Value Add Multifamily Apartment Complexes

“My sweet spot is value added, and the reason that I say that is I see a lot of mom and pop operators who have rolled up their sleeves and earned every dollar that’s in their bank account. That just means a lot to me because of their work ethic. They may not have swung the hammer, but they’ve managed the properties, unclogged the toilets, and mowed lawns as they’ve built their 8-plex into a 20-plex, and now they own 14 different apartment complexes.” — Rene Nelson, CCIM, CRE, Pacwest Commercial Real Estate

A lot of times for a value ad, it may be as easy as going in and spending $4,000 or $5,000 per unit, putting in a new kitchen and a new bathroom, and ripping out the carpet because a lot of tenants really don’t like carpet. Tenants often prefer those laminate floor type finishes so that it feels a little cleaner to them.

Value add is a great strategy to consider because you can go in pretty economically by putting in finishes at about $5,000 per unit in an apartment complex and then raise rents. This investment can provide the opportunity to add $200 per month in rent for each unit. That adds up quickly when you have multiple units.

Of course, not every situation is a value ad just because the complex may be older and a little bit antiquated. You could go in and invest a lot of money, changing the complexion of the complex, only to find out that the appeal of the older property is now missing.

In some instances, it’s good to keep it up to speed. Decent carpet, the kitchen, and the bathroom are always the focus. High-speed Internet is of great importance. If you’re dealing with millennials and you don’t have an opportunity for high-speed internet, you have a big problem.

If you’re thinking about a value add, there are many issues to consider. Let the experts at Pacwest Commercial Real Estate help. Call Rene Nelson at 541-912-6583.

Ask the Experts is a regular video series featuring David Moore, Equity Advantage CEO. David teams up with industry experts such as Rene Nelson, CCIM, CRE, with Pacwest Commercial Real Estate, and Bob Nelson, real estate investment broker, with Pacwest Real Estate Investments to answer questions most asked by clients about 1031 exchanges, market trends, and opportunities.

Right now, a number of national student housing developers are interested in the Eugene market. This is the result of a few factors, primarily what’s happening with the Phil Knight Science Center, and Hayward Field. The university is going to try to transition Hayward Field to look like a European track. They’re trying to bring in some very competitive athletes, and this will look great for the University of Oregon. It is putting us back on the map.

For years our football program was at the pinnacle. Through some changes there, we’ve kind of slipped off, but we still have a high-caliber of sports program, whether it’s track and field, basketball, or women’s softball. We’re competing with all the other national schools, and that keeps us on the radar for developers.

Eugene Student Housing Investment Market

Over the years the enrollment at University of Oregon has remained relatively steady, so the Phil Knight campus will really add a huge benefit. They anticipate that’s going to add about 750 students and professors, just at the beginning.

Additional students mean additional opportunities. The national student housing developers look at our market and know that we still have a large influx of out-of-state students as well as international students that are coming to our market, and that is obviously attractive.

We really have two different dynamics with the existing housing. We’ve got the older complexes that were built in the ’60s, ’70s, and ’80s. Those are your typical, three-story, wood-frame apartment complexes. Those are filled and have a waiting list. There were also a lot of four-bedroom apartment units created in the early 2000s, in part as an answer to a restrictive parking requirement that said you had to have X number of parking spaces per unit. If you went with more bedrooms, you still only had to have so many parking spaces per unit, reducing the amount of parking you had to provide. Those properties hit a bit of a dilemma in that they didn’t have the amenity package that was provided by the most recent apartment complexes. However, there seems to be a chicken for every roost. Then you have the nicer complexes where the rents are a little higher. The brand new complexes run about $200 a bedroom higher, so not every student (or their parents!) can afford that.

“Some local developers have built some smaller complexes, and those are full. But with the changes coming with track and field and other planned improvements and expansions at the university, we’re just starting to see some pretty amazing student housing developments. Those larger national developers often bring to the table quite an amenity package. Whether it’s free tanning, or roof-top pools, or sand volleyball pits, that’s where they make the quality-of-life appeal to students. That’s what the students call it: quality of life. Mom and dad look at it and go, wow, you’re going to drain my bank account.” —Rene Nelson, CCIM, CRE, Pacwest Commercial Real Estate

It’s interesting from an investor’s standpoint. We have people that may be more concerned with the preowned, older, lower priced per unit complex because they make greater sense for a rate of return standpoint. But there are numerous opportunities for investment. If you’re considering student housing investments, call Rene Nelson at 541-912-6583.

