, resulting in a 30 basis point sequential increase in metro occupancy to 95.6%, a 26-year series record high.

Axiometrics surveys of 641 larger stabilized same-store properties recorded a 94.9% average occupancy rate, representing 80 and 140 bps sequential and year-on-year increases, respectively. Class-A properties reported the highest average occupancy (95.2%) for the second consecutive quarter, followed by the

class-B (95.1%) and class-C (94.0%) segments. Class-C notched the largest sequential quarter advance, rising 150 bps from the 4Q14 level.

Mesa and Scottsdale submarkets reported the highest occupancy rates (96%+), and Central Phoenix (91.2%) the lowest.

RCR find that 95% of historic occupied stock growth changes can be explained by an equation using U.S. payroll and metro inventory growth and metro vacancy as independent variables. The demand forecast is constructive but projected supply overwhelms it, sending occupancy down 260 bps by 2018. We have a downward logical bias for supply though, suggesting a better outcome is likely.

Effective Rent Summary Mean Rent (Reis) Annual Change RED 50 Rent Change Rank RCR YE15 Forecast RCR YE16 Forecast RCR YE17 Forecast RCR YE18 Forecast

$773 3.9% 18th 3.9% 3.4% 3.2% 3.3%

1Q15 Effective Rent Trends

alone as the only segment to record a sequential y-o-y acceleration: rent growth increased from 5.1%. Tempe (7.1%-9.0%) and Northeast Phoenix (8.7%) submarkets notched the fastest gains; S. Scottsdale (3.5%) and East Mesa (4.0%) the slowest.

Fueled by strong job and home price growth, RCR’s rent model foresees robust rent growth in Phoenix’s future, despite heavy supply (a negative variable). The forecasts gains in the 3% to 4% range through 2019, yielding a 3.9% compound annual rate, ranked 9th among the RED 46.

Trade & Return Summary $5mm+ / 80-unit+ 27 Sales Approx. Proceeds $624mm Avg. Cap Rate 5.2% (FNM) Avg. Price/Unit $89,864 Expected Total Re7.1% turn RED 46 ETR Rank 23rd RED 46 RAI Rank 16th Risk-adjusted Index 5.66 1Q15 Property Markets and Total Returns

Investors continued to feast on Effective rents surged sequential- Valley properties, acquiring 27 assets ly by $8 (1.0%) to $773, according to valued at $5 million or more for total Reis, raising the year-on-year com- proceeds of $623.8mm, down moderparison from 3.5% during 4Q14 to ately from 31 and 41 closings in 4Q14 3.9%, fastest recorded since 2007. The and 3Q14, respectively, for sales of performance raised Phoenix to 18th $735.3mm and $1,192,5mm. The rank among the RED 50 on this basis, average price per unit paid increased up from 26th position in the prior sequentially, however, rising from quarter. Much of the impetus came $76,303 during 4Q to $89,864, but from the class-A sector where asking remained well below the recent high rents increased 4.4% y-o-y, more than level of $98,140 observed during twice the 2.1% advance recorded 3Q14.

Sellers were skewed toward indiamong class-B/C assets.

VALLEY, METRO, ARIZONA Axiometrics same-store data viduals, merchant builders and uncovered a stronger 6.3% average REITs. Buyers consisted predomiy-o-y rent increase, down slightly nately of real estate investment funds from 4Q14’s post-recession high of and a few private equity players.

6.4%. Class-B properties posted the Cap rates for class-A properties fell largest gain (6.5%), followed by in the low– to mid-5% area. Class-B assetsOct, tradedDec about 50 bps behind class-A (6.3%)Feb, and class-C Apr,(5.4%).

Jun,ByAug, contrast, class-C properties stood continued on page 5

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VALLEY, METRO, ARIZONA APT

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Market Overview ...continued from 4 “A” levels. Class-C trades gravitated toward a 6.25% - 7.5% range.

In light of the strong demand for Phoenix properties expressed by buyers, RCR elected to reduce the generic cap rate assumption 30 basis points to 5.5%. At this level, our model estimates that an investor in metro assets would expect to earn a 7.1% 5-year, unlevered total return, 20 bps above the RED 46 mean and 23rd rank among the group. Equation forecast error is relatively low, boosting riskadjusted returns to 16th place in the peer group rankings.

MARKET OVERVIEW | 1Q15 | PHOENIX, ARIZONA MARKET MARKET OVERVIEW OVERVIEW || 1Q15 1Q15 || PHOENIX, PHOENIX, ARIZONA ARIZONA MARKET OVERVIEW | 1Q15 | PHOENIX, ARIZONA Phoenix Effective Rent Trends Sources:Phoenix Reis, Inc., Axiometrics RCR Forecast Effective Rentand Trends

Phoenix Effective Rent Trends

MARKET OVERVIEW | 1Q15 | PHOENIX, ARIZONA MARKET OVERVIEW | 1Q15 | PHOENIX, ARIZONA MARKET OVERVIEW | 1Q15 | PHOENIX, ARIZONA Phoenix Occupancy Rate Trends Source: Reis History, RCR Forecasts

97% 96%

95.6% Source:

97% 96% 95%

95.6%

Phoenix Occupancy Rate Trends

RED 46 AVERAGE PHOENIX (REIS/RCR) RED 46 AVERAGE PHOENIX (REIS/RCR) RED 46 AVERAGE PHOENIX (REIS/RCR)

Reis History, RCR Forecasts

94.2% Phoenix Occupancy Rate Trends

95.6%

93.6% Source: Reis History, RCR Forecasts

96% 95% 94% 97% 95% 94% 93%

94.2%

95% 93% 92% 91%

2013

2014

92.8%

93.5% RED 46 AVERAGE 92.8% PHOENIX 93.5% (REIS/RCR)

