Disruptions in Oregon Real Estate Episode 7:
Money Is Cheap, Should You Trade up Your Apartment Complex in Eugene?

As a commercial real estate investor, you want your investments to achieve the returns you are looking for. One way to keep your investments working for you is to stay abreast of trends and interests rates. Is your Eugene apartment complex doing what you need it to do for you? Is it time to make a change? Learn about your options and how to evaluate your motivations and goals as an investor.

What You Will Learn in Episode 7:

• The cost of money these days
• Normal interest rates for small apartment complexes and how that is changing
• Why now might be the right time to consider buying more units or going into something newer
• How rent control is affecting investment choices
• Benefits of commercial real estate investment: tenant pays taxes, insurance, and for maintenance and repairs
• Understanding your motivation as an investor
• How to analyze investment returns to achieve goals

Many factors influence how you evaluate your investment opportunities in Eugene and Lane County real estate. Interest rates, inventory, your own motivation and goals, and rent control laws are just a few. Commercial real estate broker and investor Rene Nelson explores these factors and how to measure the value of your current real estate portfolio and make decisions for the future.

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Money Is Cheap, Should You Trade up Your Apartment Complex in Eugene?

Barry MacGuire: Welcome to the Disruptions in Oregon Real Estate podcast with your host, René Nelson, helping you stay in the driver’s seat of your investment portfolio. As a commercial real estate broker and investor herself, author René Nelson’s passion is to keep your heart earned real estate investments working for you. Her goal is to help Oregon real estate investors analyze and measure the value of their current real estate portfolio while exploring available opportunities. And now your host, René Nelson.

René Nelson: Hi, Barry. How are you?

Barry MacGuire: Good. How are things in the market right now?

René Nelson: They are crazy.

Barry MacGuire: Tell us René.

René Nelson: Okay, so here’s the deal. As you probably know, if you’ve heard, read any media or heard anything on the news, interest rates are super low.

Barry MacGuire: Money is cheap.

René Nelson: Money is really cheap. Here’s what’s motivating that. Unfortunately, as most people know, in China, there’s the Corona virus.

Barry MacGuire: Sure.

René Nelson: And that is making an impact on international investors who are bringing their money into America now. They’re flooding our markets.

Barry MacGuire: America’s a safe haven, is that what you’re saying?

René Nelson: Yes.

Barry MacGuire: Okay.

René Nelson: Yes. That also means then money’s cheap because we have a surplus right now. Lenders, the treasury, the tenure treasury just dropped, so lenders drop their interest rates again. So I’m going to just give you a measurement, a tool, a measurement of how to look at this. Normal interest rates for a 10 to 20-unit apartment complex have been around 4.25 to four and a half percent.

Barry MacGuire: Which is historically pretty good, isn’t it?

René Nelson: Yes.

Barry MacGuire: Okay.

René Nelson: It’s really good. I got a quote yesterday on a 20-unit apartment complex, just your two story bread-and-butter, built in 1970s, no real bells and whistles, not a lot of amenities, the lender quoted 3.95%.

Barry MacGuire: Wow, under four.

René Nelson: Yeah. I mean, it’s just crazy right now what’s happening with interest rates and the cost of money. So what that does for sellers, it’s a good time to look and see if you want to trade up and go to bigger units or newer units. Because a lot of people that have an apartment complex in their portfolio, most people have owned that for a couple of years, on an average like seven to 10 years.
Now’s a good time to look at moving up and buying more units or going into something newer. So you might wind up going down to fewer units but newer, so you’re going to have less maintenance, less repair, and less headache of stuff to deal with.

Barry MacGuire: So this would be a 1031 exchange?

René Nelson: Yes, you would do a 1031 exchange into newer units.

Barry MacGuire: Okay. Are we finding a lot of people are thinking about doing this or are they just sitting there with the properties that they’ve been happy with over the last few years?

René Nelson: It’s really interesting. I have a California investor that’s looking to buy up to 10 million worth of real estate right now. He specifically wants campus. So he called me and said, “I have cash up to 10 million, find me campus. I want something within walking distance to the U of O.” I started calling all my clients and my database as well as all the multifamily owners within a one and a half mile radius of the U of O area.

A lot of people I’m finding are saying, “I don’t know what I would do if I were to sell,” and when I start asking them questions about, “Well, tell me about your property. Are you happy with your cashflow?” “Yeah, I’m pretty happy with my cashflow.” Then I start asking them questions about, “Well, how’s your maintenance been and how’s the property performed?” Then they really start to think, “Well, maybe I want to get out of student housing.”

So we’re starting to see people that are looking at getting out of a certain type of real estate and go in to something that’s more passive in commercial real estate where they’ve got a tenant that’s maintaining the property and paying the taxes and the insurance and the maintenance and repair.

That’s in more of a true commercial property compared to an apartment complex where you’re going to have a property manager that’s going to be taking care of things, but you’re still going to be responsible financially for the maintenance and repair.

Barry MacGuire: Are you finding people who are gravitating more getting out of apartments, maybe getting into more retail and stuff like that?

René Nelson: Yeah, a lot of people have been concerned about the rent control and so that’s been one of the key motivators is people have watched their real estate portfolio, specifically apartments really grow and get at the top of the market. They know that it’s probably a good time for them to do something different with that property.

So now they’re looking at other opportunities like, “Okay, if I sold my eightplex, what can I 1031 exchange into?” So an example, I have a client right now that’s going to sell an eightplex and a fourplex that are side by side. He’s going to sell those, and we’re going to 1031 exchange him into an office building where it has two tenants. They’re long-term established tenants. One tenant has been there since the year 2000, that’s how long he’s been a tenant.

Barry MacGuire: Yeah.

René Nelson: He just signed a new five-year lease with two options to renew, and both of those tenants in that office building are responsible for the taxes, the insurance, and the maintenance and repair. I know that I keep mentioning that and most people are probably like, “Why is that important?” The reason is because the rent that you are anticipating, that’s all your money, that all goes into your pocket and you don’t have to take care of the maintenance of the building. The tenant is responsible for that.

Barry MacGuire: Oh, really?

René Nelson: Yeah.

Barry MacGuire: That’s nice.

René Nelson: It is, and the taxes and the insurance and everything else. So you get to keep the building. Tenant pays everything, and that’s also nice because I find that office tenants will take care of a building better. They’ll fix things faster. They’ll take care of it better because they know they’re on the hook for the repairs.

Barry MacGuire: Good point.

René Nelson: So rather than tolerating a leak in the ceiling of, “Ooh, don’t want to call the landlord because he’ll be mad at me or he’s going to raise my rent,” instead of doing that they get on it right away and fix it.

Barry MacGuire: That’s a very good point.

René Nelson: Yeah, I see that all the time. I can’t tell you how many times I go through an apartment inspection and I’ll see either a bucket under a kitchen sink or a leak in the ceiling and I’ll say to the tenant, “Have you notified your landlord of this?” “No, not yet, because I’m afraid my landlord’s going to be mad at me, my landlord will evict me, my landlord will raise my rent,” which none of that can happen.

Barry MacGuire: It’s the opposite.

René Nelson: It is. The landlords really want to know that stuff so they’re going to fix it.

Barry MacGuire: Yeah, they want that feedback.

René Nelson: Yeah, yeah, but I just see all the time tenants are scared to approach their landlord with issue. So they don’t say anything until they have a bucket under the sink catching a drip with an issue.

Barry MacGuire: All right, so money is cheap. What’s your suggestion for people that have properties might want to trade up? What do you say?

René Nelson: Here’s what you really need to know is how’s your property performing right now. If you were to 1031 exchange into something different, how would that perform for you in the future? So I first look at cashflow. What are you earning and cashflow right now off of your property and what are you going to be receiving for the new property that you 1031 exchange into?

Some of my clients are deciding that capital gains are probably as low is there going to be and so a lot of my clients, I have one client in particular that selling an apartment complex for four million. He’s just decided he’s going to pay the capital gains and sell it and pay the tax and be done with it and put the cash in the bank. He’s tired. He just doesn’t want to own real estate anymore.

Barry MacGuire: Has it been a real headache for him or?

René Nelson: Not really. He’s got a professional management company that manages it. They do a great job. The property was built in 2012. He’s really financially secure, obviously.

Barry MacGuire: Okay. I guess he just wants to simplify his life.

René Nelson: He wants to simplify his life and he’s just at that point where he’s like, “I’m just going to pay the tax and sell and put the cash in the bank.” For him, it’s peace of mind.

Barry MacGuire: Sure.

René Nelson: So what I find for a lot of sellers is we have to really dig into what’s their motivator. If they could wave a magic wand once and could take their current existing property and go into something new and different, what would that look like? Because some people say, “I want ease of management.” Okay, that tells me they probably don’t want to go into multifamily. They probably want to go into a triple net commercial building where the tenant is responsible for everything, and they just get the check in the mail.

Some of the drawbacks of those type of properties, as an example, a lot of times the rent is fixed for five years. You have little rent increases where the rent can go up, say 3% per year annually, but that’s a big difference between multifamily where now your rent can go up 9.9% or whatever the rent cap is plus CPI.

Barry MacGuire: Sure.

René Nelson: Does that make sense?

Barry MacGuire: Yes, it does.

René Nelson: Okay. So sometimes there’s trade offs. Do you still want to be a multifamily and if you do, I own apartments, so don’t get me wrong. Apartments are a great property to own for commercial real estate, but there’s some people that are just starting to see the changes that are happening in Portland right now for the screening laws that are happening. They’re really concerned those will pass statewide within the next 12 to 24 months.

We’ve talked about it in past podcasts, that’s going to be a game changer because that will put more mom and pop operators who self-manage, that’s going to put them under the gun. They’re going to have tough situations where their tenants are going to potentially create issues for them, and they may or may not know how to handle that. If they don’t handle it properly, they can be sued. So there’s a target painted on their back right now for being savvy, knowing what they’re doing and really learning the laws. There’s so much to it with the lies, it’s hard to know it all.

So for a lot of my clients, I look at where are you at right now and where do you want to be. One of the questions I asked my client, “If you were setting here three years from today, looking back, what would need to happen in order for you to be happy with your real estate portfolio?”

Barry MacGuire: That’s a good question to ask.

René Nelson: Some people say, “Well, I want to be on a beach. I don’t want to work.” If they’re working a day job right now and their real estate portfolio is generating them $500 a month in cashflow, I’m probably not going to be able to help them quit their day job.

Barry MacGuire: Not yet.

René Nelson: Go live on a beach in three years.

Barry MacGuire: Yeah.

René Nelson: So it has to be realistic, but what they really want to do-

Barry MacGuire: They could live on a beach, but they just wouldn’t have a house to go to. They just have to stay on that beach and do a little bit of fishing for food.

René Nelson: Exactly. I guess that’s true. We could always get them there. It’s just what they like the quality of life.

Barry MacGuire: Exactly. So it really sounds it’s for those people that have properties, it is a case-by-case basis. It’s like everybody’s individually unique, right?

René Nelson: It really is, and every property is different.

Barry MacGuire: Yeah.

René Nelson: Because to me it starts with the numbers. I’m an analytical person by nature, so I like to look at their current rent roll in the last three years of their real estate schedules and their tax returns. Because a three-year history will tell me how that property is performed.

So I’m going to give you an example. A couple of weeks ago I analyzed 150-unit apartment complex. The owner has a professional management company that’s doing a great job for them. When you drive by the property, it’s got great curb appeal.

Barry MacGuire: Well-maintained.

René Nelson: Well-maintained shrubs and landscaping looks great. The exterior of the building looks great. Interestingly enough when I looked at the last three years of their income and expenses, their expenses are really high. So we’re seeing on that particular property, we’re seeing almost 60% operating expense where industry standard is about 45%.

So by looking at the numbers, I’m able to analyze it and look at it not only how has it performed in the last three years but looking at it then through the eyes of a buyer, how will it perform when they take ownership? The reason that’s important is if I’m representing the seller, I have to be able to defend that most probable sales price.

When I tell a seller, “Here’s what your property can sell for,” I have to be able to defend that number and explain to an appraiser, a buyer’s broker or the buyer. Here’s how I derived at the sales price and here’s how this property should perform based on the last three years of expenses.

Barry MacGuire: Is that what you typically go by, three years, there’s a one year, five years?

René Nelson: That’s a great question. Really three years. The reason that you don’t want to do just one year is what if last year they minimized on maintenance and repair and just scrimped by knowing that they were going to sell?

Barry MacGuire: Fudge the numbers a bit.

René Nelson: Yeah.

Barry MacGuire: Yeah.

René Nelson: So if you look at three years, you really get that trend and you start to see how the property is performed.

Barry MacGuire: Okay. All right, well, like I said, it’s a case-by-case basis. If somebody is a property owner and has been thinking about maybe selling, maybe trading up, how can people contact you?

René Nelson: You can call me at 541-912-6583.