Ask the Experts is a regular video series featuring David Moore, Equity Advantage CEO. David teams up with industry experts such as Rene Nelson, CCIM, CRE, with Pacwest Commercial Real Estate, and Bob Nelson, real estate investment broker, with Pacwest Real Estate Investments to answer questions most asked by clients about 1031 exchanges, market trends, and opportunities.

Listen or Read

I’m René Nelson with Pacwest Commercial Real Estate. I’m a CCIM and a Counselor of Real Estate.

I’m Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments. Same companies, names? No, not quite. Pacwest, yes. You’re Pacwest Commercial Real Estate. I’m Pacwest Real Estate Investments. Each of us bring a little different specialty to real estate investments, income property investments.

René Nelson: Yeah. My niche that I really prefer to work on is multi-family or apartment complexes, and also helping people buy passive real estate using single tenant, triple net opportunities.

Bob Nelson: And I do… mine is more of a specialty focus to the transaction itself, the 1031 exchange. I’m known nationally as the 1031 guru, maybe self-proclaimed, but so far nobody’s knocked me off the perch. So, with that expertise, I’ve been doing this for 50 years and been through five recessions, and it is that that allows me to bring to the table some pretty valuable insight on what might happen in the future, because a lot of our thinking is now defensive thinking. It has been great, we’ve had a long run, but things might change a little bit. How do we prepare ourselves for that change?

What a Client Should Bring to the Conversation of Leveraging Multifamily Portfolio

Bob Nelson: What would you suggest a potential client do in preparation for talking to us and preparation for talking about potentially changing their portfolio?

René Nelson: For a lot of investors, they feel like things are moving along smoothly. We’re in a healthy, robust economy. Employment is still showing favorable, but I think for a lot of people, they’re wondering, is there still an opportunity for me to leverage my portfolio into more units? Should I pay off debt? And really, what we like to do is sit down, and strategize, and look, and analyze that with you, as far as, what’s your cashflow? What’s your ultimate objective? Are you trying to quit your day job and just live off of your real estate portfolio? And if that’s the situation, what kind of an income stream do you need to replace?

Candidly, you’re probably not going to get there if you only own duplex or a fourplex. You’re going to need to continue to probably work your day job and continue to acquire more real estate. But how do you get there? How do you get that, for what Bob calls your string of ponies together, in order to have that passive income stream for the rest of your life? One thing that you need to do is go in and get pre-approved with a good commercial lender, so that you know what you’re going to be approved for and have purchasing capacity to enable to pull off. But part of that is also going to start with, what’s your financial statement look like?

The Importance of Current Financial Information in Determining Your Current Position

Bob Nelson: And please, update your financial statement. We can’t ask you enough to make sure that you’re absolutely current, understand your current position.

Understanding your current position may startle you. You most likely have a larger net worth than what you’d anticipated. You may also, though, have a reasonably poor balance, as far as the financial statement is concerned. You might be top heavy in cash, you might be top heavy in debt, but it’s good to get a picture of that.

René has a mortgage background, has the capacity to look at a financial statement and create some insights that a lender, a prospective future lender, would be able to spot. So, we can put you in a position where you’re going to look as attractive as possible to that lender. So, a current financial statement that’s up-to-date.

We also would like to see a current rent roll for those properties that you do own, length of the leases, what’s the size of the leasehold income, what’s the size of the spaces? That would allow us to take a quick look at your level of rental income. Is it consistent with the market or are you substantially behind, or are you pretty much cutting edge? If you’re professionally managed, you’re probably not too far from cutting edge. That’s not necessarily totally true, but it would be good to look at that because that’s exactly what a lender is going to look to.

We also would like to see three years of your history, your operating history on that property. That means three years, if you’re an individual, you filed what’s known as a Schedule E on your federal tax return for each of the properties that you own. We’d like to see three years of Schedule Es for the properties that you would have us take a look at.

If you’re not an individual filing individually… you would be, for instance, a limited liability company, an LLC, we’re not after a Schedule E. Instead, the same would be a form 8825.