93.6%

92.8%

94.2% 2016f

2015f

93.6% 2017f

93% 91% 2012

2013

2014

2015f

2016f

2017f

92% 2012

2013

2014

2015f 2016fand Supply Trends 2017f Phoenix Absorption

2018f 93.5% 2018f

2019f

2018f

2019f

2018f

2019f

92.8% 2019f

97% 95% 94% 93%

92.3% 92.3%

96% 94% 93% 92% 95% 93%

92% 92.3% 91% 1Q20f 94% 92% 91%

1Q20f93% 92.3% 91% 1Q20f92%

Units (T12 Months) Units (T12 Months) Units (T12 Months) Units (T12 Months)

AverageAverage Cap Rate Average Cap CapCap Rate Average RateRate

4,000 5,000 6,000 8,000 3,000 4,000 5,000 7,000 2,000 3,000 4,000 6,000 1,000 2,000 3,000 5,0000 1,000 2,000 4,0002012 1,0000 3,000 02012 2,000 2012 1,000 0 7.5% 2012 7.5% 7.0%

91%

Source: Reis History, RCR Forecasts

Phoenix Absorption Trends 2015f 2016f and Supply2017f

1Q20f

Source: Reis History, RCR Forecasts

COMPLETIONS ABSORPTIONS COMPLETIONS ABSORPTIONS COMPLETIONS

2014

2015f

2016f

2015f

2013

2014

2015f

2017f

2016f

2018f

2019f

1Q20F

2017f

2018f

2019f

1Q20F

Phoenix2016f Cap Rate Trends 2017f

2018f

2019f

1Q20F

2018fPHOENIX2019f

1Q20F

Source: eFannie.com, RCR Calculations

Phoenix Cap Rate Trends

7.5% 6.5% 7.0% 7.0% 6.5% 5.1% 5.5% 6.0% 6.5% 6.0% 5.1% 5.5% 7.5% 5.5% 6.0% 5.1% 5.5%

6.1% 6.1%

5.0% 5.5% 7.0%

5.5% 5.0% 6.5% 4.5% 1Q12 2Q12 5.0% 4.5% 5.1% 5.5% 6.0% 1Q12 2Q12 4.5% 5.5% 1Q12 2Q12 5.0%

2015f

Phoenix CapMOU Rate NTA Trends 2016f I 2017f N R EGI ON

6.1%

3Q12

6.1% MOU NTA I N R EGI ON

Phoenix Cap MOU Rate Trends 6.1% NTA I N R EGI ON

5.7% 5.7% 5.7%

4Q12 5.7%

6.2%

Source: eFannie.com, RCR Calculations

6.2% 6.2%

5.1%

1Q13

2Q13

3Q12

4Q12

1Q13 6.2%

3Q12

4Q12

1Q13

6.1%

MOU NTA I N R EGI ON

5.2%

5.4%

5.2%

5.1%

3Q13

5.1%

5.2%

2Q13

3Q13

2Q13

5.4%

4Q13

3Q13

5.4%

6.1%

1Q14

Ascent Papago (Cent. Phoenix South) Property NamePark (Submarket)

Trillium Deer Valley/Trillium No. (Deer Valley) AscentLeaf Papago ParkPark (Cent.

Phoenix Green at Dana (East Mesa) South) 44 Monroe (Central Phoenix South) Trillium Deer Valley/Trillium No. (Deer Valley) SkySong Apartments (South Scottsdale) Green Leaf at Dana Park (East Mesa) Property Name (Submarket) 44 Monroe (Central Phoenix South) SkySong Apartments (South Scottsdale) Green Leaf at Dana (East Mesa)South) Ascent Papago Park Park (Cent.

Phoenix SkySongDeer Apartments (South No. Scottsdale) Trillium Valley/Trillium (Deer Valley)

5.5%

PHOENIX 5.5% 5.5%

2Q14

5.5%

5.5% 5.5%

3.9%

2015f 2015f 2015f

2016f 2016f 2016f

2017f 2017f 2015fPhoenix Home 2016f Price Trends 2017f

3Q14

5.5% 4Q14

4Q14

4Q13

1Q14

2Q14

3Q14

4Q14

3Q14

4Q14

A++ / HR (2008) Property Class/ B+/A– (2006/12) A+ / MR (2013) B- / GLR (1987) Type A++ / (Constr.)

HR (2008)

17-Apr-2015 Approx.

Date of 27-Mar-2015 11-Jun-2015 31-May-2015 Transaction 17-Apr-2015

$50.7 Total Price / $91.2 $67.5 $22.1 (in millions) $50.7

27-Mar-2015 24-Feb-2015 31-May-2015

11-Jun-2015 31-May-2015 24-Feb-2015 11-Jun-2015 27-Mar-2015

2018f 2018f 2018f

2019f 2019f 2019f

1Q20f 1Q20f 1% 1Q20f

Source: S&P Case-Shiller FHFA Home Price Indices and RCR Phoenix and Home Price Trends

Phoenix Home Price Trends

Source: S&P Case-Shiller and FHFA Home Price Indices and RCR Source: S&P Case-Shiller and FHFA Home Price Indices and RCR

Phoenix Home Price Trends

Source: S&P Case-Shiller and FHFA Home Price Indices and RCR

4.8% 4.8% 4.8% 4.8% U.S. FHFA HPI U.S. U.S. FHFA FHFA HPI HPI

2013 2014 2013 2014 HPI 2013 U.S. FHFA 2014 2013

2014

2015f 2015f 2015f 2015f

5.1% 5.1% 5.1%

10.1% 10.1% 10.1% 10.1%

10.6% 10.6% 10.6% 10.6%

5.1%

5.1%

PHOENIX FHFA HPI PHOENIX PHOENIX FHFA FHFA HPI HPI

2016f

5.1% 5.1% 5.1%

2017f

2016f 2017f PHOENIX 2016f FHFA HPI 2017f 2016f

2017f

1.6% 1.6% 1.6%

PHOENIX S&P C-S HPI 1.6% PHOENIX PHOENIX S&P S&P C-S C-S HPI HPI

25% 25% 25% 20% 20% 25% 20% 15% 15% 20% 15% 10% 15% 10% 10% 5% 5% 10% 5% 0% 0% 5% 0% -5% -5% 0% -5%