Barry MacGuire: Website?

René Nelson: Best place to go is eugene-commercial.com. I’ve got an easy little app that you can click on and book an appointment online or reach out to me on my website.

Barry MacGuire: René, thank you so much.

René Nelson: Thanks, Barry.

Barry MacGuire: She is here to help you. Once again, 541-912-6583 or eugene-commercial.com. Thanks for listening.

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Disruptions in Oregon Real Estate Episode 6:
Selling an Apartment Complex in Eugene: Out-of-State Owner

Selling an Apartment Complex in Eugene: Out-of-State Owner

As an investor, it pays to remain informed about the state of the multifamily market in Lane County. Understand the factors that can impact sale price and what it will take to put your property on the market. Both buyers and sellers should be aware of the silent market at work in Eugene/Springfield and the value of connecting with a broker who can help you understand your goals and evaluate your options.

What You Will Learn in Episode 6:

• Considerations when selling an apartment complex: number of years of ownership, whether there’s an onsite property manager, recent capital expenses, current rent roll, last three years of operating statements
• The importance of having an LLC to limit your liability when you own an apartment complex
• What a buyer should look for when evaluating an apartment complex for purchase
• Cap rates and sales comps in Lane County
• The silent market in Eugene/Springfield
• The benefits of triple net commercial properties

There are numerous considerations when it comes to selling an apartment complex. A good broker will help you navigate those issues as well as the cap rate and sales comps in Lane County. For buyers, a broker can guide you as you evaluate goals and opportunities and decide what’s right for you.

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Selling an Apartment Complex in Eugene: Out-of-State Owner

Barry MacGuire: Welcome to the ‎Disruptions in Oregon Real Estate Podcast, with your host, René Nelson, helping you stay in the driver’s seat of your investment portfolio. As a commercial real estate broker and investor herself, author René Nelson’s passion is to keep your hard earned real estate investments working for you. Her goal is to help Oregon real estate investors analyze and measure the value of their current real estate portfolio while exploring available opportunities.

Now your host, René Nelson.

René Nelson: Hi Barry.

Barry MacGuire: How are you doing?

René Nelson: I’m really good. Hey, let’s talk about the apartment market in Eugene and Springfield.

Barry MacGuire: Okay. You’ve got a little story to tell us, right?

René Nelson: I do.

Barry MacGuire: Tell us a story please, René.

René Nelson: So I recently received a call from an investor out of the California area. She has owned a fairly large apartment of a couple of 100 units in Eugene.

Barry MacGuire: Oh that’s big.

René Nelson: Yes. It’s really big. Couple of 100 units, and she’s owned it for over 30 years, and she wants to retire. She just wants to cash in and take the money and run. So she Googled how to sell an apartment complex in Eugene, and I popped up because I do a lot of promotion and I’ve talked on my website about how I help people buy apartments, sell apartments, buy RVs, buy mobile home parks- because that’s really my niche, the multifamily world where it’s apartments, mobile home parks, and RV parks. So she called me and said, “I’m interested in selling this apartment complex,” and I was able to walk her through how I go through that analysis. So do you want to talk about that?

Barry MacGuire: Please, yes. I’m from out of state, I’ve got a complex, I don’t know the first thing about how to sell that. How do we do it?

René Nelson: So the first thing that I like to do is find out a little bit of the details: how long have they owned it? Do they have an onsite manager? Have they done any recent capital expenses, like added new roofs or completed siding? Just to get a general arms around the property, find out how many units, and then what I like to do is ask that client to send me a current rent roll and the last three years of their operating statement.

Barry MacGuire: Current rent roll is how far back?

René Nelson: I like within the last 30 to 60 days. Basically what I’m looking for is twofold. I’m looking for how much are they pulling in in rents because I want to compare their current rents to the market rents. Then what I also want to see is whether the tenants are month-to-month or on year-long leases and when the last rent increases were. When I analyze a property, I’m looking at it through the eyes of a potential buyer, even though I’m analyzing it for the seller, because we have to have what I call defendable numbers.

Barry MacGuire: Okay. Those questions will come up as a buyer. So you mentioned real quickly about three years, what was it? Three years of taxes?

René Nelson: Yeah. Three years of their tax statements. So people will either file their real estate under a schedule E if it’s in their personal tax return, or if they own the property in the name of an LLC they’ll typically have that in their form 8825, which is the LLC tax returns.

Barry MacGuire: That’s very common, right?

René Nelson: It is. Most people own larger complexes in particular in an LLC because it gives you that protection that if something happens on the property, let’s say … Well, I had a client that had a property up North and one of the tenants kidnapped his girlfriend, and there was some domestic abuse issues there. Luckily, the lady came out okay, but there were some issues there. If you have violence or something that happens on your property, you want to make sure that your liability and exposure is limited to just the assets that are in that LLC.

Barry MacGuire: LLCs are really important, aren’t they?

René Nelson: It really is, because if you have other assets like other real estate, other property or even cash, your personal residence, you want to really protect that, and that’s where a good real estate attorney comes into play because they’re going to advise you how to put each property in an LLC.

Barry MacGuire: Okay. So you look for the rent roll, you look for the taxes, what else?

René Nelson: Yep. Then I also like to see the most recent year to date operating statement from either the property manager or the individual owner. When most units get about 40 units or bigger, I see that most owners use a professional property manager.

Barry MacGuire: Understandable.

René Nelson: Yeah, because that’s a big complex and there’s lots of tenants, there’s lots of things to deal with. So we’re just starting in the year 2020, I asked this particular person to give me her year to date through 2019, the income and the operating expenses from her property manager. The reason I needed that is she hasn’t of course filed her tax returns yet, but I needed to see how the property performed for last year. The reason that I do that deep analysis is I’m looking for trends. I’ve built this unique software system where I have the ability to analyze and basically spread out three or four years worth of tax returns to look at.

I’m looking for trends for income and expenses. I’m looking to see if the expenses are higher than the industry norm. Because what I see for a lot of buyers is they always think, “Oh, that seller doesn’t know what they’re doing. I can operate that property more efficiently.” Well, is that really true? The only way we’re really going to know that is to do a deep-dive analysis and take a look at that property.

Barry MacGuire: As a buyer, is there a way to see some sort of documentation on how the property management company has been dealing with the issues with the renters?

René Nelson: Yeah, that is a great question. So when I represent a buyer, we put together a document requesting certain things from the seller once our offer is accepted and we’ve entered our due diligence period. So typically, you’re given 25 to 30 days to do the complete due diligence on a property. What I do with my clients is we look at the rent roll, we look at the leases, but then in addition to that, I also ask that the seller provide any documentation that they have where there has been a complaint by a tenant to either the city, the state, or a federal agency as well as the labor and Bureau.

Because if you’ve got a tenant that’s going to make a complaint, they may make it at the state level, but they may also make a complaint at the level called BOLIM. It’s Bureau of Labor in Management, and they’re the ones where tenants can make a complaint against a landlord. So I just put in writing that we want anything that would affect the property itself, property ownership, or any future claims against the property. So if the landlord has been notified that they’re going to be sued or if they have a disgruntled tenant, we want to know that now going into it.

Barry MacGuire: I think that gives you a good cross section of not only the management company but also the tenants that live there. If there’s a ton of complaints from certain tenants and stuff like that, it’s just nice knowing that as a buyer going into the situation.

René Nelson: It really is, because that also helps us understand whether it’s the tenant mix or whether it’s the lack of attention from a property manager. That’s pretty rare in Eugene-Springfield right now. I feel like every property manager is really working hard to meet the needs of the owner and also meet the needs of the tenants. I haven’t heard any bad complaints recently. I just think most property managers are working really, really hard right now to just keep a happy home front for the tenants and also manage the property well for owners.

Barry MacGuire: What’s the next step?

René Nelson: So after I get the rent roll and the tax returns, then it takes me a day or two to analyze that property. If it’s 20 units, I could do that fairly quickly. But when it’s 100 to 200 units, that’s a pretty deep dive that I’m doing, and I’m analyzing it several ways. So the first thing that I look at is something I would almost call forensic accounting, because I’m looking back over the last three years of how the property has performed.

I’m looking for those trends and I’m looking to see whether the expenses been what I call market-level or industry-level. Are they in-line with what everybody else is using to use for maintenance and repair, property management, and utilities? Then, going forward, I look at it from a buyer’s perspective. That is where my defendable numbers come into play.

Because if I represent a seller and I give them a most probable sales price, and we get an offer from a buyer, I have to be able to help my seller defend those numbers to an appraiser, a lender, the buyer, and the buyer’s agent. So I’ll be doing a deep-dive and looking at recent sold properties that have occurred in the last six to 12 months. Those are called sales comps.

Barry MacGuire: In that area?

René Nelson: Typically what I will do is go through Eugene-Springfield. I try not to go out of Lane County, because I don’t feel like it’s really fair to compare a property in Eugene to something in Salem. I’ll see appraisers do that sometimes if it’s really, really big. There was a 300 unit apartment complex that sold December 31st for 51 million and they did have to go out of Lane County to pull one or two of those comparables because a 300 unit complex is pretty big for Eugene.

Barry MacGuire: Okay, so you compare?

René Nelson: Yep. So then we compare and we look at like and similar properties that have sold. What I’m doing there is I’m looking for trends, I’m looking at price-per-unit, I’m looking at the sales price, and then I’m looking at the cap rate that was used. So to refresh everybody’s memory, a cap rate is a snapshot of how a property performs at this date in time. It’s not five years down the road, it’s not even two years down the road. It’s today. If I bought this property today, how would this property perform for me as the buyer?

I use a cap rate. So the cap rate is not something that you can Google or look up. The cap rate is set by the market, and that’s one thing that I’m pretty engaged with because I continually talk to other brokers and appraisers to find out what are they looking at in properties and what are cap rates for properties that they’re bringing onto the market or selling, because that helps set the price per square foot and the price per unit.

Barry MacGuire: The higher the cap rate, the better?

René Nelson: When the cap rate goes up, that is a better rate of return for the buyer, but that also can drive the price down. So cap rates can be tricky, and I like to really look at what’s happened over the last six months for cap rates, because a cap rate can change pretty quickly. The other thing you have to look at with cap rates is that it’s based off of the condition of the property, so it’s not just the net operating income. If the property is older and has some deferred maintenance, that’s going to have a higher cap rate.

The reason is there’s more risk. So in a healthy market, like right now where we’re at in Eugene, a lot of the multifamily properties and apartment complexes are selling off-market. They don’t hit the open market where they’re listed in LoopNet or CoStar or some of the other traditional marketing sites that we use.

Barry MacGuire: Why?

René Nelson: Because a lot of people, brokers in particular, have what I call a silent market. So I have a list of buyers that are looking to buy, who are pre-qualified or cash buyers, and they say, “When you see 60 units that are 1970 or newer, call me, I want to buy them.”

Barry MacGuire: So it’s a case of supply and demand. It’s just such a hot demand right now.

René Nelson: It is. I have a whole list of sellers that I’ve analyzed properties for and they’ve said, “I’ll sell, but I don’t want to openly market my property.” They don’t want their property manager to know, or more importantly, their tenants to know, that they’re marketing the property. I call that my silent market because the sellers will call me, we’ll do a deep-dive analysis, I’ll give them a most probable sales price, and then they’ll say, “Yes, I’m interested.” So I’ll give you an example. I have a client right now that has a newer property in the campus area. It’s 32 beds. It’s within two blocks of walking distance to campus.

It’s in the $4 million range. But he doesn’t want it openly marketed because students are they’re tech savvy, so they’re Googling all the time and they’re on the web and everything else.

Barry MacGuire: They can get information pretty quickly.

René Nelson: Yes, and he doesn’t want his student tenants to see that and think, “Oh my gosh, the apartment I live in is going to be sold. They’re going to jack my rent up,” because you can’t do that anymore.

Barry MacGuire: No.

René Nelson: You can’t jump those rents up. Most students are in a 12-month lease, so they’re protected. But they’re young so they don’t know that, and so-

Barry MacGuire: A little panic sets in.

René Nelson: Yeah, exactly. A lot of my sellers just say, “I want to sell, but I don’t want to openly market it,” and so I have this list of silently available properties. In the last 12 months, I’ve done probably $35 million in real estate that I have helped my clients either buy or sell that has never hit the market.

Barry MacGuire: Wow.

René Nelson: That’s what a silent market is.

Barry MacGuire: Okay, real quickly, back to the cap rate. Is there a particular cap rate range that you’re looking for?

René Nelson: Yes. Thank you. Right now, on an average, we’re seeing cap rates around five to five and a half percent. That’s the average cap rate. So as an example, if it’s lower than that, if it’s four and a half percent, what that indicates is that seller is being aggressive and they’re asking for a high price and the cap rate is low.