If we can see those three years… I’m more concerned with the pattern of expenses than I am potentially with the income. The income I can figure out on my own. The past operating history of the property, not so much so, so if we can see the three years of operating history…

It’s also very helpful from our standpoint, if it’s professionally managed, to see the three December operating statements for those same three years. Your property manager will break down an expense into maybe 20 categories, your Schedule E or 8825 breaks it into 14 categories, and we can take a quick look at what’s there.

In some instances, we have to cycle out capital expenditures that do not recur year in and year out, because if that’s the case, we need to pull that away in order to get a more accurate view of net operating income. If we have that, we’ve got a pretty good idea how this property performs, what could be done to make it perform better, and in some instances it’s not to sell the property at all, it’s to adjust the management, it’s to adjust the financing, it’s to make subtle adjustments, and sometimes they’re particularly subtle, that would be helpful.

But, again, if we can see this information, and hopefully several months before you’ve decided that you would sell the property you would like to get rid of, it allows us to structure and posture for a 1031, the highest level of success that we could with a 1031 tax-deferred exchange.

To a number of individuals, the capital gains of a property they’ve held for, let’s say, the past eight to 10 years, is roughly one-third of the value of that property, which… I’m going to say one-third to 40% of your equity position, depends on your depreciation recaptures and so forth, but it’s important to know that, and with that, we’ve got a good chance of creating a substantial investment strategy that would significantly improve your position.

René Nelson: Absolutely. In the next video, Bob, let’s talk about the benefits of 1031 exchanges and how that could benefit a multi-family owner or a commercial property owner.

Bob Nelson: You know, I’d really like to get David Moore to join us and add his expertise also.

René Nelson: Yeah, I think that’d be great.

René Nelson Pacwest Commercial Real Estate Investment is an expert when it comes to leveraging your multi-family portfolio. Your future is important, so call her today for all the answers you need! 541-912-6583.

Listen or Read

I’m René Nelson with Pacwest Commercial Real Estate. I’m a CCIM and a counselor of real estate.

I’m Bob Nelson, also a CCIM by professional designation, and a counselor of real estate, certified at the national level. I’m Pacwest Real Estate Investments. We are related by the first name, obviously, Pacwest. Pacwest Commercial Real Estate, Pacwest Real Estate Investments. Each of us specializing in a little different offering, working together when we need to, working separately on projects, investment situations when that’s called for.

Investment Strategy and 1031 Tax Deferred Exchanges

René Nelson: One of my niches is multi-family, and I have a lot of clients that ask me how they harvest equity and how they use that to bolster their portfolio. I know you’ve got a lot of great strategies, Bob. What’s your ideas on that? If I had an apartment complex, what would I do with it?

Bob Nelson: Well, first of all, I think we would analyze it, and we’re not doing that for a fee. We’re trying to figure out what your game plan is, what your strategy is. We can evaluate it, is there more things that can be done… are there more things that could be done with the property that you currently own? Is there a value-increasing opportunity by doing certain things to the property? You may say, “But I don’t have the cash, or I don’t have the interest in doing that.” Well, fine. Then we identify what you might also do with that same property.

But, for instance, as an example, we may find that you have a huge equity in a property, however, it’s got a mortgage on it and that mortgage has the same size payment as it did when you initially took it out. So, it restated the cashflow as going up somewhat, but the mortgage payment’s still chewing up a large portion of the cashflow. In some instances, is to refinance one of the properties that you have, harvest the equity, the refinance proceeds, the net loan proceeds, and pay off the other property. Now, all of a sudden, the cashflow steps up nicely and we can increase your performance that way.

Other instances, it’s not just refinance to pay down debt, it may be refinance to pay for a kid’s education, college educations, health bills, things that have happened where we would be able to pull equity out of something that you own that’s still performing nicely and utilize that to advance your personal life experience.

Other instances, it’s not just the refinance, it may be, in fact, to literally sell, if you find the thing is at the top of the market, and the benefit would be to go out at the top of the market, take the equity, tax deferred, not paying capital gains tax, operating through a 1031 tax- deferred exchange, moving it into a different asset with a different loan balance, a different loan strata where the property now, that you have gone into, produces a much higher benefit and a greater opportunity in the future.

Some would say the apartments have kind of run their course. At the same time, would I recommend somebody buy apartment? Sure. They’re always safe. You got two choices. You can live in an apartment or you can live in the street, I guess. The option of living in an apartment is always comfortable. We always know there’s going to be tenants for that property. Other types of properties, maybe there isn’t a tenant for it. If things happen, the economy changes and so forth.