2018f 2019f 1Q20f 2018f PHOENIX 2019f S&P 2018f 2019fC-S HPI 1Q20f 1Q20f -5% 2018f 2019f 1Q20f

5% 5% 5% 4% 5% 4% 4% 3% 4% 3% 3% 2% 3% 2% 2% 1% 2% 1% 1% 0% 1% 0% 0% 2012 2012 0% 2012

US GDP GROWTH JOB US GROWTH US GDP GDPGROWTH GROWTH METRO JOB GROWTH US JOB GROWTH US JOB GROWTH US GDP GROWTH METRO JOB GROWTH METRO GROWTH US JOB JOB GROWTH METRO JOB GROWTH

Source: BLS, BEAEmployment Data, RCR Forecasts Phoenix PhoenixPayroll Payroll EmploymentTrends Trends Source: BLS, BEA Data, RCR Forecasts

Source: BLS, BEA Data, RCR Forecasts 4.4% Phoenix Payroll Employment Trends

4.0% 4.0% 4.0%

4.4% Source: BLS, BEA Data, RCR Forecasts 4.4%

3.1% 3.1% 3.1%

4.0%

4.4%

3.1%

3.9% 3.9% 3.9%

3.9% 3.9% 3.9%

3.9%

3.9%

2019f 2019f 2019f

2013 2013 2013

2014 2014 2014

2015f 2015f 2015f

2016f 2016f 2016f

2017f 2017f 2017f

2018f 2018f 2018f

2013

2014

2015f

2016f

2017f

2018f

2019f

5% 5% 5% 4% 5% 4% 4% 4.0% 3% 4% 3% 3% 2% 3% 2% 2% 1% 2% 1% 1% 0% 1% 1Q20f 0% 0% 1Q20f 1Q20f 0%

4.0% 4.0% 4.0%

1Q20f

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Any views expressed herein areorsubject to change without notice duethird to market conditions and other factors. reliance upon this information isis solely and exclusively at your own risk.

Please consult your own counsel, accountant or other advisor regarding your reliance upon this information solely and exclusively at your own risk.

Please consult your own counsel, accountant or other advisor regarding mation situation. containedAny herein beexpressed used or considered as an offer or a solicitation of andue offer to participate in any particular transaction or strategy.your Any specific views herein are subject to change without notice to market conditions and other factors. specific views expressed are subjectatto change notice due to market and other or factors. reliancesituation. upon thisAny information is solelyherein and exclusively your own without risk. Please consult your own conditions counsel, accountant other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.

$91.2 $36.2 $22.1

$67.5 $22.1 $36.2 $67.5 $91.2

2Q14

Price / per unit Price / $134,148 per unit Price / $143,849 $134,148 per unit $275,272

$143,849 $134,148 $99,550 $275,272 Price / $143,849 $207,692 $99,550 per unit $275,272 $207,692 $99,550 $134,148

RED Capital Research | June 2015 RED Capital Research | June 2015

5.2% 5.2% 5.2%

1Q15 1Q15

5.2%

1Q15

1Q15

Estimated Cap Rate Estimated 5.1% Cap Rate Estimated 4.9% 5.1% Cap Rate 4.6% / 5.8% pf

4.9% 5.1% 5.5% 4.6% / 5.8% pf Estimated 4.9% 5.1% / 5.7% pf Cap5.5% 4.6% / Rate 5.8% pf 5.1% / 5.7% pf 5.5% 5.1%

$207,692 $143,849

5.1%4.9% / 5.7% pf

$275,272

4.6% / 5.8% pf

44 Monroe (Central Phoenix South)

A++RED / HRCapital (2008)Research 17-Apr-2015 | June 2015

$50.7

Green Leaf at Dana Park (East Mesa)

B- / GLR (1987) 31-May-2015 RED Capital Research | June 2015 A+ / MR (2013) 11-Jun-2015

$22.1

$99,550

5.5%

$67.5

$207,692

5.1% / 5.7% pf

SkySong Apartments (South Scottsdale)

3.9%

5.5%

2Q14

(in millions) Total Price / (in$36.2 millions) Total Price / $91.2 $36.2 (in$50.7 millions)

A+ / MR (2013) B(1987) A- / GLR LR (2007) A+ / MR (2013) B+/A– (2006/12)

5.5%

5.5%

1Q14

Transaction Approx. Date of 24-Feb-2015 Transaction Approx.

Date of 27-Mar-2015 24-Feb-2015 Transaction 17-Apr-2015

B+/A– (2006/12) LR (2007) B-A-/ /GLR (1987)

PHOENIX

5.5%

4Q13

Type (Constr.)

Property Class/ A/ LR(Constr.)

(2007) Type Property Class/ B+/A– (2006/12) A/ LR (2007) Type (Constr.)