Well, here’s the problem. If a buyer needs financing, they’re going to go to a bank or a credit union in town, and the banks and credit unions right now are loaning interest rates around 4.25. So if you’re buying at a four and a half percent cap rate and you’re borrowing money at 4.25, the spread isn’t enough. There’s too much risk in relation to buying that property.

Barry MacGuire: Well, you’re looking for a little cashflow too, aren’t you?

René Nelson: Yeah.

Barry MacGuire: Yeah.

René Nelson: Yeah.

Barry MacGuire: The cash flow is not there with those numbers.

René Nelson: That’s exactly it. Typically, what I see there is that the seller is happy with their property. They’d sell it if the right person came along, but they’re happy enough that they don’t want to get in line with market reality, which I’m okay with. I mean, you know what? It’s one of those things where they say, “Hey, if you find a buyer, I would sell, but this is my price.” Really that indicator, if they’re below a five cap in this market, is that I’m really happy with what I have. If something better came along, I would consider it, but I’m pretty happy with what I have.

So I just add them to my silent list at that point, and when a buyer approaches me … I have had situations where buyers are in a 1031 exchange, they’re in their last two to three days, maybe their property that they were pursuing fell apart or something came up in the due diligence and they’ve got two to three days to identify or they cut a big check to the government.

Barry MacGuire: Oh boy.

René Nelson: In a situation like that, it may make sense to buy something at a four and a half percent cap rate. But market cap rates are really between five and five and a half percent, because at that point you can get cheap money at 4.25, you’re buying at a five and a half cap rate, and there’s still opportunity to make money on those properties.

Barry MacGuire: Okay. So you’ve crunched a little bit of numbers. What’s the next step?

René Nelson: Then at that point, what I also do is an analysis for the location and the demographics. So, is it in a good location? Are you going to be able to attract quality tenants and retain quality tenants?

Barry MacGuire: Is that property going to appreciate?

René Nelson: Yes, that’s exactly what I look at. What’s the opportunity for the market? Is it in an established neighborhood or is it right on the fringe of a changing neighborhood, where maybe it’s a little industrial or a little rough? Your tenant pool is going to change continually if you’re on that fringe, and that of course makes a difference in the cap rate.

If you’re on 12th and Main or corner of Main and Main, you’re going to be able to get a 5% cap rate. If you’re in an outlying area and you’re in that fringe changing neighborhood, you’re probably looking at a six to 6.25 cap rate, and that’s just one of those things that it takes years of experience to learn, to know how to price it, and where the most probable sales price is.

That really is, in my opinion, what I have to offer to clients. I do a deep-dive analysis that generates a 14-page report for someone that will show them how their property is performing. It shows the income through an analysis standpoint, it gives them the most probable sales price, and then it also shows them the opportunity that’s available to them as well as any risk and exposure. I put that together in a 14-page report that’s really designed to help people that are debating about whether they should sell their apartment complex in Eugene.

You can give me a call, I can run that analysis and then walk you through it and say, “Okay, here’s how your property is performing compared to other properties in the market, here’s your most probable sales price, here’s three other properties that are like and similar that have sold in the last six months, here’s how long it’ll take us to probably get an offer.”

Most of that happens within 30 days. When I put the word out and we start advertising it, we will typically get an offer. If it’s priced right, we often will get an offer within just a few days, and then we know within 30 days, because at that point the buyer has completed their due diligence and we know if that deal is going to stick or not.

Barry MacGuire: It’s pretty exact science here.

René Nelson: It is, it is.

Barry MacGuire: What’s the next step?

René Nelson: Really at that point then, I give the analysis to the client and walk them through it. I really ask them to make a gut check, make sure that this fits what they want to do, and of course, then we also look at where will they go? Are they going to do a 1031 exchange? Do they want to buy up and buy more units? Do they want to go to a different location? Do they want to go out of state? So that’s also part of my analysis, is what the seller wants to do.

Frankly, what I’m seeing for a lot of people is that they’re just deciding that it’s the right time to sell and they want to take the cash and move on. Some people are putting their money into municipal bonds because they’re tax free, and they’re just steady-Eddie to get a paycheck in the mail.

Barry MacGuire: Sure.

René Nelson: Other people are buying triple-net commercial property where the tenant is responsible for those three triple-net things, which are the taxes, the insurance, and the maintenance. That really just gives that owner peace of mind, that they can segue or 1031 exchange at a multifamily. They go into commercial property and the tenant is going to take care of the maintenance of the property and the taxes and the insurance so that seller, when they own that property, they’re just going to get a check in the mail.

I’ve got a client right now that owns a small portfolio, so they own an eightplex and a series of duplexes, and they’re going to 1031 exchange out of those properties and they’re going to go into a single asset that has a national tenant in it, and that tenant is responsible for everything, taxes, insurance and maintenance.

Barry MacGuire: It’s like a retail business or something?

René Nelson: It is a retail business. My clients are going to buy a Dollar General. It has a brand-new 15-year corporate guarantee lease on it, and for my clients, it’s peace of mind. They’re just going to get a check in the mail for the next 15 years and they don’t have to do anything. It’s turnkey.

Barry MacGuire: Fantastic.

René Nelson: Dollar General doesn’t even want you on the property to pick up a popsicle wrapper. They specifically ask owners not come to their site. I mean, you can visit, but they don’t want you showing up with a toolbelt saying, “Hey, I’m here to fix the roof.”

Barry MacGuire: I’m here for the gutters.

René Nelson: Yes, exactly. Exactly.

Barry MacGuire: Well, that’s fantastic. That’d be a great situation to be in as an owner.

René Nelson: Yeah, so for an owner who has literally rolled up their sleeves and painted, screened tenants, mowed lawns, and cleaned out gutters and done all that hard, heavy lifting over the years, a lot of those owners are starting to age, and they need retirement, they need ease of management, and they need that steady, dependable income that their properties have generated for them.

Barry MacGuire: After going through the whole process, that’s a little light at the end of the tunnel. It’s like, “Okay, there we go. Dollar General, we’re coming your way.”

René Nelson: Yes, yes. Frankly, that’s the reason that I do that deep dive analysis for my clients. They give me the information and then I become like the mad scientist behind the curtain from Wizard of Oz, where I’m just over there crunching numbers and digging through the information twofold, because I want my clients to understand how their property has performed up to this point, and then more importantly, where they’re going. What’s the light at the end of the tunnel for them?

Barry MacGuire: We need people like you because most of us, to be honest, we don’t like doing that kind of stuff. You’re vital.

René Nelson: I love that.

Barry MacGuire: Really?

René Nelson: I get up every morning, eat cereal, and think how many numbers do I get to crunch today?

Barry MacGuire: If people are wanting to sell or buy or what have you, if they want to get in touch with you, how can they do so?

René Nelson: The best way is to call me at 541-912-6583, or you can go to my website, which is eugene-commercial.com.

Barry MacGuire: René, thank you so much.

René Nelson: Thanks, Barry.

Barry MacGuire: You can tell René’s got a real passion for what she does. Once again, the phone number is 541-912-6583, or go to the website, eugene-commercial.com. Thanks for listening.

[/toggles]

Learn more about the opportunities available to capitalize on the current disruptions in the Oregon multifamily market

Click the button below to download my book or request a hard copy:

If you’re ready to talk with me about your options as an investor:

SCHEDULE A 15-MINUTE DISCOVERY CALL

Disruptions in Oregon Real Estate Episode 5:
How Oregon Rent Control Rent Increase Restrictions
Impact Multifamily Property Improvements

How Oregon Rent Control Rent Increase Restrictions Impact Multifamily Property Improvements

The increased restrictions as a result of Oregon rent control are having a significant impact on investors’ willingness to take on multifamily property improvements. Learn about the factors that landlords must consider as they consider their opportunities to raise rents and the improvements their properties may need.

What You Will Learn in Episode 5:

• Situations in which landlords can raise rent above this year’s 9.9 percent cap
• The lack of incentive to make property improvements
• The reason Lane County investors are buying but out-of-state investors aren’t as active
• The reasons apartment investors are considering switching to other types of commercial property investments
• The opportunities available in mini-storage and triple net
• Tenants’ concerns about bringing issues to their landlord’s attention and the impact on property maintenance
• The possibility of the rent cap being reduced even more in 2021

The increased restrictions that come with Oregon rent control are having some unfortunate effects on multifamily investors in Lane County and beyond. Many landlords are now hesitant to make the investment in multifamily property improvements due to the various restrictions on increasing rents. Know your options to protect yourself as an investor.

[toggles title=”Read the Full Transcript”]

How Oregon Rent Control Rent Increase Restrictions Impact Multifamily Property Improvements

Barry MacGuire: Welcome to the Disruptions in Oregon Real Estate podcast with your host, René Nelson, helping you stay in the driver’s seat of your investment portfolio. As a commercial real estate broker and investor herself, author René Nelson’s passion is to keep your hard earned real estate investments working for you. Her goal is to help Oregon real estate investors analyze and measure the value of their current real estate portfolio while exploring available opportunities. And now your host, René Nelson.

René Nelson: Hi Barry, how are you?

Barry MacGuire: Good, how are you doing?

René Nelson: I’m doing fantastic.

Barry MacGuire: Happy 2020.

René Nelson: Thank you.

Barry MacGuire: All right, I have a question for you. It’s a brand new year, should landlords raise the rents?

René Nelson: Well, that all starts with when did you last raise your rents? Because now with rent control, you can only raise your rents once every 12 months.

Barry MacGuire: Just once?

René Nelson: Just once.

Barry MacGuire: I didn’t know about this restriction.

René Nelson: Yes. So you have to look when was the last time, because it’s really critical that you do not raise it more than once in 12 months, or you will have issues.

Barry MacGuire: What happens?

René Nelson: Oh, your tenant can sue you. It’s really serious.

Barry MacGuire: And in 2020 what’s the cap that they can raise the rent?

René Nelson: It’s 9.9%. Last year in 2019 it was 10.3%, and because CPI, consumer price index, dropped a little bit, the new cap is 9.9%. So what you do is you literally, it’s old school math, you take your rent times 0.099 and that tells you how much you can increase your rents.

Barry MacGuire: What kind of feedback have you been getting from landlords about this?

René Nelson: Yeah, not a lot of my landlord clients are excited about it. It’s now in place, so they’re used to it, but a lot of them are frustrated because there’s no incentive for them to do improvements to the properties, and we’re going to talk about that later in the show. But it definitely is making an impact on property owners who, in the past if you had a 1970’s two story wood construction apartment, maybe it was 20 units, a lot of times investors would go in and rip out the carpet, put in that laminate flooring, new cabinets, new appliances, just freshen it up inside.

Barry MacGuire: Mm-hmm (affirmative).

René Nelson: Nobody wants to do that anymore. There’s no incentive to do that.

Barry MacGuire: That’s a tough situation we’re in right now.

René Nelson: It is. I mean I had an investor who just rehabbed a one bedroom, one bath unit because a tenant had been there 10 years and moved out on their own, and my investor went in and rehabbed that and he spent $14,000 on a basic remodel. Literally ripping out carpet, putting in basic new laminate flooring or vinyl flooring, and painting the cabinets, and just freshening it up and it cost him $14,000. And he was only able to raise the rents minuscule, 9.9%.

Now in that situation, the tenant gave notice, so she moved out on her own, she got a job relocation opportunity, so she moved out on her own so the landlord could have raised rents to market at that point, but he decided not to go crazy and raise it $200 or $300.

Barry MacGuire: Okay, that’s actually something that I was actually wondering about. If somebody does move out, does the landlord have the capacity then to raise it more than the 9.9% like you said, to bring it up to market?

René Nelson: Yes, so long as the tenant gives their own notice and moves on their own. If you give them a no-cause notice or you evict them, then you cannot raise the rent.

Barry MacGuire: Okay. Just curious, are you seeing rent control impact apartment values in Oregon?

René Nelson: Yeah, because here’s what’s happening. Now investors are not making those improvements to the property, so they’re not making them better and nicer and newer, and that makes a direct impact to the net operating income. So, as market rents just are creeping up at 9.9%, now there’s fewer investors that want to come to Oregon and buy. Most of the opportunities that we see in the Eugene, Springfield area are buyers that are buying locally.

So, it’s a local Lane County investor that’s buying, but when we look at property values, apartment values in particular, we’re just not seeing big growth opportunities right now. It’s still kind of flat in the market. A lot of it… there’s two reasons, not a lot of people are selling right now. They’re still trying to figure it out. They’re weighing out, I call it reading the tea leaves.

Barry MacGuire: Sure.

René Nelson: They’re trying to figure out, “Okay, how much more legislation will change and swing the pendulum that much more in the favor of the tenants and impact the landlords”? So they’re weighing that out and then they’re trying to figure out, “If I did sell, what would I go into”? And I’m doing a lot of analysis for clients right now where we’re looking at their current portfolio.