René Nelson: You’re talking about office or retail-

Bob Nelson: I’m not saying apartments are bad. I’m just saying that for some people, they’re saying they’ve kind of run the course. I’ve enjoyed owning an apartment, now put me into something that is less management-intensive, less risk-oriented, greater dependable cashflow by the nature of the tenant, and so forth. It could be an office, could be a retail shopping center, could be a number of different things.

René Nelson: In the next video, Bob, let’s talk about how someone would go in and talk to a lender and get pre-approved and get ready to make that transition to either harvest equity or to go and buy more units or change their portfolio.

Bob Nelson: That makes sense.

René Nelson: Great.

When making tough decisions about selling your investment property, consult René Nelson with Pacwest Commercial Real Estate and enjoy the peace of mind you get from working with an expert who knows the ins and outs of 1031 tax-deferred exchanges. Call her today! at 541-912-6583

Listen or Read

I’m René Nelson, CCIM with Pacwest Commercial Real Estate Investments.

I’m Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments. Both companies are named Pacwest, but they’re two different firms. You are Pacwest Commercial, I’m Pacwest Real Estate Investments. What do you specialize in?

René Nelson: I specialize in multifamily as well as single tenant triple net opportunities where people just receive passive income in the mail.

Bob Nelson: You’re really well connected nationally with the bigger brokerage houses that on occasion will have a corner on that type of inventory. We do act as a team on occasion. We act separately on occasion. It depends on your situation. We have the capacity to pull in the talent to get the job done.

Defensive Real Estate Investment Strategizing

René Nelson: So, Bob, one thing I’d like to talk about is kind of a defensive strategy. I have a lot of multifamily owners that are thinking about getting out of their multifamily portfolio and they’re thinking, “How do I do that?” When they come to meet with me, one thing that I always start to look at is, “Well, where’s your rents in comparison to competing properties?” So, let’s talk about those strategies that we talk to multifamily owners about.

Bob Nelson: Well, it’s interesting because frequently they have enjoyed over the last three or four years, rents that have increased potentially 40%, sometimes even higher than that, and it’s like, “Gee, my bottom line is getting larger and larger, which is exactly what I want. That’s increasing cash flow.” They also sense that there may be a top to that, that things have gone up about as far as they’re going to go up, and why don’t we harvest out of this one, go into either a different property or more of what we have, better utilizing our equity, increasing our rate of return, making a more safe situation?

But for those who are thinking along the lines of creating greater safety, I would call it defensive real estate investment strategizing. How do you keep what you have yet risk enough to be able to reasonably expect a higher return? How do we do that safely? That’s exactly what we do.

We anticipate where you’re going, the capacity you would have, the benefits that you’re after, and how to then utilize those benefits. Now, when I say benefits, it’s the equity in your property, it’s the cash that you have, etcetera. Your net worth. How do we optimize your position in order to satisfy the benefits that you’re after from the next investment holding period?

René Nelson: Absolutely. One thing that I see for a lot of my clients is they’re trying to figure that exit strategy and what the timing on that looks like.

Investment “Food Groups” – What Type of Investment to Go Into Next

René Nelson: Absolutely. Then one thing that we look at is what food group, is what Bob and I call it, is what would you like to go into? Do you want to go into something more passive real estate? Where you just get a check in the mail?

Bob Nelson: No management, etcetera.

René Nelson: Do you want to go into more units, newer units?

Bob Nelson: We refer to units as apartment complexes.

René Nelson: Or do you want to go into a value-add situation, especially for a multifamily complex or an apartment complex? There are some value-add plays where maybe you’re buying a 1960 or a 1970 apartment complex and it hasn’t been updated. You can go in and add what, about $4,000 to $5,000, typically, per unit if you’re going to do maybe new floor coverings, new kitchens, and then increase your rents. It just depends on what market you’re in and where their rents are at currently in the market. But that’s what a value-add opportunity is.

Bob Nelson: But we really need to study that first in order to evaluate. There are some properties where you really shouldn’t put a great amount of money, just simply keep it up to speed. Not necessarily give it a huge renovation or a face lift.