A++ / HR (2008)

NOTABLE TRANSACTIONS Trillium Deer Valley/Trillium No. (Deer Valley)

Ascent Papago Park (Cent. Phoenix South) Property Name (Submarket) Notable Transactions 44 Monroe (Central Phoenix South)

3.9% 3.9% 3.9%

RED Capital Research | June 2015

PHOENIX

5.5% 3Q14

NOTABLE TRANSACTIONS 5.1% 5.2% 5.4% 4.5% NOTABLE TRANSACTIONS 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 Property Class/ Approx. Date of Total Price / NOTABLE TRANSACTIONS Property Name (Submarket)

PHOENIX (REIS/RCR)

3.9% 3.9% 3.9%

RED Capital Research | June 2015

Source: eFannie.com, RCR Calculations Source: eFannie.com, RCR Calculations

6.1%

RED 46 AVERAGE

Phoenix Absorption and Supply Trends

2014

2014

7% 7% 7% 6% 6% 7% PHOENIX AXIOMETRICS SAME-STORE 6% 5% 3.7% 5% 6% 5% 3.3% 3.7% 3.3% 3.4% 3.7% 4% 5% 4% 3.3% 3.3% 3.4% 4% 3.3% 3.3% 3.7% 3% 3.4% 3% 4% 3.3% 3.3% 3% 3.4% 2% 2% 3% 2% 1% 1% 2% 2017f 2018f 2019f 1Q20f 1%

PHOENIX PHOENIX Sources: Reis,(REIS/RCR) Inc., Axiometrics and RCR Forecast PHOENIX (REIS/RCR) PHOENIX AXIOMETRICS AXIOMETRICS SAME-STORE SAME-STORE

continued on page 6

Source: Reis History, RCR Forecasts

2013

2013

25% 25% 25% 20% 20% 25% 20% 15% 15% 20% 15% 10% 15% 10% 10% 5% 5% 10% 5% 0% 0% 5% 0% -5% -5% 0% 2012 -5% 2012 -5% 2012

2012

ABSORPTIONS COMPLETIONS

2013

2014

Sources: Reis, Inc., Axiometrics and RCR Forecast Sources: Reis, (REIS/RCR) Inc., Axiometrics and RCR Forecast PHOENIX Phoenix Effective Rent Trends PHOENIX AXIOMETRICS SAME-STORE

RED 46 AVERAGE RED RED 46 46 AVERAGE AVERAGE

Phoenix Payroll Employment Trends

96% 95% 94%

Phoenix Absorption and Supply Trends

2013 2014 ABSORPTIONS

2013

97% 96% 95%

Source: Reis History, RCR Forecasts

91% 8,000 2012 7,000 8,000 6,000 7,000 8,000 5,000 6,000 7,000

2012

2012

97% 96%

93.5%

93.6%

94.2%

95.6%

96% 94% 93% 92% 94% 92% 91% 2012

97%

YoYYoY Growth Growth Trend Trend Growth Trend YoYYoY Growth Trend

Average Occupancy Average Occupancy Average Occupancy Average Occupancy

Phoenix Occupancy Rate Trends

97%

2014 2014 2014

YoYYoY Rent Rent Trend Trend Rent Trend YoYYoY Rent Trend

Source: Reis History, RCR Forecasts

MARKET OVERVIEW | 1Q15 | PHOENIX, ARIZONA

2013 2013 2013

YoYGrowth YoY Growth Growth Trend Trend YoY Trend YoY Growth Trend

Daniel J. Hogan Director of Research djhogan@redcapitalgroup.com +1.614.857.1416 office +1.800.837.5100 toll free

7% 7% 7% 6% 6% 7% 6% 5% 5% 6% 5% 4% 5% 4% 4% 3% 3% 4% 3% 2% 2% 3% 2% 1% 1% 2% 2012 1% 2012 1% 2012

RED Capital Research | June 2015

RED Capital Research | June 2015

myitzchaki@MSYLaw.com

RENTAL HOUSING JOURNAL ARIZONA • July 2015

5

East Mesa

$745

Northeast Phoenix $765

Glendale South

$615

Paradise$636 Valley 3.4% Peoria /$863 Sun City/ Surprise 1.4% South Mesa $581 3.4%

$726

Sunnyslope Physical Vacancy $755 West Mesa Change $721 1Q14

4.0%

Central Phoenix North

$897

6.1%

$891

3.0%

$669

4.4%

1Q15 2.8%

$647 5.6% $617 5.4% Change

5.2%-140 bps 3.4%-120 bps

$632

4.6%

2.4% -80 bps

6.0% 3.8%

-210 bps $744 2.9%

$773

1.6%

3.9%-130 bps

Peoria / Sun City/ Surprise $621

$633

1.8% Metro

Central Phoenix South

$711

$733

3.0%

Chandler / Gilbert

$859

$886

3.1%

$661

6.2%

2.0% 5.5%

Deer South Valley Scottsdale

$689

$716 $851

3.8%

$897

3.9%

3.4% 5.4%

East Mesa

$745

$765

2.7%

$891

2.0%

1.2%

$647 $863

Maryvale West Mesa

$562

$581 $617

North Scottsdale

$987

$1,045

5.9%

North Tempe

$813

$842

3.6%

Northeast Phoenix

$726

$755

4.0%

$744

Paradise Valley

$701

$721

Peoria / Sun City/ Surprise

$774

$803

South Mesa

$648

South Scottsdale South Tempe

3.7%

6.1%

4.4%

13.5%

2.0%

2.50%

3.7%

-110 bps 3.8%

35

-190 bps 4.5%

20

240 bps

3.9% 3.0%

-140 bps

4.4%

-120 bps

13.5%

45 40 30

4.50%

74.0%

4.2%

-110J. bpsHoga Daniel

3.3%

Director Research -120ofbps djhogan@redcapital -60 bps +1.614.857.1416 offi +1.800.837.5100 to