And I have a program that I’ve created, it’s my own unique process where I collect their data and I analyze it, and then I give them suggestions on how they could improve the property performance. Or if they went into a different type of property, maybe they go out of multifamily and they go into a commercial leased, commercial property, what that would do for them and what kind of a yield or a rate of return they would get on that.

Barry MacGuire: If the individual chooses to go into a commercial property, perhaps a storage unit, are they free of the rent control restrictions?

René Nelson: The rent control only applies to multifamily where people live and reside as their domicile.

Barry MacGuire: And you’re seeing a lot of people making that switch?

René Nelson: Yeah, I am. Because a lot of people are looking for a yield in return. So they want a yield on their money in relation to the risk that they’re willing to take. And they want to yield on the money that they’re going to put into that property because they could just as easy put it in the bond market, the stock market, there’s other places they could park their money. So they want to earn a rate of return on that money and it has to make sense for them. So that’s one thing I do with my clients is we literally weigh out… a lot of investors will look at cap rates.

A cap rate basically is a snapshot in time of the first year that you buy the property. How much net operating income will that property generate in relation to what the seller is asking for purchase price? And most investors just stop there because that’s the only formula that they know how to calculate. But in my world, as a commercial real estate broker, my goal is to educate my clients, and so I want them to understand the yield. How long will they own that property and what will that property generate for them in cashflow over that time period?

Barry MacGuire: Mm-hmm (affirmative).

René Nelson: On the average, most investors own property five to seven years before they want to change. A lot of times I’ll see people, what I call trade up, where they’ll take a 10 unit and move it into a 15 or a 20 unit property. They’ll buy other property. That’s what I call trading up. You’re going up. You’re staying in the same category, but you’re going up in unit count, or you’re going up in size.

Barry MacGuire: Is that when you do a 10-31 exchange?

René Nelson: Yes, that is when you would do a 10-31. You would basically sell a property, do a tax deferred exchange and go up to more units. But I’m also seeing multifamily owners who are considering looking at other opportunities like mini storage or triple net. And triple net properties basically means that the tenant pays for the taxes, the insurance, as well as the maintenance on the property, in addition to the base rent that they pay you.

Barry MacGuire: And I bet you multifamily owners that make the switch over to maybe something commercial related, I’m sure there’s something to be said for the peace of mind knowing there’s a little less government intervention from Salem in regards to rent control.

René Nelson: Yeah, you really don’t. You’re in control of your destiny at that point and you really don’t have that government intervention happening on the home front.

Barry MacGuire: Mm-hmm (affirmative). So it sounds like rent control has had an impact on apartment owner’s willingness to make improvements. Because if the owner spends the capital to make those improvements, a lot of times you won’t get that return on the investment.

René Nelson: That is true. They just did a study in Portland to see how rent control was impacting Portland and they estimated that there’s about 20,000 units that are 60 years or older, and they’re anticipating that the owners are not going to make improvements to those properties because you can’t make it up and rent, like I talked about, so.

Barry MacGuire: 60 years, these are probably needed improvements. Much needed improvements.

René Nelson: Yes.

Barry MacGuire: It’s not just cosmetic.

René Nelson: No, it is not cosmetic. I mean there will be, just as an example, dry rotten in bathroom floors.

Barry MacGuire: Mm-hmm (affirmative).

René Nelson: We see that a lot with rental properties, kids getting in and out of the bathtub and water splashes, and just different things like that happen to properties over years and years of wear and tear.

And I see a pattern where the tenants don’t want to say anything to the landlord because they’re afraid their rent will go up or they’re afraid they’ll get in trouble. Like, “Ooh, I should have told landlord that I had a leak under the kitchen sink and I didn’t”. And they put a bucket under there and it just gets worse and worse and then all of a sudden you have a serious leak. And I just see a lot of tenants that are fearful to reach out to their landlord.

I’m the opposite. The first day you have a leak. If you’re my tenant, I want you to call me because I want to get it cured for you and I want to make it right and I want to make it a great situation for you to live in.

But that’s not what I typically see when I go through unit by unit in property inspections when my client’s buying something. When we walked through a lot of times we’ll see deferred maintenance. Now sometimes that’s a lazy landlord who knows there’s a problem but they don’t want to spend the money.

Barry MacGuire: Mm-hmm (affirmative).

René Nelson: And I think we’re going to see more and more of that, because landlords are trying to figure out at what point do they need to make improvements to a property versus, “Can I get away for another year before I fix that leaking roof or that rotten siding”, or you name it.

Barry MacGuire: I like the way you approach things, it’s like the old Benjamin Franklin philosophy, “An ounce of prevention is worth a pound of cure”.

René Nelson: Absolutely.

Barry MacGuire: Yeah.

René Nelson: Because when I walked through with those inspectors and then I see their reports and see the cost to cure that deferred maintenance, especially for things like dry rot, it’s, “Wow, if you would cured that in the first year or two as opposed to letting it go for five years, it would have been so much cheaper to fix it in year one than year five”. And now the bathroom floor is totally shot and you’re going to have to rip everything out.

Barry MacGuire: With all these properties in Portland, did you say 20,000 that are 60 years or older?

René Nelson: Yes.

Barry MacGuire: With all these properties not getting any renovations or work done on them, what’s the prognosis down the road?

René Nelson: Well, it’s also a catch-22 because they did a study, and because of rent control, it impacts new development starts for apartment complexes.

Barry MacGuire: Mm-hmm (affirmative).

René Nelson: And they’ve estimated that by the year 2030, that there’ll be probably at least 3,000 units, individual units, 3,000 units that will not be built. So, we’re going to see it on both ends of the perspective. We’re going to see the new construction, fewer developers will want to come into the state of Oregon.

Definitely in Portland we’re seeing new construction starts for apartments drop, they’re starting to go down. So there’s going to be fewer new apartments that will be built. And then the remodel of the older stuff, we’re going to see that I think start to diminish and investors start cutting corners, and not making as many improvements as they used to because there’s not as many dollars, because of rent control.

Barry MacGuire: That’s not good.

René Nelson: No, it’s really not. Really honestly, it backfired what the legislation was trying to do, because it’s ultimately going to impact the tenants. And unfortunately there’s going to be fewer houses, new opportunities to move into.
I think we’re still going to have a housing shortage, especially in Portland. And now we’re going to have a situation where I think… well, we saw it in San Francisco for years with rent control, where investors and property owners, apartment owners, in San Francisco, they didn’t want to make improvements to their property. And they kind of had some, I wouldn’t call them slums, but some less than desirable places to live.

Barry MacGuire: Is Salem getting any word of this? Is anybody in Salem going, “Oh wait, this is not a consequence we even thought about”, or are they oblivious to it?

René Nelson: What I’ve been told is the year 2020 is a short legislation year, so we do not anticipate that we’re going to see any changes. But in 2021 we anticipate that they will probably reduce the rent cap even more. So right now we have a 7% rent cap. California just passed rent control at 5%, and so the anticipation is that Oregon will reduce their rent cap even more.

And the other thing, Portland just passed the screening laws that you and I have talked about on a couple of our shows, the anticipation is that in 2021 those screening laws will pass statewide. And that’s going to make an impact, because now you have to take a 500 credit score and there’s a bunch of new rules that are being rolled out in Portland and if that passes statewide, I think a lot of investors are going to be really unhappy. And part of my… I’m not a gloom and doom person, my glass is way more than three quarters full, it’s almost overflowing.

Barry MacGuire: But at the same time you are a realist though.

René Nelson: Yeah, and I am a realist. And my goal is to educate people and help them be aware of what’s coming down the pike, because if all that happens in 2021 there’s going to be a lot of investors that are going to want to get out of multifamily. And the problem is it’s going to plummet the market because there’s going to be so much inventory on the market.

We saw that in Portland. Portland was a really tight market for apartment complexes for sale in 2014, ’15, ’16, there just wasn’t much for sale. When rent control passed in 2017 and you had the relocation fees and everything, all that passed in Portland, we saw the market flood with apartment complexes for sale.

Barry MacGuire: Really?

René Nelson: Mm-hmm (affirmative). And I predict it’ll happen in 2021 in the state of Oregon. If the rent control gets tamped down and they tighten that and if they pass screening laws statewide, there’ll be multifamily owners that are going to want to bail out.

Barry MacGuire: So it’s already been hitting Portland pretty hard, how about here in Eugene?

René Nelson: Well, we don’t have as many complexes in Eugene as we do in Portland, but I am definitely seeing properties sell. I’m helping an investor right now buy a $19 million apartment complex, because the seller is here in Oregon and he knows now is the time to get out. And my buyer is coming in from California and thinks that this is a great opportunity to start buying and acquiring. So, things are silently happening right now.

So, I think the takeaways for today would be, I have two things that I offer to people. I will do a free market rent study, it’s a quick condensed version of looking at where your rents are in comparison to three other properties.

Barry MacGuire: Sure.

René Nelson: I like to help people understand, how does your property compare to other properties? So if you have five units or more, that’s a service that I can offer to apartment owners. I don’t do it for duplexes and the smaller stuff like that, you can call your favorite residential broker and ask them, you can get on Craig’s list. But for apartment owners, I give them this condensed market rent study.

And then the other thing that I do is a detailed analysis for investors that are trying to decide if it’s the right time to sell. I have this unique process called the pro-analysis, where I look at their property performance. We do a review of what they want to accomplish, and then we look at, what are they really looking for opportunities?

Barry MacGuire: Mm-hmm (affirmative).

René Nelson: Do they want to go into a different product type? Do they want to buy more units? Do they want to go into a different state, or do they just want to stay put and stay where they’re at? So using my pro-analysis, I can help them look at all the different factors. Where are they at right now? Where do they want to go? And what risk are they willing to take to get that yield that they’re looking for?

Barry MacGuire: And I see that people can schedule a free 15 minute strategy call, correct?

René Nelson: Yeah, you can go to my website, which is eugene-commercial.com, and click on the button at the top. Schedule a free 15 minute consultation, free of charge, we jump on the phone and we just talk out strategies and how I can help people.

Barry MacGuire: And what’s the website if people want to find out more about rent control?

René Nelson: Go to stoprentcontrol.me, that’s stoprentcontrol.me, and you can download a free copy of disruptions in Oregon real estate. It’s a guide that I wrote to help investors understand what’s happening in the market right now and how they can prepare for what’s coming in the future.

Barry MacGuire: René, thank you so much.

René Nelson: Thanks Barry.

Barry MacGuire: And it really is a good guide. It’s up to date, it’s informational, and it’s an easy read too. Once again, it’s called disruptions in Oregon real estate, and you can download it for free at stoprentcontrol.me. We’ll talk to you next time. Thanks for listening.

[/toggles]

Learn more about the opportunities available to capitalize on the current disruptions in the Oregon multifamily market

Click the button below to download my book or request a hard copy:

If you’re ready to talk with me about your options as an investor:

SCHEDULE A 15-MINUTE DISCOVERY CALL

Disruptions in Oregon Real Estate Episode 4:
The Four Phases of the Real Estate Cycle

Apartment Rental Market in Lane County

Understanding the phases of the real estate cycle is critical for investors because as vacancy starts to increase, it affects how much an apartment owner can charge for rent, which trickles down to their bottom line. This in turn impacts what their property could potentially sell for. Learn where Lane County is in the real estate investment cycle as well as what to expect.

What You Will Learn in Episode 4:

• The last recession and its impact on Eugene area commercial real estate
• The four phases of the real estate cycle:
  • Recovery
  • Expansion
  • Hyper supply
  • Recession
• The current healthy apartment rental supply in Lane County: renters looking to rent and new units still being built
• How incentives go up as the rental market softens
• Impact of UO on rental pool market and the 3,000 new beds that will be coming on the market over the next 18 months
• How rent control affected migration into Portland
• The impact of rent control on out-of-state investors

Recovery, expansion, hyper supply, and recession are the four phases of the real estate investment cycle. In Eugene keeping tabs on what’s coming in the UO rental pool market is also important. Knowing where Lane County is in real estate cycle will help investors make critical decisions about their multi-family properties.

[toggles title=”Read the Full Transcript”]

The Four Phases to the Real Estate Cycle

Barry MacGuire: Welcome to the Disruptions In Oregon Real Estate podcast with your host, René Nelson, helping you stay in the driver’s seat of your investment portfolio. As a commercial real estate broker and investor herself, author René Nelson’s passion is to keep your hard-earned real estate investments working for you.

Her goal is to help Oregon real estate investors analyze and measure the value of their current real estate portfolio while exploring available opportunities. And now your host, René Nelson.

René Nelson: Thank you, Barry. Today I would like to talk about the four phases of the real estate cycle. And here’s why it’s important for the listeners to know this information because as vacancy starts to increase, it will make an impact on how much an apartment owner could charge for rent.

And then that trickles down to their bottom lines. So when they get ready to sell or if they want to sell, the first thing that we look at is the net operating income. So if your net operating income has been shrinking or reducing, that will have an impact on what you could potentially sell your property for.