There are some properties that are perfectly good as they are and that may optimize the cash flow. Other instances people say, “Hey, I want to give it a real jolt. I want to give it a complete face lift.” Do keep in mind you don’t want to become all of a sudden, the best thing in a ho-hum neighborhood because if you’re thinking in terms of quality of tenant, and if you’re thinking in terms of maybe reselling, the neighborhood has the capacity to either benefit you substantially or hold you back. These are all things that we think about in the process. We have the capacity to do rent analysis and so forth that are pretty helpful.

René Nelson: Absolutely. In the next video let’s talk about how someone would take their current portfolio of an apartment complex and how they would harvest equity and move that into more units.

Bob Nelson: Okay. Makes sense.

There are plenty of benefits to be had in multifamily property investments, so if you’re in the market to buy or sell, contact an expert like René Nelson at Pacwest Commercial Real Estate Investment for the best advice! 541-912-6583

Listen or Read

I’m René Nelson CCIM with Pack West Commercial Real Estate, and I’m a real estate investment broker.

I’m Bob Nelson, also a CCIM and a counselor of real estate designated CRE, and I’m also a real estate investment broker. I tend to specialize in tax deferred exchanges. You also have a specialty you’d like to mention?

Straight Talk About the Benefits of Tax Deferred Exchanges

René Nelson: I like to do multi-family. I find that a lot of my multi-family clients, when they go to sell, they do like to do tax-deferred exchanges. There is a little bit of misnomer about tax-deferred exchanges Bob, and the benefit. Why don’t you talk about that for a couple of minutes? Let’s just tell them the benefits.

Bob Nelson: We’ve had a tremendous run up in value over the last five to six years in income producing property. I guess we can stick to apartment complexes for right now, to be particularly specific. There are situations where people are saying, “You know, I’ve run a tremendous amount of equity into this property. I’d like to harvest that equity and, maybe, move it to a different type of asset or a bigger apartment complex or maybe two or three properties because I’ve got two or three heirs that I’d like to start thinking in terms of leaving things to.” We can, at that particular point, create a transaction that is referred to as a 1031 tax-deferred exchange whereby, we can sell the property that you have and, in a very timely manner and, this is the key, a very timely manner find the replacement property so you’re not hanging out to dry.

If you go very long, you will be paying the capital gains tax. Our capacity, or our strength, is finding those replacement properties and getting them under contract, potentially prior to the time that you’ll actually sell your relinquished property and that’s the key to what we do. We know exactly what needs to be done, we know how to do it so if you are in a position where you’ve decided, “I would like to go out of this one and into a different asset food group,” or a different property or more properties, we have the capacity to structure that transaction and take you from point A to point B.

René Nelson: I think you bring up a good point, also, in regard to exchanging. It’s really important to find the replacement property before you sell the property that you want to relinquish or get rid of. You really want to find the property that you want to go into first. What we frequently find is that there is some analyzation that needs to be done on that property. We always like to look at a seller’s tax returns if possible, but we may not get that upfront preliminary.

The Advantages of Working With a 1031 Exchange Expert

Bob Nelson: Well, if they’re working with us, they will provide what we need in order to come up with a creative strategy, and if it gets to be too secretive and not give us anything, I’m not willing to take the liability of taking on those sensitive transactions where the investor has a fairly high tax consequence. They’re either on our team or they aren’t. We work on an exclusive basis.

If we’re dealing with an individual, we want to be the only broker that’s dealing with that individual, and if somebody else would like to present something, they present it through us so we can do the analysis work and identify the true investment benefits prior to the time we start wasting our time because a timed transaction like a 1031 has a huge time schedule. You violate that time schedule, you pay that tax. You’re absolutely right, they can’t find decent replacement property on their own, quickly enough, to make a 1031 safe transaction.

René Nelson: Absolutely. That’s one of the benefits that we bring to our clients, both buyers and sellers, is having the connections on a national level with other CCIMs and counselors of real estate and the ability to help you analyze the numbers to make sure you’re making a smart investment.

Bob Nelson: That’s exactly what we specialize in. We like to be accurate 100% of the time. That’s difficult to do unless everybody’s pulling on the same end of the rope and we know what our time frames would be. If you expect top quality service, we need to have those time frames in advance of the time that you are going to potentially sell the property that you own so that as that happens, we can have a perfectly linked transaction.

René Nelson: Absolutely. In the next video Bob, let’s talk about how you prepare your property to get ready to sell and the investment strategies there.

Bob Nelson: Okay. Makes sense to me.