10

5.0%

4.4%

5 0

50 bps

2.7%

25 15

12.5%

Phoenix

Minimum Maximum Mean Median Values

0.449% 7.15% 3.48% 3.49% 10000

40

5.4%

8.3%

35 30

5.2%

3.7%

25 20

3.4%

3.8%

15 10

5 2.4%

4.5%

3.9%

5.0%

0

$773

4.50%

74.0%

12.5%

5.1%

45

$632 11%

10%

9%

8%

7%

6%

5%

$744

4.9% 2.4%

2.50%

$669

$617 4%

Metro

3%

West Mesa

$773

6.8%

5.6%

50

$891

$647

$632

3.4% 1.9%

Phoenix Compound Annual Rent Growth Distribution

50

-180 bps

-50 bps

Phoenix Compound Annual Rent Growth Distribution

$897

$847

Sunnyslope

3.4%

-80 bps

4.6%

10.7% 240 bps FOR MORE INFORMATION A

-50 bps 8.3%

6.2%

3.0%

5.1%

2.8% 5.4% 4.6% -80 bps FOR MORE2.9% INFORMATION ABOUT RED’S RESEARCH CA 3.8% 1.6% -130 bps

$661

$851

$669

3%

Metro

1.4%

-70 bps

11%

$850

8.0%

10%

Sunnyslope Goodyear / Avondale

-90 bps

5.2%

9%

3.4%

4.4%

8%

$636

7%

$615

5.3%

6%

Glendale South

$847

$803

5%

South Tempe

$648

4%

South Mesa

$774

8.1%

$851 3.7% $847 4.4%

11%

1Q15 $701

1Q14

2.0%-190 bps 5.4%240 bps

4.9%

10%

Paradise Valley

3.6%

2.8%-180 bps $617 3.8%-110 bps $744

9%

Submarket

South Tempe $842

6.2%

8%

Effective Rent

$813

4.0% -80 bps $647

7%

Northeast Phoenix

5.9%

1.2% 1.9%

6%

SUBMARKET TRENDS (REIS) North Tempe Submarket Trends (Reis)

South $1,045 Scottsdale

5%

North Scottsdale Market Overview ...continued from 5$987

4%

MARKET OVERVIEW | 1Q15 | PHOENIX, ARIZONA

$774 3.0% Metro $803 $648 6.8% $661

3%

Goodyear / Avondale $850 RENTAL H OUSING J OURNAL A RIZONA Maryvale $562

$726 2.0% Sunnyslope $755 $701 8.0% West Mesa $721

2.7%

4.6%

-50 bps

10.7%

240 bps

Daniel J. Hogan 4.2% 50 bps Phoenix

Minimum Maximum Mean Median Values

0.449% 7.15% 3.48% 3.49% 10000

Director of Research 2.7% -110 bps djhogan@redcapitalgroup.com 3.3% -120 bps +1.614.857.1416 office 4.4% -60 bps +1.800.837.5100 toll free

FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT: Phoenix Compound Annual Rent Growth Distribution 2.50%

13.5%

50

4.50%

74.0%

12.5%

45 40 35

Phoenix

30

Minimum Maximum Mean Median Values

Daniel J. Hogan 25 20 15

0.449% 7.15% 3.48% 3.49% 10000

10

Director of Research RED Capital Group, LLC  RED Mortgage Capi djhogan@redcapitalgroup.com FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT: 1 0 W e s t B r o a d S t r e e t , C o l u m b u +1.614.857.1416 office +1.800.837.5100 toll free Daniel J. Hogan 11%

9%

10%

8%

7%

6%

5%

4%

3%

5 0

Director of Research djhogan@redcapitalgroup.com +1.614.857.1416 office +1.800.837.5100 toll free

THE FACE OF LENDING

RED Capital Group, LLC  RED Mortgage Capital, LLC  RED Capital Markets, LLC (Membe 10 West Broad Street, Columbus, Ohio 43215

 redcapitalgr

© 2015 RED Capital Group, LLC

FACE THE FACE OFTHE LENDING

OF LENDING

RED Capital Group, LLC  RED Mortgage Capital, LLC  RED Capital Markets, LLC (Member FINRA/SIPC)  RED Capital Partners, LLC

RED Capital Group, LLC  RED Mortgage Capital, LLC  RED Capital Markets, LLC (Member FINRA/SIPC)  RED Capital Partners, LLC

10 West Broad Street, Columbus, Ohio 43215

 redcapitalgroup.com  +1.800.837.5100

1 0 W e s t B r o a d S t r e e t , C o©l2015 um u s Group, , OLLC hio 43215 REDbCapital

 redcapitalgroup.com  +1.800.837.5100

© 2015 RED Capital Group, LLC

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RENTAL HOUSING JOURNAL ARIZONA • July 2015

RENTAL HOUSING JOURNAL ARIZONA

Dear Maintenance Men:

By Jerry L'Ecuyer & Frank Alvarez

Dear Maintenance Men: We have been in drought conditions for a long time here in the West, however I keep hearing about the wet weather condition called “El Nino”. What is “El Nino” and how should I prepare my apartment building for its coming?

John Dear John: An El Niño is a weather pattern produced by unusually warm ocean temperatures in the Equatorial Pacific. The El Niño phenomenon is associated with extreme weather around the globe and in California it typically means a wet winter with higher than normal rain levels. The National Oceanic and Atmospheric Administration (NOAA) is predicting a 60 percent change that the El Niño conditions will continue all year.

So how do you prepare for El Niño? Inspect your building’s roofs, gutters, drains, flashing and trim overhanging trees. In other words, don’t wait for the wet season to find out your roof is in poor condition.

Get the work done now while it is dry and the roofing companies are not busy. Don’t forget about large trees

that hang over your roofs. In wet windy weather, they can cause a lot of damage to a roof if a limb breaks or a tree falls because of soggy soil.

Flat roofs are especially vulnerable to blocked scuppers and roof drains.

The backed up water will find the slightest weakness in any roof system and even cause a roof collapse.

Dear Maintenance Men: Pigeons are driving me crazy! I have tried everything to get rid of the pigeons that have taken over eaves and patios at my complex. I have used fake owls, high pitch sound devices, goop to give the pigeons sticky feet and spikes everywhere.

They just laugh at the spikes and walk and nest over them. Any advice will be welcome!