Barry MacGuire: All right, you got to help me understand this. I’m new to this. What are the four phases to a real estate cycle and where are we right now?

René Nelson: Okay. The four phases are, first it’s recovery and that is where vacancy start to decline and there’s no new construction happening, so we’re in a recovery mode.

Barry MacGuire: Okay. Historically, let’s talk about when that happened. Was that after 2009, 2010? Were we in the recovery mode there?

René Nelson: Yeah.

Barry MacGuire: Okay.

René Nelson: We just started to see the market kind of catch its breath and all of a sudden we could notice that the market was stabilizing and the vacancy-

Barry MacGuire: We didn’t see it at the time. We were still a little bit frightened and scared about what was going on, but we were actually past the bottom and we were starting to get a little bit better. Right?

René Nelson: That’s right. That’s right. Historically, when we came out of that recession, we did not see a lot of new construction. If you think back about 2014, ’15, even ’16 as we were coming out of the recession, there were not a lot of new apartment complexes that were being built in our area. In Portland they were being built but not in the Eugene Springfield area, predominantly.

Barry MacGuire: Why cautiousness or what was the reason why?

René Nelson: For a lot of developers, they had taken it pretty tough financially in the recession and the lenders were not loaning money as freely as they are now. And so most of those developers, when they’re building apartment complexes, they need lenders’ money or leverage in order to pull it off. There’s one apartment complex that’s just being finished right now in Eugene that was $30 million.

Barry MacGuire: What? Just being finished now?

René Nelson: Yes.

Barry MacGuire: Wow.

René Nelson: That’s a lot of money to pull out of your own pocket, so a lot of them use leverage while when the lenders are conservative and not loaning money or requiring a much larger down payment, the developers don’t want to get into the market.

Barry MacGuire: What market was hit harder? I’m getting off topic here, but what market was hit harder during the great recession as far as rentals? Was it Portland or Eugene?

René Nelson: I would say it was 50/50. Part of our dilemma here in Eugene is we don’t have as many large employers. Our bigger employers here in lane County are the hospitals, university, education. But when you’re in Portland, you’ve got all the tech industries, hospitality, service, plus education, plus healthcare. So you’ve got more big employers in Portland.

Barry MacGuire: More diversification.

René Nelson: Yeah.

Barry MacGuire: All right. I’m sorry, I got us off topic there. Recovery is the first stage.

René Nelson: Recovery is the first one and then we go into expansion. So what we’re starting to see there is vacancies are still declining or flat, so people aren’t moving around and you don’t have a lot of competition. Vacancies are just kind of stable and now we’re starting to see people build, developers are starting to build. So think back to the development that occurred over by Costco off of Chad Drive.

Barry MacGuire: Just North of it.

René Nelson: Yeah, just North of it. That started right after we came out of the recession, they started building over there and started building apartments. And there were some additional apartment complexes that were built back in that area, in that very street bridge area. And primarily because you’ve got high earners that live in that area, high demand because you’re close to all the amenities, food, shopping-

Barry MacGuire: Shopping, High Five.

René Nelson: Yep. That’s what the renters want. And then you add to it, nice amenities in the apartment complex itself. Most of those have covered parking, they have pools, they allow pets. And so that will draw the demand for the higher quality tenants who want to pay more money in rent.

And so then you start to see more people want to get into the construction market because now they see that there’s demand and they see how fast those leased up.

So during that expansion phase, we see people kind of looking around, developers looking around saying, “Huh, maybe it’s time that I should start building.” And their bankers are now opening the purse strings and starting to loan money a little more freer.

Barry MacGuire: Okay. That’s the second step. What’s the next stage?

René Nelson: Well, the next stage then is hyper supply. What happens with hyper supply is we get into too much construction that has occurred and now there’s an oversupply. We’re not there right now in Eugene.

The market is there in Portland. There is an oversupply in the Portland market right now, but in Eugene, we’re at a healthy, healthy balance right now for the demand of renters that want to rent and the new units that are coming to the market.

Barry MacGuire: Do we typically follow Portland like six months to a year later? Are we going to be there soon, do you think?

René Nelson: I don’t know that we’ll be there soon. And I’m going to talk about why. Because the fourth part of the cycle is then a recession. And what happens during hyper supply and a recession is you start to have increasing vacancy and there’s still more units that are coming to the market.

Now, in Portland, they have more units that have hit the market because those apartments are now completed, but there’s not enough renters right now to absorb that. So they literally are starting to give concessions where they’re offering free rent, discount, you get a free month rent if you sign a 13-month lease. So they’re starting to do that in Portland.

I don’t think we’re going to have to do that in the Eugene area for a while because we’re still in a healthy balance. And part of that is because of interest rates.

If the lenders had increased interest rates, remember earlier in 2019 when the Fed Trader raised rates around July, mid year. And then they did a quick correction and they said, “Oops, we dipped our toe in the water, the market corrected itself, we’re not going to raise rates.”

Barry MacGuire: Sure.

René Nelson: If they would have started to raise rates like the Fed thought they needed to do, we would be headed into a recession in my opinion.

Barry MacGuire: Yeah, they were on a road to that in 2018. They were pretty aggressive with rate increases, right?

René Nelson: Yes. And they realized that they needed to reel it back in in order to keep our economy healthy. But in the recession, one thing that we noticed, rates were pretty flat, but then the lenders started requiring more of a down payment.

So they started tightening down their guidelines and a lot of us in the industry could feel the changes, but we didn’t quite see it coming. I don’t think anybody really realized we were going to have such a mortgage meltdown. We could do 10 radio shows on what happened there with the debacle with subprime mortgage rates and how that crashed the economy.

But ultimately, the lenders got really skiddish and so they tightened their lending guidelines almost overnight when we went into that recession back in 2008 and ’09 and that experience that we had. When they do that, that makes a direct impact on new construction. New construction starts and who wants to get into the market to build apartment complexes.

So right now we’re in a really healthy balance in the Eugene Springfield area in Lane County. We’ve got renters that are looking to rent and we’ve got new units that are coming out of the ground still. So we’re in a really healthy balance right now. In my opinion, we’re still in that expansion mode right now in our area.

Barry MacGuire: At least in Eugene. Not in Portland though.

René Nelson: That’s right.

Barry MacGuire: They’ve gone a little too far up there. How does the vacancy rate look right now for the whole State of Oregon?

René Nelson: In the Eugene area in the fourth quarter of 2019, we’re at 4.6% for vacancy. Statewide, it’s at 5%.

Barry MacGuire: That’s about average, right? Is that to consider the norm?

René Nelson: It is the norm. And what happens is as the rental market starts to soften, then incentives go up. Luckily we don’t really have to give a lot of incentives right now in Eugene.

We are seeing incentives in the campus area, but really what we experience here is there’s 23,000 students at the University of Oregon and 78% of those students live off of campus. So think about the population that’s out there in the renter pool. 23,000 students, 78% of them live off campus.

And if you did a poll within a one and a half, two-mile radius of the University of Oregon and you polled apartment complex owners, I can tell you at least 50% of those property owners, because I know a lot of them will say they either have graduate students or University of Oregon students that live in their apartment complexes. So that’s one thing that has helped keep our vacancy low in our area and keep up below the national average.

Barry MacGuire: All right, so do you think we have an oversupply of properties and how does rent control factor into all this?

René Nelson: Well, rent gains in Eugene are stronger historically than they have been in Portland and even nationally. During the last cycle, we saw our rents increase about 43% in the Eugene area, but that was before rent control went into play. So one thing that we’re watching right now, as I mentioned, rent growth is really supported by the low vacancy and the number of U of O students that are in the rental pool market.

Barry MacGuire: Sure.

René Nelson: A lot of Eugene apartment complexes are lower in what I call, no frills. They’re built in the ’70s, they’re a two-story walk up.

Barry MacGuire: Pretty basic.

René Nelson: Pretty basic, and that’s what the average young renter is looking for because it fits into their budget. I’m going to talk a little bit about what’s happening on the new construction end of apartments because we’ve talked a little bit about supply and demand. There are several new apartment complexes that are coming out of the ground right now.

Barry MacGuire: Here in Eugene area?

René Nelson: Here in the Eugene area, there’s one in the Country Club Road area that was 110 units. Just completed and that’s the one that costs roughly $30 million to build. And there’s 174 units out by Costco in Eugene and they’re leasing up right now and they’ve had a really good success ratio.

Barry MacGuire: Good.

René Nelson: In the South Eugene area, there were 117 units that were built in the South Eugene area and they were 60% occupied in the first month.

Barry MacGuire: Well, that’s healthy.

René Nelson: It is.

Barry MacGuire: Very healthy.

René Nelson: It shows that there’s still a high demand for renters that want to move into new quality units. And guess how much the average rent in that South Eugene complex?

Barry MacGuire: 1,000.

René Nelson: Ooh, no.

Barry MacGuire: Way off?

René Nelson: Try 1,300-

Barry MacGuire: Really?

René Nelson: For the average unit.

Barry MacGuire: The average?

René Nelson: Yeah. And then there’s new complexes that are being built downtown. There’s a couple that are being built out in the River Road area that will be done in January of 2020. And then the kind of the cherry on the cake or the cherry on the ice cream sundae is there’s 3,000 new beds that will be coming out of the ground in the University of Oregon area in the next 18 months.

Now, the average listener may be saying, “Why does that impact me?” Because the U of O students, as new opportunities for housing become available, they want to move closer to campus so they can walk and bike because it’s almost impossible to find a parking spot in the university area.

Barry MacGuire: Sure.

René Nelson: We kind of call it duck hunting with a rake. I mean, it’s just really hard to find a parking spot. So the closer they are to campus, to their friends, to their classes and to social life, they’ll move closer to campus.

So as these 3,000 new beds come out of the ground, think about the average student population at the university. They haven’t rolled out any new announcements that they’re going to double student population or grow a bunch of classrooms.

So I really think what that means is students are going to move in closer to campus and so we’re going to start to see some vacancies in the outlying apartments.

Barry MacGuire: Apartments, okay. Yeah, because that made no sense. You said that they’re pretty much steady at 23,000 students year after year and then they’re adding these 3,000 extra beds. Okay, that makes sense then. So is there an influx of people moving to the Eugene Springfield area?

René Nelson: We are still seeing a healthy balance of new people moving into the area, especially from outlying areas. They’re moving in because there’s job growth and where can you not go to a restaurant or to a store where there’s a help wanted sign right now?

Barry MacGuire: True.

René Nelson: I mean, they’re looking for people for employment. So we do have a lot of people moving into our area. For the listeners, you may be saying, “Okay, why is all this important to me?” It all boils down to your bottom line.

Let’s start at the top with your income. If you’ve got a 20-unit apartment complex and you’re within a five-mile radius of the University of Oregon, that pretty much encompasses all of downtown Eugene.

And now there’s 3,000 new beds competing for the same student population that are living in your complex. And let’s say out of a 20-unit complex, you’ve got five students that live there. Either the graduate students or junior seniors, you’ve got five people that live in your complex. If they can get cheap rent near the university, they’re probably going to move.

Barry MacGuire: That’s a quarter of your rooms.

René Nelson: It is. Now you have to figure out, “Okay, how’s the economy? Do I drop my rent? What do I need to do to stay full?” And there’s just a bunch of things that you really have to pay attention to and it changes almost on a monthly basis. Definitely changes on a quarterly basis.

That’s one reason that I provide to my clients a free Eugene Springfield multifamily report and you can go to my website, stoprentcontrol.me… I’m just going to segue here. I’m not asking you to sign any petitions. It’s just an easy website that I created, stoprentcontrol.me, so that people could go in, fill out their name and download a free copy of my book Disruptions In Oregon Real Estate.
I talk about the cycles in the real estate market and how that impacts you as a property owner, but then I also offer a free report to my clients on a quarterly basis that talks about the rent, the vacancy, what we’re seeing in either an uptick in rent or what we’re seeing for new construction starts.

And what I’m trying to do there is just help the apartment owners really stay aware of what’s happening in the market. Are we flat and stagnant for vacancy? Are we going to see a spike in rent? Are there 200 new units in my area that are coming on to compete with me? So it’s stuff like that. I always try to think, what are people laying awake at night thinking? And most people that own apartments are thinking, “How do I stay full and how do I keep the tenants that I have?”

Barry MacGuire: As far as migration to a Eugene, are we above, below average nationwide? I’d assume we’re probably a little bit above, right?

René Nelson: We are above, yeah. In 2016 and ’17 Portland had 101 people a day that moved into Portland.

Barry MacGuire: A day?

René Nelson: A day.

Barry MacGuire: Wow.

René Nelson: And so that’s where we also saw rent control start to take its grassroots movement because as all those people were moving into Portland, they kind of flooded the market and so there was a housing shortage, not enough units. Landlords started to spike up their rents and that’s where we saw our rent control start to take control.