Working with an expert who knows how to find the best 1031 exchange replacement property is important when doing a transaction of this type. Contact René Nelson of Pacwest Commercial Real Estate Investment for all the help you need: 541-912-6583

Listen or Read

Hi, I’m René Nelson with Pacwest Commercial Real Estate. I’m a CCIM member and also have the designation CRE, which stands for Counselor of Real Estate.

I’m Bob Nelson and I’m also a CCIM by professional designation and also a counselor of real estate, which by the way is the highest professional designation you can earn in real estate. We have two different companies. Pacwest Commercial Real Estate is René’s. Mine is Pacwest Real Estate Investments and we specialize in investment real estate, but a little different slant to it. What do you do young lady?

Defensive Real Estate Strategies and Ideas to Maximize Client Portfolios

René Nelson: My preferred form is to sell multi-family, as well as triple net. But really what I’m finding right now is that my clients need strategies and ideas on how to maximize their portfolio, what do they do with their real estate? A lot of my clients have worked their portfolios about as hard as they can in multi-family, and they know that it’s probably a good time to transition. They’re not sure when to do it and they’re not sure how to do it, so let’s talk a little bit about the strategies.

Bob Nelson: Well, that’s exactly what we specialize in. It’s understanding a client’s needs, what capacity they have in order to change their position, and then allowing us to relate that in terms of investment benefits, identifying then the properties that would produce that level of benefit, and then moving them from where they are into where they would like to be, and doing it in a seamless manner so as to defer the capital gains tax, utilizing a 1031 exchange. It’s an interesting process.

In today’s market, we’ve had a tremendous run, a tremendous string of positive value growth in real estate and now people are thinking, “I’d like to lockup some of that wealth in case the market was to turn or I’m just simply tired of an apartment complex, which has tenants, trash, turnover, etc. I would like to go into something that’s a little more no-brainer.” Again, this is defensive thinking. How do I preserve my net worth, but still allow it to grow at a reasonable rate, a safe rate, so that I could pass it to heirs, or I could utilize the free time that I’m freeing up from the ownership and management aspect to travel, to enjoy life a little bit more.

René Nelson: Absolutely.

Bob Nelson: Some of our clients are getting a little long in the tooth. They look at me, they can relate to that. It’s a process of us identifying a defensive strategy, not just an offensive strategy and going out and accomplishing the end that they’re after in the next holding period.

René Nelson: Absolutely. One thing that I see for a lot of my clients is they’re trying to figure that exit strategy and what the timing on that looks like.

Bob Nelson: Now, when you say exit strategy, you’re saying going out of what they own into maybe a different form or format?

René Nelson: Absolutely.

Bob Nelson: Okay.

René Nelson: One of the keys is how do they do that without having to pay the tax or how do they do that with the maximum rate of return. In the next video, I’d like to talk with you about that, on how do you 1031, do a tax-deferred 1031 exchange.

Bob Nelson: Okay.

René Nelson: Also, in your eyes, what’s the best way for, maybe, a multi-family owner to maximize their net operating income before they get ready to sell?

Bob Nelson: Okay. That makes sense. Thank you for being with us.

When you have questions about real estate strategizing, consult with experts like René Nelson with Pacwest Commercial Real Estate and Bob Nelson with Pacwest Real Estate Investments to make the best plan for your financial future. Contact René Nelson at 541-912-6583.

Listen or Read

Today we’re talking with René Nelson, CCIM, a well-known multi-family expert and commercial real estate broker about commercial real estate in Eugene.

René, what’s the latest on landlord tenant laws in Oregon?

René Nelson: Well, Patrick, we’ve seen a pretty sweeping change. When Portland passed their relocation and their new tenant laws in February, a lot of investors decided to flock into the Eugene market. We were excited at the time, and then shortly thereafter we watched that House Bill 2004 gain momentum and realized that it may have an impact on the state of Oregon. They took it to the House and it was passed, and then they took it to the Senate and I have to tell you at that point when we saw it gain momentum and traction a lot of my multi-family investors became a little concerned. Some of them started calling me and we analyzed properties to see if it was the right time to get out. Most of them, I advised them to just stand firm and let’s watch and wait and see what happened, and I think it worked to everybody’s advantage at this point.

René, how do you see things going forward?