Jennifer Dear Jennifer: Although your situation is beyond this; the first line of defense is not letting pigeons get a foot hold at your property in the first place. Talk to your residents and make sure no one is feeding the pigeons! It sounds like you have tried most of the common antidotes for getting rid of established unwanted pigeon flocks. Getting rid of pigeons is a war of wills. If you give up, they will return. The key is to make them as un-

comfortable as possible and not stopping until they are gone. First thing to do is clean the area with bleach to remove any pigeon nesting smells and spraying any stubborn pigeons with a water hose over and over. If the area lends itself to be closed off, put up netting to keep the birds from entering the area. If the spikes are broken, replace with stronger ones.

Check at your local farm supply or the internet for stronger better quality spike strips. The area must be monitored constantly until the birds have found a new nesting area away from your building and remember, this is a daily battle if the campaign is to be successful.

Dear Maintenance Men: Drought or no drought, I have decided to ditch my lawn! I figure in the long term, getting rid of the grass will save me time and money with less watering and maintenance. What recommendation do you have to help me achieve my plan?

Dorothy Dear Dorothy: Creating a drought tolerant landscape is a great idea. As you mentioned, the drought tolerant landscape will cost you less money in water and will be easier to maintain.

The single greatest consumer of water in your landscape is the turf. Reduce the grass area to ease the burden on water. Xeriscaping is a term for a water conserving landscape.

Some of the benefits of Xeriscaping

is water saving, low maintenance, pesticide free, pollution free (no lawnmowers) and use of local native plants. You might want to consider using Ornamental grasses, as they are drought tolerant, look great and give your landscape a bit of vertical dimension. Succulents of course are great at conserving water. Flax and Delphiniums Iris are a few perennials to use. Marigolds, Mexican Sunflowers, Phlox and Vinca Passion are Annuals that will work well. As for shrubs, look at Japanese Black Pine, Mountain Currant, Sassafras, Honeysuckles etc. A good choice in trees are Acacia, Gray Birch, Monterey Cypress, Eucalyptus, Fig, Juniper Amur Maple to name a few. Check with your local nursery for what best suits your area as or climate. Be sure to provide good drainage and using plants native to your area are best.

Call Buffalo Maintenance, Inc for maintenance work or consultation.

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7

RENTAL HOUSING JOURNAL ARIZONA

Landlord Liability ...continued from page 1 move. If the individual fails to either correct the situation or move, the landlord would take the appropriate legal action.

But Klimkowski v. De La Torre adds another responsibility for the property managers to worry about.

In this case, the Arizona Court of Appeals had to decide whether the landlord should be liable for damages resulting from a nuisance created by one of his residents and brought to his attention by a neighboring property owner. And, despite this notice, the landlord continued to rent to the

offending individual on a month-tomonth basis. The court ruled that in this situation, the landlord may be held liable if a third party (the neighboring property owner) suffered damages as a result of the offending resident’s nuisance.

Key to the decision was that the landlord continued to rent to the resident beyond the expiration date of the lease and time period needed to terminate the lease.

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DETAILS OF CASE Let’s review the details of the case.

Klimkowski, the neighboring property owner, observed De La Torre’s renter storing a gas tank, paint thinner, tar paper and other flammable products near his property line. He also saw the renter’s children playing with cigarette lighters on various occasions.

The neighbor informed De La Torre of the situation and voiced his concern that the condition created a fire hazard to his property. Despite the warning DeLaTorre continued to rent to the individual without requiring any corrective actions.

Two months later, Klimkowski discovered the storage shed on De La Torre’s property burning. Before he could take any action, several explosions propelled burning items onto his property and burned him. He sued De La Torre for his injuries and damage to his property.

Even though fire officials could not pinpoint the cause of the fire, the court ruled that if the landlord had the power to remedy the nuisance but failed to do so, he or she could be held liable.

Further, continued the court, in Arizona, a landlord has the right to terminate a month-to-month lease at the end of each month with or without reason, provided the renter receives proper notice. Said the court:

The notice requirements can scarcely be said to be a serious barrier to the landlord exercising the power to abate a nuisance on his property if his tenant will not abate it himself or permit it to be abated by his landlord.

While the court only referenced the landlord’s ability to use a monthto-month termination notice, it also implied that the landlord could use a non-compliance notice.

In certain circumstances, it may be more appropriate to use a five-day health and safety or ten-day material non-compliance notice under A.R.S. § 33-1368(A). Additionally, an immediate material and irreparable breach notice is permissible for any situation that jeopardizes the health, safety or welfare of someone.

Andrew M. Hull Hull, Holliday & Holliday, PLC

RENTAL HOUSING JOURNAL ARIZONA • July 2015

RENTAL HOUSING JOURNAL ARIZONA

Becoming More Favorable ...continued from page 1 proceed with strong caution.

In contrast to the latest Standard & Poor's/Case-Shiller Home Price Indices, which recently reported a five percent year-over-year property appreciation rate, the BH&J Index suggests that potential purchasers in many cities around the U.S. should begin to bargain more aggressively.

"Potential buyers should be cognizant that 'the deals' are out of the marketplace and that it is essentially a tossup between rent and ownership as to which way will, on average, provide greater wealth accumulation," said Ken Johnson, Ph.D., a real estate economist who is one of the index's authors and an associate

dean of graduate programs and professor in FAU's College of Business.

"Miami, in particular, deserves attention as it has been trending toward rent territory for several reporting periods. In Miami, potential buyers should seek to bargain more aggressively."

Seven cities (Miami, Honolulu, Los Angeles, Pittsburgh, Portland, San Francisco and Seattle) are at or near the indifference point between ownership and renting. Here the spread between monthly rent payments and ownership payments appears to be at a point where neither ownership nor renting is statistically favored.

Apartment Security ...continued from page 3 ways either collect the card/fob from the tenant upon move-out or retire the card/fob from the system upon move out.