Barry MacGuire: All right, so we’re going to wrap things up here. Well, let’s just do a little recap here. The four phases of real estate. We’ve got the recovery, expansion, hyper supply, and then recession. Portland tends to be right now a little bit more in the hyper supply. Eugene here, more into the expansion, maybe tail end of expansion. We’re not sure. We’ll see about that, right?

René Nelson: That’s right.

Barry MacGuire: But things are looking good so far, right?

René Nelson: Really good.

Barry MacGuire: All right. Things to do, pay attention to the vacancy rate because that signals hyper supply, correct?

René Nelson: Correct.

Barry MacGuire: Oversupply, that becomes a problem when you want to sell, right?

René Nelson: It does. Because again, if you start to experience high vacancy and your net operating income drops, that’s going to make a direct impact to what you can get for a sales price.

Barry MacGuire: Simple case of supply and demand.

René Nelson: That is correct.

Barry MacGuire: All right. Anything else you want to pass along? Let’s talk about the website real quickly. Let’s talk about what people can find on your website.

René Nelson: Sure. Go to stoprentcontrol.me. You can put in your name and click the button and you can download a free copy of my book. Disruptions In Oregon Real Estate.

Barry MacGuire: It’s a real easy read, by the way. I’m not a genius by any means, but I even understand it. It was really good and it’s a quick read too.

René Nelson: I designed it so somebody could sit down with a cup of coffee and drink it and get the basic just of how rent control is impacting Oregon apartment owners and what they can do about it.

Not everybody has to sell. This is not a gloom and doom situation, but what I want to do is educate people on what their options are and watch the signs.

I always listen to Warren Buffet and I try to read as much as I can read about him, and he’s always watching for signs on how the market is shifting and changing, and there are easy things that we can watch here locally with vacancy, with how many new units are coming out of the ground. Just those little tail signs will tell you where our market is going.

And then of course, watching interest rates and where lenders are at with their desire to loan money.

Barry MacGuire: One of my favorite quotes from Warren Buffet… He’s by the way, done pretty well for himself.

René Nelson: I would say so.

Barry MacGuire: His a quote was, “It’s always good to learn from your mistakes, but it’s even better if you can learn from other people’s mistakes.”

René Nelson: Yeah, that is so true. Very true. And you know, I would agree with that because we’re seeing that now in our Eugene market, what the Portland apartment owners had to suffer through. And it’s funny because, like you and I talk about, what happens in Portland trickles down.

So when rent control went into place, then the landlords got really tough on screening and started really making it difficult for people to qualify. The legislators have now passed rent screening laws in Portland. We know those are probably going to trickle out statewide within the next year or two.

And so talking about learning from other people’s mistakes, we’re watching what Portland does because then that impacts us here. I don’t want to be gloom and doom, but I will tell you that I work with a lot of out-of-state investors and they really are starting to segue into other markets. They’re headed to Utah, Texas, Arizona. I mean, you name it.

There’s about five states that they’re calling me saying, “I don’t want to buy in Oregon right now. I have apartments here, I’m going to keep them. But my gut is a lot of those out-of-state investors will probably start to sell within the next 12 to 18 months because as the rent control just continues to take more of a foothold and there is talk that they may lower rent control even more in the 2021 legislation year.

A lot of investors are looking at that saying, “I don’t know if I still want to be in the market.” But it’s a great opportunity for some of my investors that all ready own property. They live in Oregon, they’re trenched here and they just say, “I want to buy everything that comes on the market.”

Barry MacGuire: Do you think our friends in Salem are listening to investors from out of state and they are like, “Maybe we should reconsider this rent control thing?

René Nelson: Honestly, no. I don’t think they’re listening to it. I think what they’re listening to right now are the tenants because it’s still happening where tenants are having to move because owners are selling their properties because they’re getting out to do to rent control.

And when those tenants have to move and they’ve been somewhere for a couple of years and they realize, “Oh, my rent just went from 850 to 1,600. 13 to 1600 because that was all that was out there in the market.” That’s not really helping the cause right now.

Unfortunately as those units are selling, a lot of them are selling to owner occupants, people that are moving into single families and duplex properties, which is great for those people because now they can have a place that they call home and they own it, but it’s just shortening the housing supply.

It’ll be really interesting. I feel like at the end of 2019, we will now have a pretty complete year that we could look at and review. It’ll be really interesting to see how that has impacted and taken out of the available rental pool. How many units it has taken out of the rental pool.

Barry MacGuire: Stay tuned. René, thank you so much.

René Nelson: Thank you, Barry.

Barry MacGuire: Once again, you can go to stoprentcontrol.me to download a free copy of René’s new book Disruptions In Oregon Real Estate. She covers lots of good information in the book about rent control and how it’s impacting Oregon real estate, and the best part is, it’s free. Thanks for listening.

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Disruptions in Oregon Real Estate Episode 3:
New Portland Screening Ordinances

How Portland’s FAIR May Affect Lane County

Oregon is now getting its first taste of statewide rent control laws, but more could be coming. Portland has new ordinances governing tenant screening and rental application processing ready to go into effect in March 2020. Learn about those rules and their potential impact, and why Lane County investors may have to contend with them in the future.

What You Will Learn in Episode 3:

• Fair Access in Renting (FAIR), which is set to go into effect in Portland in March 2020
• The issues apartment owners will likely have with FAIR’s impact:
  • 72-hour notice before taking first application
  • Processing one application at a time (which means elimination of open houses for rentals)
  • The need to explain why you have denied an application
  • Tenants will only have to earn two times the monthly rental amount to be considered
  • Changes in the credit score that landlords can require for tenants to rent their properties
  • The importance of using the Housing Bureau’s rules for screening out applicants
  • The need for multifamily owners to keep good records and save them

Apartment investors in Lane County should keep an eye on the new laws (known as FAIR) set to take effect in Portland in March 2020 and their effects. What happens In Portland often becomes law statewide within 12 months. These new laws in Portland will have a profound impact on tenants and landlords alike. As a multifamily owner, it’s critical to stay informed.

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New Portland Screening Ordinances

Barry MacGuire: Welcome to the Disruptions In Oregon Real Estate Podcast with your host, René Nelson, helping you stay in the driver’s seat of your investment portfolio.

As a commercial real estate broker and investor herself, author, René Nelson’s passion is to keep your hard earned real estate investments working for you. Her goal is to help Oregon real estate investors analyze and measure the value of their current real estate portfolio while exploring available opportunities. And now your host, René Nelson.

René Nelson: Thanks Barry. Today I’d like to talk about the new Portland screening ordinances that are currently being reviewed right now by the Portland Housing Bureau. This recording is happening in December of 2019.

So whenever you listen to this podcast, just be aware that the decisions were made in December and they go into effect in March of 2020.

Barry MacGuire: First thing I want to ask you, I’ve heard the acronym FAIR, F-A-I-R. What is FAIR? And is it fair?

René Nelson: Well, let me tell you the top three things and then we’ll discuss it and decide if it really is fair. So that stands for Fair Access In Renting, and Portland really felt like tenants were struggling to meet criteria for landlords.

And so that’s one reason that the city counselors put this on the docket and on their agenda to pass. And so they have passed this and approved this. It is now with the Portland Housing Bureau where they are now refining the law and it will go into effect in March of 2020.

Barry MacGuire: How is this going to affect landlords?

René Nelson: Substantially.

Barry MacGuire: Really?

René Nelson: Yeah, it really will. So I brought just a couple of the top three to five things that I think will be a big game changer for a lot of people.

And let me mention, if you want to read these in depth, you can go to the City of Portland’s website and it’s portlandoregon.gov. portlandoregon.gov, and look for the Portland Housing Bureau icon or tab that’s on the front of that webpage. And you can look at the FAIR housing rules and what they’re looking at right now. And then what will ultimately pass as law in March.

So here’s some of the top things that in my opinion will be of issue or concern for apartment owners.

Barry MacGuire: Okay.

René Nelson: You are now going to have to give 72 hours of leeway before you can take your first rental application. So you’re going to have to post a property that it’s available and you have to wait 72 hours before you can take your first application.

Barry MacGuire: Why?

René Nelson: Because they want to make it fair, F-A-I-R, to all applicants. So they feel like if a landlord just takes the first application, maybe they took the easy road and didn’t give all applicants an opportunity to apply.

Barry MacGuire: Okay. I think that’s a little long, but what do you think?

René Nelson: Well, and really one of their main criteria also is they built some of these rules because they’re also trying to make sure that people with handicaps and different things have fair access to housing.

And I can honestly tell you that every landlord that I know automatically factors that in for their tenants. Because we’re all regulated by HUD on a federal level. I mean the chance that a landlord is going to discriminate is right at none. I mean every now and then maybe they make a mistake.

But we love people that are in need and that come to us and say, I just need a great place to live. Yep, you can make an application. And for some people in Portland, I guess maybe that wasn’t happening.

I don’t know exactly, but I know that that was one of the things that the city counselors felt was not happening. That maybe people that had some disabilities were not getting a fair chance to look at housing.

Barry MacGuire: Okay. 72 hours, fair enough. What’s next?

René Nelson: 72 hours. So the next thing is how the applications are processed and the order that applications are being considered. So how this is going to work is you can only process one application at a time.

So I have had landlords who have held open houses. Hey, I’m going to be at the property from ten to noon on Saturday and just pop by and you can take a rental application. They’re not going to want to do that in the future. You’re going to want to process one application, the first application that comes to you.

You need to look at it and decide if that tenant passes your criteria and then make the decision, either you’re going to rent to them or you are not. Because tenants have felt like that they made an application, but maybe their application got pushed to the bottom and the landlord took somebody else’s application instead. So now you can only process one application at a time.

Barry MacGuire: So no more open houses?

René Nelson: No more open houses, not for renting.

Barry MacGuire: Really?

René Nelson: Yeah.

Barry MacGuire: Thoughts?

René Nelson: I believe that you’ll still be able to do open houses if you want somebody to tour it and look at it. But why would you do that? With Craigslist you can just post all the pictures that you need. Don’t open yourself up and be liable as an apartment owner and a landlord. Follow the rules.

Barry MacGuire: Okay.

René Nelson: And so from this point forward, I’m just telling all my clients, don’t do the old school. Do it the way you now need to do it to keep yourself out of trouble.

Barry MacGuire: All right. One applicant at a time.

René Nelson: One applicant at a time and you have to either approve it or deny it. And that’s the third thing. If you deny it, you have to explain the process of how and why you denied the application.

Think about it just like if you were applying at a local credit union for a car loan or a signature loan and they said, gee, I’m sorry you’re declined. You want to know why?

Barry MacGuire: Sure.

René Nelson: Same situation. If your potential landlord says, I’m sorry, you’re denied, they’re going to have to give you written documentation why they’re denying your application.

Barry MacGuire: Okay. Just real quickly, going back to the one applicant at a time, I’m not a landlord so I’ve never done this before, but doesn’t that put the landlord on the spot to actually make a decision right then and right there? I mean can’t they wait for a day or two before they accept whoever they want for that particular residence?

René Nelson: Yes. I probably wasn’t clear on that, so that’s great clarification. Yes, you can actually take your time, pull a credit report.

So it’s not like you have to decide right on the spot, but you also don’t want to take three applications all at the same time. So maybe somebody emails you one and someone hands you one or you have two or three people at an open house and they’re literally at the kitchen table or on the counter.

Barry MacGuire: That’s what I was thinking right there.

René Nelson: Filling out the application to hand it to you. Once somebody hands you the application with their screening application fee or their credit check fee, you better process that one that you have right there in your hand and just tell everybody else, just take it and I’ll call you if this first applicant doesn’t meet the criteria. I will call you, write down your phone number. That’s really all I want from you at this point.

Barry MacGuire: Sorry to backtrack on you.

René Nelson: No, no, that’s great.

Barry MacGuire: So you have to give reason. You have to stay reason which I think is fair.

René Nelson: I do too. I do too. Now the Portland Housing Bureau is going to put out the requirements. So as an example, in the past, most landlords would use a rule that you had to earn three times the rent in gross income. So if the rent was $1,000 you had to prove that you earn $3,000 between you and whoever else was going to live in the house.

Portland felt like that that was a barrier for a lot of people to get into housing. So they lowered that to two times the rent. So that will be one of the criteria that’s coming out.

Now, one other thing that I’ve heard that in my opinion will be a game changer is they’re lowering the credit score requirements and we touched on that in the last time.

Barry MacGuire: Yes we did. They’re really lowering it, down to something like 500 right?

René Nelson: Yes, that is correct. And in the past, most landlords had a requirement in the 640 to 675 credit score requirements and the Portland Commissioners just felt like that was too much of a barrier.

So that’s why they’re now lowering it. There’s nothing specifically right now on the Portland Housing Bureau website that I could find today.