René Nelson: Well, I have to tell you, Patrick, here’s how I see this is going to play out. The House bill was defeated this week as the Senate adjourned, and it just narrowly passed in the House in April. The vote was 31 to 27. It never really gained momentum with strong support once it hit the Senate floor, and many of the senators cited that they were concerned with how the bill was written because it removed no-cause notices, it required landlords to pay relocation fees, and for the first time since 1985 there was a provision in there to lift rent control in the state of Oregon. All of a sudden, nationwide Oregon started to kind of get the label that we were going to have rent control. A lot of investors that had been coming out of the California market and the Phoenix market, some other, Florida market, all of the sudden they started to divert and look other places.

When this bill was defeated this week, we realized that that’s a good thing for our market. It puts us back in the running with best prices in the United States for price per unit and for rent. There’s some other states … obviously Phoenix, as an example. Because that city is so vibrant they have a tendency to edge out Portland for rent. Seattle edges out Portland, but when you look at a sustainable lifestyle the tenants love to live here, which gives us a great tenant pool, so that really helps multi-family.

To answer your question, the one thing that I do see though is we’re pretty confident that the tenant advocacy groups are probably going to try round two on the next legislation session, and they’re probably going to try to bring this back up again and have it voted on again.

Thank you, René. Now our listeners know what’s new with commercial real estate in Eugene right now. If you need more information, go to Eugene-commercial.com or call René at 541-912-6583.

The moral of the story is that the rent control effort in Oregon has stalled for the moment, but there is significant momentum remaining. If you invest in commercial real estate, you need an expert like René Nelson on your side. She’ll keep you up-to-date on everything affecting the investing climate.

With so much in the news about landlord/tenant law changes, many are wondering how these changes will affect multi-family commercial property in Eugene. In this episode of our popular blogcast series, René outlines what impacts she expects to see.

Listen or Read

Patrick:  Today we’re talking with René Nelson, CCIM. A well-known multi-family expert and commercial real estate broker about some recently proposed changes to Oregon, landlord, and tenant laws.

René, how will new Oregon landlord laws affect multi-family commercial property in Eugene?

René Nelson: You know Patrick, historically multi-family buyers have flocked to buy commercial property in Eugene. Our prices are cheaper than Portland. We have a strong tenant pool, and we have a solid employment base here with the university and some other new businesses that are in our area. I think that’s going to change swiftly for all those multi-family buyers that have flocked to us in the past. Here’s how I see it: if an investor is now going to be limited to what he can charge for rent, why wouldn’t he go to another state or a more popular city like Phoenix, Dallas, San Diego, Seattle? Not to mention that there’s really not going to be much motivation for an investor to buy and fix up a property.

Due to the economy of scale, when an investor buys a property to rehab it, they’re going to typically go in and do 25 toilets, 25 showers, 25 kitchen remodels, because it’s just cheaper that way. Now, the government is saying, “Hey, if you do that work, we’re going to control what you can charge for rent.” Really, the only way that an investor would be able to raise rents would be if that tenant moved out and they put a new tenant in, then yes, they would be allowed to raise the rent. As you can see, there’s just a de-motivation. Now the government is going to tell an investor what they could charge for rent, and oh by the way, there’s no motivation to improve the property and make it nicer for the tenants who are living there, because you’re going to be maxed out on what you could charge for rent.

There are proposed limits to rent increases then?

René Nelson: There are. The limits are, you can raise your rent by 5%, but if you exceed and go over 10% and your tenant gives you notice that they’re going to move because of the rent increase, you now have to pay relocation fees, and it’s really expensive. It’s anywhere from $2,500 up to $4,500, depending on the size of the unit.

René, how will out of state investors see that?

René Nelson: I think they’re going to review it as too much risk and not enough reward. I think they’re going to feel that the government is too involved in their business and limiting free market and free opportunity to charge the rent that the market would support. Why wouldn’t they head to other states? I just see that multi-family … We’re going to start to see investors segue out of the market, rather than come in.

Here’s an interesting point that really has not been discussed. In my opinion, it’s a major contributor to what’s happening to the current housing crisis. A law was passed in Oregon on July 1st of 2014, that required all landlords to accommodate Section 8 or housing assistance leases. You can pinpoint to that exact date and time for when rent started to go through the roof as a mechanism for landlords to escape having to rent to Section 8 tenants. In reality, that law has backfired on the intent of helping tenants with housing and it’s created a housing crisis. Now government is saying, “Hey, we’re going to control rent,” and multi-family owners are not happy about it. I think we’re going to see an exit out of the multi-family market and prices are going to be impacted.