Though it takes more time and work, the most secure option is to make sure that cards/fobs are returned upon move-out and then reissued to the new tenant. By using this practice you have a general idea of how many fobs are needed for the building. If you find you are buying more fobs without retiring them, you may have an undeclared loss issue. Like computer systems, access systems have a limited amount of memory. Adding new codes without retiring any may cause the system to reach the limit requiring the purchase of added memory, which can be expensive.

The Police We encourage our property managers and tenants to call the police when faced with a security problem.

We do not want anyone to get injured by an angry tenant or a criminal. Unlike the strategies previously covered, the police not only discourage crime, they also document it on the public record through police reports and can help draw the local police department’s attention to the issues at the properties. Police presence can be very helpful in discouraging crime.

Sometimes, when budgets are tight or crime is rampant, the police departments don’t have time or staff to respond to suspicious activity. When all else fails, you may need to hire private security patrol services.

Private Security Patrol Services Security patrol services deliver uniformed visibility to discourage criminal behavior when police departments are not available.

The best security patrol companies staff trained and armed officers who wear body cameras to track the audio and video of every incident.

Their patrol vehicles are equipped with GPS and computer systems that allow them to take active notes for all properties, map locations of failed lighting systems, track parking RENTAL HOUSING JOURNAL ARIZONA • July 2015

Four cities (Chicago, Cincinnati, Cleveland and Detroit) remain in strong buy territory with scores that have historically favored wealth accumulation through home ownership.

The index conducts a "horse race" comparison between an individual that is buying a home and an individual that rents a similar quality home and reinvests all monies otherwise invested in homeownership.

Johnson's collaborators in this ongoing independent research are Eli Beracha, Ph.D., assistant professor in the T&S Hollo School of Real Estate at FIU, and William G. Hardin III, Ph.D., director of the T&S Hollo School of Real Estate at FIU's College of Business.

The index's results are standard-

ized between 1 and -1, with negative scores favoring ownership and positive scores favoring renting. The BH&J Index provides information on both the direction and health of varying housing markets, as well as collateral information for real estate professional, developers, lenders and housing policy makers.

The BH&J Index is published quarterly and is available online at http://business.fau.edu/buyvsrent.

Due to data availability and the time necessary to calculate the most current index values, the index is produced two months after the end of the quarter.

Florida Atlantic University

violations, and collect evidence that can be used in court if the property owner chooses to pursue legal proceedings.

Physical security companies offer services that include driving through properties and stationing overnight guards. These security patrol services typically check doors to make sure they are locked up, and respond to calls from on-site managers who request them to roust transients or help break up fights. Like the other strategies discussed, security patrol services deter criminal activity by being visible. Managers and owners can also post their signage at the property to deter criminals from cruising the property.

If you have an active drug dealing problem, onsite security can help protect the onsite manager. At a difficult property it might be almost impossible to recruit and hire a property manager without twenty-four hour armed and uniformed security.

Many years ago we were hired to manage a property that the city threatened to take over due to the numerous police calls there. We hired onsite security for two months, identified and evicted the problem tenants, and were able to turn the property around.

Summary Property security should never be overlooked by owners of investment properties. There are many strategies used to improve property security including thorough tenant screening, community building activities, adequate lighting, trim and effective landscaping, camera systems, access control systems, cooperation with the police and the hiring of private security patrols.

When properties have a pattern of crime, it makes sense for owners and property managers to review all of the resources that can help create a safer environment for all. Safer properties equate to lower tenant turnover and more profit for property owners. Safety should always be a component of a property operations plan.

9

RENTAL HOUSING JOURNAL ARIZONA

W

sk the Secret Shopper

ebster defines the word "objection" as: "A reason or argument presented in opposition, a feeling or expression of disapproval." He makes an objection sound negative. In reality, an objection from a prospective renter is a positive buying signal. It tells the leasing person that he or she is interested, but needs help figuring out the "details." A prospective renter who really isn't interested will not bother objecting to anything, but just

politely go through the motions of looking and then leave. Recently a question came up about overcoming objections when there doesn't seem to be a solution: Q: We don't have any "extras" at our community and our apartments don't even come with washers and dryers. How can I deal with objections that pertain to features and benefits that our community just doesn't have?

A: Having a thorough knowledge

of your community, the local neighborhood and also your competition will give you the ability to meet objections head on. This will also enable you to anticipate objections, and in some cases deal with them before your prospective renters bring them up.

If you are leasing at a smaller community with no recreational facilities and the majority of your prospective renters are seeking an exercise facility, then make an arrangement with a local gym or health club in order to obtain a discount membership for your residents. You could offer your neighborhood fitness center free advertising in your newsletter and/or new resident packet, in exchange for the discount. If you have limited storage space at your community, you could work out the same type of a deal with a public mini storage facility in your area.

If you are receiving objections or complaints about certain aspects of the apartment interior, then be honest about the situation and offer a solution that your prospective renter can live with. During a past apartment tour, I noticed the carpeting was not in great shape; it was clean, but had a worn appearance and a rather large, obvious stain right in the middle of the living room. While I expressed my delight over the size of the apartment and its other positive attributes, I let the leasing person know that I was disappointed in the condition of the carpet. I asked what could be done about it. The consultant was very straightforward and honest with me. She agreed that she would not want to live with that

stain either. However, they just did not have money in their budget at this time to do a carpet replacement.

As a solution, she offered to give me a $100 "carpet allowance." She told me I could use the money to buy an area rug that would match my furniture, and place it over the stain. She said, "I know it's not new carpet, but you will get a new rug and then you won't even know the stain is there."

When it comes to creatively overcoming objections, the challenge is to focus on what you can change, and not dwell on circumstances that are beyond your control. Maintaining a positive attitude and being realistic about what you honestly can and cannot offer will go a long way in earning the respect and trust of your prospective renters.