Barry MacGuire: Sure.

René Nelson: But yes, in the notes and the minutes from the Portland Commissioners meeting earlier this year, they had talked in the 500 range.

Barry MacGuire: Wow. And so the national average is 695. What’s the range where it’s kind of iffy? People are going like month to month to pay their bills and stuff like that.

René Nelson: Yeah. You typically see that range in about 625 to 645. It’s where you can start to tell that people are struggling, they’re going to miss a car payment or they’re going to miss a student loan payment. And they’re starting to really juggle what gets paid. And unfortunately I think some of it is going to be rent payments in the future.

Barry MacGuire: Sure. Yeah, you’re setting yourself up for a lot of problems down the road, I think.

René Nelson: Yes. Yeah, I would agree.

Barry MacGuire: So what’s next? We got through three I believe?

René Nelson: Yeah. And I would say that the last criteria that is, in my opinion, going to give some apartment owners heartburn. Let’s go back to denying credit. If you choose not to use the Housing Bureau’s requirements that they’re going to put out, then you have to give your own list to a potential tenant of how you’re screening that person.

So think about it, Barry. You now have declined someone and they have a list in front of them of what you’ve used for requirements. They’re going to go to an attorney and say, I was discriminated against.

So I would not use your own criteria. I would follow the rules for the Housing Bureau and really learn those rules and follow them to a T because it’s really expensive. You can be sued for three times the rent in damages plus attorney fees. It’s expensive if you make a mistake.

Barry MacGuire: A lot of landmines out there.

René Nelson: Really. It’s going to be a game changer for a lot of landlords, especially people that have self-managed. A lot of the larger apartment complex clients that I deal with, they have a manager, but you have to make sure that even your manager is staying up to date and knows what’s coming down the pike for changes.

Barry MacGuire: All right, so this is happening in Portland, but why should anyone outside the Portland area even care about this?

René Nelson: Well, because normally what happens in Portland passes statewide and it’s typically within 12 months.

Barry MacGuire: It’s going to trickle down.

René Nelson: It’s going to trickle down. 2021 is a short legislation year, so we may not see it statewide until 2022 but I do believe that once Portland gets these new screening laws in place and they start tracking them, then it’s going to pass statewide.

Barry MacGuire: Have you noticed over the years, once something happens in Portland, what’s the next market? Is it Eugene, is it Salem? Is it Bend or Medford that usually follow suit right after that?

René Nelson: Yeah, that’s a good question. Ironically, when Portland passed the rules that if you were going to give a no cause notice to a tenant, then you had to pay relocation fees. Bend passed it shortly thereafter.

Barry MacGuire: Bend? Okay.

René Nelson: Well, Eugene was kind of slow to pass it and then it passed statewide and so that’s typically what we see as it goes Portland, Bend and then it normally goes statewide.

Barry MacGuire: How’s this going to impact a apartment owners going forward in the future?

René Nelson: They need to be educated and know what’s happening. Again, if they use a professional management company, they’re probably going to be okay, but if you are self-managing, you need to be really educated on what the lies and what has changed and how to protect yourself against that.

Barry MacGuire: All right, so a lot to digest here in this podcast. First and foremost, let’s do a little recap of the new screening laws have been approved in Portland, correct?

René Nelson: Yes.

Barry MacGuire: All right. Apartment owners, they need to be aware of the changes and the impact of these changes, correct?

René Nelson: Correct.

Barry MacGuire: Arm yourself. Knowledge is key. You’ve got to arm with knowledge and stay out of trouble because there are those landmines, right?

René Nelson: There are definitely landmines.

Barry MacGuire: Anything else you can add just to before we wrap things up here today?

René Nelson: Yeah, I think probably the biggest takeaway is keep really good records and save those records because a tenant has up to 12 months to come back and dispute something with you and say, hey, you gave me a no cause notice. Or you raised my rent unfairly within a 12 month time period. I’m going to sue you. So as a landlord you need to keep your records for at least 12 months.

As a real estate agent, I have to keep my records for six and seven years. So I have boxes and boxes of records. And I love it because I know if somebody has a dispute with me, I could always go and pull that file out and dig through it. And I’ve got all that documentation there.

As a landlord, I want that same peace of mind. So I typically save my rental agreements for the same time periods, six years, while I’m saving my real estate records.

Barry MacGuire: That’s a good idea. Not only legally, but I think down the road, if anything comes down with the IRS, it’s always good to have documentation of everything that has gone on in that property. Right?

René Nelson: It really is. You don’t need it until you need it. And then when you need it, you want to put your hands on it. So if you’re kind of a sloppy bookkeeper, hire somebody.

Barry MacGuire: Sure, exactly.

René Nelson: Hire a U of O kid at 15 bucks an hour to come in and help you create a bookkeeping system, a record keeping system. It’s really not as tough as it sounds. If paperwork isn’t your forte, hire somebody.

Barry MacGuire: Words of wisdom. René, what’s the website once again?

René Nelson: Yeah, you can go to stoprentcontrol.me and download a free copy of my book, Disruptions In Oregon Real Estate.

Barry MacGuire: What are some of the other things on the website?

René Nelson: Yeah, so I put a little tab or an icon up at the top that has all the information about the Senate bill 698 in relation to rent control. I also have articles on there about what landlords can do to protect themselves.

I try to keep as many articles and information on there of different things that I see that impact landlords and apartment owners. And just what we’re seeing with the general appetite, with the changes in the industry and how it could impact people.

Barry MacGuire: René, thank you so much.

René Nelson: Yes, thank you.

Barry MacGuire: Once again, check out the website, a great resource. It’s stoprentcontrol.me, and while you’re there, download the free copy of René’s new book, Disruptions In Oregon Real Estate. She covers lots of good information in the book about rent control and how it impacts Oregon real estate. And the best part is you can get a free copy of it right now. That’s stoprentcontrol.me. Thanks for listening.

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Disruptions in Oregon Real Estate Episode 2:
New Laws Favor Tenants in Oregon

Oregon’s statewide rent control law, which passed early in 2019, is now impacting tenants and landlords in Eugene, Lane County, and throughout the state. This law favors tenants and is affecting how investors have to prepare when they want to sell their properties. Learn the four carve-outs that accompany the new law and how to enforce tenant rules.

What You Will Learn in Episode 2:

• The four carve outs that allow landlords to legally issue written notice ending a tenancy:
  1. If the property is going to be demolished or torn down
  2. If an immediate family member is going to move in
  3. If you are doing renovations that will make the property uninhabitable
  4. If you’re going to sell the property to someone who’s going to buy it and own or occupy it
• The timing for notices to end tenancy
• The differences in the rent control laws in Portland and Bend versus Eugene
• Predictions of what’s to come in 2020
• The differences in the rent control laws in Portland and Bend versus Eugene

The statewide rent control law passed in Oregon in 2019 is disrupting the multifamily market in Lane County and throughout the state. The law is affecting landlords and causing them to consider whether selling might be the right option. As a multifamily investor, it’s important to be educated about the law and avoid getting on the wrong side of things. Know the circumstances under which you can issue a notice to terminate a tenancy.

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New Laws Favor Tenants in Oregon

Barry MacGuire: Welcome to the Disruptions in Oregon Real Estate podcast with your host, René Nelson, helping you stay in the driver’s seat of your investment portfolio. As a commercial real estate broker and investor herself, author René Nelson’s passion is to keep your hard earned real estate investments working for you.

Her goal is to help Oregon real estate investors analyze and measure the value of their current real estate portfolio while exploring available opportunities. And now your host, René Nelson.

René Nelson: Hi Barry. Thanks for bringing me on. Today we’re going to talk about rent control and Senate Bill 608 and I appreciate you being here and let’s talk about this and ask me some questions.

Barry MacGuire: Real quickly. I guess the first question is, let’s review Senate Bill 608. What is it?

René Nelson: Okay, so in the Bill 608 it was designed to offer tenants protection against termination of tenancy and drastic rent increases. So that was the first thing. And they also require now longer notification periods for termination and it requires that a landlord has to have a reason to terminate a tenancy of more than one year.

Barry MacGuire: And you’ve recently had a case where a client wants to sell their property. Correct? Tell us about that.

René Nelson: Yeah. I had a client, and I’ve also had a lot of residential brokers call me because they know that I’ve really studied the rent control primarily because I sell apartment complexes. So if we’re selling a 20 unit apartment complex, most of the tenants just stay and we just sell those.

But when you’re looking at a duplex or even a single family resident, a lot of times the sellers say, “I want that tenant out before you put it into the multiple listing service,” as an example. Maybe the tenant is a hoarder or they’ve got a car jacked up on blocks in the driveway and it’s just not going to create good curb appeal.

So I’ve had a lot of residential brokers call me and say, “René, I’m about ready to put this great property on the market, but I need to get the tenant out. What do I do?” And I always tell them, “Okay, tread lightly because if you make a mistake, it’s very, very expensive.” And there’s some rules.

So the way that this works is with Senate Bill 608 it now protects the tenants so that you can’t just give them notice like you could in the past and tell them, “Hey, you need to move. We’re going to sell the property.”

Barry MacGuire: Even if they are hoarders? If they do have those vehicles up on blocks, you can’t do it?

René Nelson: Yeah, you can’t do it. So we’re going to talk a little bit about how to enforce your tenant rules because they still have to follow your rules and your guidelines. But you can’t just come in and say, “Hey, you’re out.” You have to start documenting that and you have to notify the tenant.

So here’s how it works. The Senate Bill was written so that it protects the tenant against just drastic rent increases and early termination or just a termination out of the blue. And it requires that the landlord, if you are going to terminate their tendency, you have to give them written cause and you have to give them why you’re doing it. And it actually takes three written violations in a 12 month period in order to terminate them.

Barry MacGuire: You say you have to give good cause. Is selling the property, is that a good reason right there?

René Nelson: It is not.

Barry MacGuire: It’s not.

René Nelson: It is not. So here’s how that works. If you’re going to sell a property that has a tenant in it, there’s four carve outs that go with the new rent control laws. And the first carve out is if the landlord is going to convert that into something different.

So let’s say they’re going to take a property and they’re going to either make it into condos or they’re going to turn it into commercial real estate or they’re going to demolish it. Then you can give the tenant notice. It has to be 90 days and you have to say, “This is what I’m going to do with the property.

So I’m basically going to demolish it or I’m going to convert it into a non residential use. And here’s your 90 day written notice that your tendency will be terminated.” So that’s the first carve out that’s allowed.

Barry MacGuire: Can the landlord use it as their own residence?

René Nelson: Yes. They can also move into it. So that’s the second one. You can move into it or you can move in an immediate family member. So you can move in a child, an adult child, you could move in a grandparent, you could move in a step child, but you don’t want to say grandma’s moving in, wink, wink, and never move grandma in. Because if the tenant finds out that you have done that, they have the right to come back and sue you for damages and they have up to a year to come back and sue you.

And I’ve had people say, “Oh, well I’m just going to move my mother in, but she really lives in Florida, so I’m really not going to move her in.” And I’m always like, “Oh, don’t do that. You are liable to be sued.”

Barry MacGuire: Well, like they say, honesty is definitely the best policy. We’re talking about the four carve outs right now. Let’s continue on.

René Nelson: To recap. The first carve out is if they’re going to demolish it or tear it down. The second carve out is if they’re going to move in an immediate family member.

Barry MacGuire: Okay there we go. Yes.

René Nelson: The third carve out is if they’re going to do renovations. So that means that the property would have to be uninhabitable. You couldn’t live in it. That doesn’t just mean paint and carpet where the tenant could move all their furniture to the middle of the room and you could paint around them or they could move everything into the garage and you could put carpet down. It has to have no kitchen, no bathroom, no heat source.

Barry MacGuire: Roof work?

René Nelson: Roof work is questionable.

Barry MacGuire: Really?

René Nelson: Yeah, because here’s the deal, roofers put roofs on all day long, all year long with tenants in it, while people are still in it. But if there’s a hole in the roof and it’s leaking, I mean a substantial hole in the roof and you’ve got issues with the tenant there, then potentially the roof could be an issue, but you really want to make sure that you do a gut check, check your integrity level.

Barry MacGuire: Is the landlord obligated to give that tenant a first right of refusal to come back into that property once the work is done though?

René Nelson: That’s a great question and the answer is no, and I’ve heard that from several real estate attorneys. And the reason is when you notify the tenant that that property is about ready to become uninhabitable, no kitchen, no bathroom, no heat source, something major is going to change in that property and you’re going to do a major remodel. You were ending the tenancy there. You’re ending the relationship.

So if you own more than four properties, you have to pay them one month worth of rent because that allows the tenant, that gives the tenant the cash that they need to go forward and put a deposit down on a property to move to. So if you own more than four properties, you have to give them 90 day written notice and you have to pay him one month of rent at the time that you deliver that notice to them.