And how do you think out of state investors will see that?

René Nelson: I think they’re going to look at it, and I think they’re going to see that there’s too much risk and not enough reward, and they’re going to just say, “I’m not interested in coming to Oregon. I’ll look at some other states,” and I just think that it’s going to hurt overall multi-family values over the next year, because there will be people that I’m already seeing it now, where investors are calling me and saying, “Get me out of my multi-family. I want to move my portfolio to another state.”

Patrick: Thank you, René. If you need more information, go to Eugene-Commercial.com or call René at 541-912-6583.

Whether you’re a local or out-of-state investor, it’s critical to understand what impact changes to these laws will have on your properties. Make plans to regularly follow our blogcasts to ensure you’re up-to-date on everything you need to know!

In recent blogcast episodes, we’ve investigated new laws that may impact multi-family investments. In this episode, René discusses an excellent alternative investment: triple net properties.

Read, Watch or Click to Listen

Patrick: Today we’re talking with René Nelson, CCIM, a well-known multi-family expert and commercial real estate broker, about important changes being proposed to Oregon’s landlord and tenant laws.

René, should I move my multi-family investments into triple net because of new laws?

René Nelson: You know, Patrick, many of my clients are doing that right now, and part of the attraction of a triple net property or a passive piece of property rather than an apartment or a multi-family complex is there’s no government regulation on rent, triple net deals usually have annual increases built right into the lease, and many of those properties come with a national credit tenant and it’s a corporate guaranteed lease. Most investors look at that and feel like it’s really a safe situation.

Are there other benefits I would see to owning triple net properties?

René Nelson: Absolutely. Let’s start with the building and the maintenance of it. Many of those triple net properties come with a lease where the tenant is responsible for all interior and exterior maintenance, often including the roof, the exterior of the building, down to even being responsible for picking up a popsicle stick in the parking lot. I tell my clients, “Drive by your property if you want, but don’t feel obligated to get out and pick up trash that’s in the parking lot, because that’s your tenant’s responsibility built into that lease.”

Now my multi-family owners that are transitioning out of tenants, toilets, and trash and having that hands-on process, now they’re going to the triple net property where it’s simply a check in the mail, there’s no government involvement with rent control, and the tenant maintains the property. It’s really ideal for a passive piece of real estate where you just want security of a good asset and you want to get a check in the mail with dependable income.

As a result, René, what kind of growth do you see in triple net properties?

René Nelson: Consumer spending is really robust right now. Lots of businesses are expanding. We have a really good residential real estate market. It’s showing that there’s strong consumer spending. People are still spending money. Businesses are expanding. There is a little uncertainty in the White House about tax reform, but if you really listen, what they’re talking about more is tax cuts and infrastructure spending. When you look at that and you separate that out, then you look back at, okay, what’s the average person that’s working, what’s their spending habits right now? They’re flocking to retail.

I know some people think, “Well, Amazon is going to put everybody out of business,” and yet many of the national retailers are continuing to flourish despite that strong online present spending, because what we’re watching is property owners, if big box stores like let’s pick a major grocery store chain, they may have a 40,000-square-foot space, and if they decide, “Hey, we’re going to close this division, we’re going to close this store,” what those property owners are doing to support the other businesses around them, they’re chopping that 40,000-square-foot building in half and they’re putting amenities in it like a restaurant or an urgent care facility and then service industries so that it gravitates more consumers to that property and it helps their surrounding businesses.

The buyer demand for triple net property is still really strong. There’s good inventory out on the market. There’s great opportunities. Really, at the end of the day, when you look at a triple net property, it gives that predictable income, hands-off management, and typically it’s got that corporate guarantee in the lease that I often talk about, because that’s so important. It’s different when it’s just a mom and pop signed on the lease versus a national credit tenant that says, “Hey, if for some reason we ever close this place, we’re going to guarantee you the rent until the end of our lease.” That really gives a passive investor peace of mind that they’re going to get their rent every month.

Patrick: Thank you, René. If you need more information, go to eugene-commercial.com or call René at 541-912-6583.

With all the uncertainty over new landlord/tenant laws, people with multi-family investments are taking a serious look at moving into triple net commercial property. And the Pacwest Commercial Real Estate Team is there to help; call or click today!