REMEMBER: Overcoming objections is the key to changing a prospective renter into a resident. HOW you creatively "turn the key" is entirely up to YOU! If you are interested in leasing training or have a question or concern that you would like to see addressed, please reach out to me via e-mail. Otherwise, please contact Jancyn for your employee evaluation needs: www.jancyn.com ASK THE SECRET SHOPPER Provided by: Joyce (Kirby) Bica Former owner of Shoptalk Service Evaluations Consultant to Jancyn Evaluation Shops E-mail: shptalk2@gmail.com Copyright Joyce (Kirby) Bica

Too Timid ...continued from page 2

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Look at the road in front of you.

Don’t focus on how you’ll make it happen. The “how” mentality is sort of like trying to edit a first draft before it is written; the “where” mentality allows you to simply get your ideas out first. Where do you want your company to go? Look down the road, see what you see and let the view have its moment. Don’t get ahead of yourself. The how will have its day.

• Think outside the box. Getting out of your comfort zone will change your usual thought patterns and spark creativity. Think about crazy stuff – maybe something too outlandish to share at a meeting or even consider seriously.

“I like to use a technique called ‘mind-mapping,’ which isn’t so much formal writing as it is plopping down random thoughts onto paper and fleshing them out later,” Herod says. “Mind-mapping allows you to brainstorm without having to provide explanations of strategies for achieving the desired goal. Here’s a

good rule: if what you think about during one these sessions seems bizarre or unlikely, it’s something you should definitely include in your vision.

Beginning his first business at age 21, Cameron Herold (www.DoubleDoubleBook.com) has been instrumental in the successful sale, branding and integration of 500 business locations with three major companies. He’s best known as the driving force behind 1-800-GOTJUNK’s spectacular growth from $2 million to $106 million in revenue in six years. His range of executive roles includes strategic planning, negotiating corporate acquisitions, operations, people, sales, marketing, call centers and public relations. Herold is a top-rated lecturer at the EO/MIT Entrepreneurial Masters Program and a powerful and effective speaker at EO/YPO & Vistage events around the world. He is the author of “Double Double.”

RENTAL HOUSING JOURNAL ARIZONA • July 2015

RENTAL HOUSING JOURNAL ARIZONA

A Tax Strategy for Investment Real Estate Grows In Popularity Proponents Say 1031 Exchanges Are Good For The Economy, But Congress Eyes Repeal

A

popular tax-deferral strategy for people who deal in investment property could be in trouble as Congress ponders doing away with it.

But already rescue efforts, such as letter-writing and lobbying campaigns, are afoot to counter any talk of repealing Section 1031 of the Internal Revenue Code, which lets taxpayers defer their capital-gains tax on the sale of the property if they reinvest their proceeds in “like-kind” property.

“A lot of people want to make sure Section 1031 exchanges stay in place because doing away with or altering this section of the tax code could be detrimental to investors, the real estate market and the economy,” says Dwight Kay, founder and CEO of Kay Properties and Investments (www.kpi1031.com).

His California and New Yorkbased company specializes in helping clients purchase Delaware Statutory Trust properties (DSTs) using the Section 1031 Tax Deferred Exchange.

“It’s a strategy that’s becoming increasingly popular,” says Kay, whose firm is licensed to do business in all 50 states. “But it’s also something that they have their eyes on in Washington, and it’s on the chopping block with Congress.”

The average American probably knows little or nothing about Section 1031, but it’s a significant tax-planning tool for investors who want to sell investment property, but don’t want to get hit with the capital-gains

tax that would result.

Here’s how Section 1031 exchanges work: Taxpayers can defer their capitalgains tax on the sale of investment property if they reinvest the proceeds from the sale in other investment property. There are strict deadlines and other specifications that must be met.

Several types of property qualify as “like-kind” under the rules. Examples include: apartment buildings, farmland, office buildings, warehouses and rental homes.

Delaware Statutory Trust properties also fall on the list. Delaware Statutory Trust properties are prepackaged as 1031 exchange properties, so an investor can close a sale quickly with no worry about missing those deadlines.

The idea of repealing Section 1031 has been talked about before. Critics of 1031 property exchanges say they allow people to defer paying capitalgains taxes for decades. Critics also say the definition of “like-kind” property is imprecise, leading to controversy with the Internal Revenue Service and providing significant opportunities for abuse.

The congressional Joint Committee on Taxation projects repealing Section 1031 would increase revenues $40.9 billion over 10 years.

Kay, though, suggests there are at least three reasons why keeping Section 1031 in place is good not just for investors, but for the overall economy as well.

• Like-kind exchanges benefit millions of American investors and businesses every year by encouraging businesses to expand and by moving dollars within the U.S. economy. “These property exchanges give a boost to the economy, and can create jobs,” Kay says. Without the tax deferral benefit, reinvestment by small and medium-sized businesses and investors would be inhibited. The economy could suffer as a result.

• Repeal could cause a decline in real estate values because investors would no longer have the ability to defer their capital gain taxes, one of the reasons many invest in real estate to begin with, and therefore may switch strategies and move to more liquid alternatives.

• “Although big-money investors certainly make good use of the 1031 exchanges, this is not something that helps just the wealthiest Americans,” Kay says. It is available to and used by taxpayers of all sizes. “We have helped clients with 1031 exchanges as small as $50,000,” Kay added.

Investors should keep in mind that real estate and Delaware Statutory Trust (DST) properties may include risks such as, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Please remember that all investors should speak with their CPA and attorney for tax and legal advice prior to making any investment decisions.

Dwight Kay, founder and CEO of Kay Properties and Investments, LLC (KPI) (www.kpi1031.com), is a Series 7, 22 and 63 licensed, Registered Representative and Real Estate Professional. His firm, Kay Properties and Investments, specializes in Delaware Statutory Trust (DST) brokerage and advisory services. Kay Properties and Investments currently has offices in Los Angeles as well as in New York City and offers securities through Concorde Investment Services, LLC, member FINRA/SIPC, in which KPI is independent from.

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RENTAL HOUSING JOURNAL ARIZONA • July 2015