Now I’m going to segue here on the side. I’ve had lots of property owners say, “Oh, well I’m going to put all my different properties into different LLCs and then that will exclude me from having to pay that one month of rent. I own property outside of Oregon. I only own one property in Oregon. So that excludes me.” You better check with your attorney because that is not accurate. So if you own more than four properties, including out of state in different LLCs, then you are qualified as a landlord and you do need to pay that 30 days worth of rent to the tenant.

Barry MacGuire: Oh, really? Okay.

René Nelson: I know a lot of people grumble and say that’s unfair, but folks, it’s reality. It’s already past. It’s the law. And if you violate that, the tenant has the ability to sue you for damages, including their attorney fees.

So think about it. They really don’t have much to risk or lose. They’re going to go to legal aid, get an attorney and they’re going to see you in court and you’re probably going to lose. So think logical, pick up the phone and call your favorite real estate attorney and run it by him if you have any questions or any doubts.

Barry MacGuire: What’s the fourth carve out?

René Nelson: Okay, so the fourth carve out is if you’re going to sell it to someone who’s going to buy it and own or occupy it. So let’s pick a single family residence. You’ve owned that for a number of years. Maybe you lived in it originally and then you moved into a bigger house and you rented that property out and you’ve had tenants in there for a number of years. Now you want to sell that single family property.

When you put it on the market for sale with your favorite real estate broker and they put it into multiple listing, you can notify your tenant that you’re going to put it on the market, which I think is the fair thing to do because you’re probably going to have a sign in the yard and it’s going to be a multiple end Zillow. And if you don’t tell them somebody that works with them-

Barry MacGuire: Communication is important. Yes.

René Nelson: Yeah, somebody is going to tell them, “Hey, your property that you live in is up for sale.” If someone makes an offer on that property and they’re going to live in it as their primary residence, then you have to notify the tenant in writing that someone is going to buy that property and they’re going to live in it as their primary residence and you have to give them a copy of the earnest money agreement to approve it. Does that make sense?

Barry MacGuire: It does. It does. Yes. Okay. So that’s the fourth carve out?

René Nelson: That is the fourth carve out. And you cannot give notice to the tenants until you have an offer in hand. So you can’t just list the property for sale and notify the tenants, “The property is listed for sale and the owner occupying is probably going to buy it. So you need to move out.” You can’t do that because that’s an assumption that may not happen.

Barry MacGuire: Now typically closings take more than 30 days and that’s what you have to give the tenants, right? 30 days?

René Nelson: You have to give the tenant 90 days notice. So it’s really kind of tricky because most conventional loans require that you move into the property within 60 days of when you close your transaction.

But honestly, because Oregon and now California are passing rent control, Fannie Mae is not really enforcing that rule because if you think about it, you can’t move in for at least 90 days because the tenant has to move out.

Barry MacGuire: This is complicated. That’s why you’re here doing what you do. We really appreciate that. Thank you. There is just so many moving parts to this.

René Nelson: There really are. Unfortunately, if you make a mistake it can be really costly. There’s really great smart people out there, primarily some really good real estate attorneys that to buy an hour of their time and run “what if”s by them is so smart.

A lot of people self-manage if it’s one to four family units or smaller. A lot of people self-manage and so they don’t have a good reliable property manager to bounce this stuff off of or ask questions.

I’m certainly not qualified to give them that information. I study it because I’m so intrigued with how the rent control has changed the multifamily market and that’s one reason that I wrote the book Disruptions in Oregon Real estate because when this first passed, a lot of people were just crazed with what am I going to do? I think I want out.

Well, if you’re going to sell your real estate, you have to kind of figure out where you’re headed because you’re either going to need to do a forward exchange at 1031 exchange or you’re going to pay tax if that has been a rental property.

So I wrote that guide as a way to help people understand rent control is not really as bad as it sounds. Yes, it has changed the game for landlords and property owners, but if you understand the rules, you can still work within the rules. And like I said on the past podcast, most landlords do not raise their rents as high as 10% annually.

What this rent control has really put into place is calming down the market so landlords can’t just show up on your doorstep for a tenant and give them a notice and say, “Hey, you’re out in 30 days.” Because it made so many people homeless or not homeless, but they had to find new housing that especially in the Portland market, it was hard to find a housing in 30 days.

Barry MacGuire: You mentioned rules. Those rules are different from community to community. The rules in Portland and Bend are different from the rules new Eugene, aren’t they?

René Nelson: They are. I know it’s hard to believe, but the rules in Portland are actually stiffer because there’s new rules that have passed that are coming out and we’ll talk about them in the next show in regards to screening and how the screening laws are now changing in Portland and how that applies to tenants and more importantly how it impacts landlords. And I predict that in 2020 those screening laws are going to pass statewide, so I think a lot of the listeners really need to pay attention.

Unfortunately, 2020 is a short legislation year, so there’s not going to be many changes. I don’t think we’re going to see changes to the tenant landlord law until 2021 so everybody needs to be really educated on what’s changing in 2020 how it’s going to impact them because one thing that we’re going to talk about on the next podcast is in relation to credit score. In Portland, you now have to take a 500 credit score.

Barry MacGuire: 500?

René Nelson: 500.

Barry MacGuire: Yeah, I don’t have great credit, but I’m not that low. That’s way down there.

René Nelson: It really is. Experian and some of the national credit reporting agencies indicate that the average consumer across the board in America, the average credit score is about 695 and that’s kind of for fair to medium credit.

There’s 800 and the higher scores for the perfect platinum credit, but for the average tenant who’s struggling to pay rent, maybe they’ve got some student loan debt, sometimes it’s hard to balance all that and you have a late payment or two. The average consumer has a credit score of about 695.

So when you’re in the 500 range, I always kind of equate that you’ve almost stopped trying at that point. It’s hit and miss whether you really want to pay your bills at that point. And unfortunately you now have to take that in Portland as one of the criteria. You can’t screen against a low credit score.

Barry MacGuire: Stay tuned more on that in the next podcast. Real quickly. For landlords and owners, it seems like it used to be a lot easier for them to get rid of their property if they wanted to. It’s just gotten really, really tough for them now, hasn’t it?

René Nelson: It really has. There’s still some opportunity.

Barry MacGuire: There’s carve outs.

René Nelson: Yeah, carve outs as an example. I don’t want to be all gloom and doom because I still have investors that say, “I love the market. I’m heavily invested, I love multifamily. Bring me every opportunity that comes across your radar.”

So it’s not all gloom and doom, but for the average mom and pop and when I say mom and pop, that’s someone that owns a couple of pieces of property. They self-manage and they’ve done a great job in the past. They’ve rolled up their shirtsleeves, they’ve fixed the properties, they’ve screened the tenants. They’ve provided great places for their tenants to live. But now because of rent control it’s really starting to change the game and it’s almost painting a target on their back where if they do one wrong step, they’re liable to be sued by their tenant for damages in addition to three months worth of rent for violating the law.

Barry MacGuire: One of the things that I’ve read in your book is you have a landlord that’s had a great tenant for a long time and hasn’t raised their rent that much over the years, but eventually that landlord is going to have to raise the rent to market value.

René Nelson: Yes, you really do. I see that when clients call me and say, “Hey, I want to sell this property. I have a client right now who wants to sell a six Plex and she’s owned it for the last 20 years and she’s got really good tenants in it. She’s been really good to her tenants, has barely raised rents like maybe $35 once a year, but hit and miss. Like once every five years, she’ll raise rents a little bit.

She’s so far behind on the market. She’s about $250 per unit per month under the market. And so now she wants to sell it and I can only value it at about 400,000 even though if you looked at a comparable property where it was up to market rent that property would be closer to about 600,000.

Barry MacGuire: My goodness.

René Nelson: It was that drastic because she was so far behind on market rent. So now what’s going to happen is because rent control is in place now landlords are going to raise rent like clockwork. So every 12 months you can now raise rent by 10.3% or whatever the cap is, which is 7% plus CPI. Right now, CPI is 3.3. Next year it’ll be a little lower. So next year in 2020 the maximum rent is 9.9. So every year landlords are going to raise rent like clockwork. If they don’t, they’re foolish.

Barry MacGuire: Also, that affects the tenant though. That hurts the tenant.

René Nelson: It does. It does because that’s going to raise rent. For some people it’ll raise it 12, excuse me, 125 bucks a month because a lot of people are paying between 12 to $1,600 for an average three bedroom, two bath. So the rent is going to go up 125, 160 bucks a month.

Barry MacGuire: And one other way that tenants were hurt was before rent control to hold. You had a lot of landlords up there that saw this Senate Bill coming down the road and they decided, you know what, we’re going to jump the gun here. And they raised their rents drastically for their tenants.

René Nelson: Yes. Yeah. You bring up a good point. We watched a race to the deadline where landlords raised rents 300, 400, $500 a month on their tenants and a lot of tenants moved out. I have a client right now who just decided that she wanted to sell her whole entire real estate portfolio.

So she’s getting out of the multifamily market and she notified the tenant that she was going to drastically rehab gut this one property before she put it on the market. So she took out the whole entire kitchen. She took out the bathroom, so there was really no way the tenant could live in it.

This tenant had been there for two years, so she notified the tenant in writing, gave them the 30 days worth of rent because she owns multiple properties and the tenant then later met the landlord at the property so that she could get her deposit money back that she had paid originally when she moved in a couple of years ago. She was paying that landlord $850 a month for rent, and she told the landlord that she wound up having to pay double in rent.

Barry MacGuire: Double?

René Nelson: And that’s just recently, that was just in November that that happened. She went out to the best thing that she could find and she didn’t go out and rent something lavish. She just went out and rented something that was manageable for her and her partner and she paid double in rent.

Barry MacGuire: I’m sure a lot of stories like that are going on in the state of Oregon right now?

René Nelson: Yes.

Barry MacGuire: The joys of rent control, isn’t it?

René Nelson: Again, it’s not all bad because I do think it is making it a little fair for the tenants so that there are no surprises. Most tennis just want a great place to live and they want to be a great tenant, but we do have some people, you’ve got hoarders, you’ve got the tenants that play loud music, you’ve got those tenants that are problem children as I kind of call them, problem children.

And there’s ways to deal with those. You can just give them written notice, but you have to make sure that you’re keeping note of that because you may have to go to court to defend that. And remember it’s three strikes and you’re out. So you can’t give them three strikes all at once. You have to do it methodically, you have to document. But there are ways to rein in those tenants if they’re giving you grief as a landlord.

Barry MacGuire: Exactly. There’s a lot of great tenants out there, but unfortunately it looks like this Bill, it really protects a lot of the bad tenants.

René Nelson: It really does. That’s why I wrote the book because I was trying to educate people on here’s how it has changed the tenant landlord law and here’s what you need to know to prepare and protect yourself.

Barry MacGuire: Well, a lot to deal with and it sounds like you’ve got a passion for this. If people want to reach you, how can they do so?

René Nelson: Probably the easiest way is go to my website, which is stoprentcontrol.me. Log in, put in your name and your email address and you can download a free copy of my book. I’m not asking anybody to sign a petition. I just made an easy website so that people could remember it while they’re driving or cooking or walking their dog and they’re listening to this podcast. Just an easy way to remember, stoprentcontrol.me. So think, “Hey, I’m a landlord. I need to protect myself. I want to stop what could be coming down the path for me. Stoprentcontrol.me.”

Barry MacGuire: René, thank you so much.

René Nelson: You bet. Thank you.

Barry MacGuire: Once again. Go to stoprentcontrol.me to download a free copy of René’s new book Disruptions in Oregon Real Estate. She covers lots of good information in the book about rent control and how it’s impacting Oregon real estate, and you can get a free copy of it. Once again, go to stoprentcontrol.me.

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Learn more about the opportunities available to capitalize on the current disruptions in the Oregon multifamily market

Click the button below to download my book or request a hard copy:

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Disruptions in Oregon Real Estate Episode 1:
Rent Control in Oregon and Its Impact on Multifamily Properties

In 2019 the state of Oregon passed a statewide rent control law that is now impacting tenants and landlords in Eugene, Lane County, and beyond. Learn about the various ways that this law is disrupting the multifamily market in Oregon and how multifamily property investors might respond.

After working as a commercial real estate broker for sixteen years and previously working as a mortgage lender for twenty-three, I am passionate about helping people understand the value of their portfolio, whether they can improve it, and the strategies and options to do so.

What You Will Learn in Episode 1:
Rent Control in Oregon and Its Impact on Multifamily Properties

• How rent control has altered the relationship between tenants and landlords in Lane County
• No cause notices, and the new laws for apartment owners
• How the rent control issue took hold in Portland, paving the way for statewide rent control
• How to track violations of rental contracts and apply the three-strike rule
• Rent control, vacancies, and oversupply in Portland and the UO area

Oregon’s 2019 statewide rent control law is disrupting the multifamily market in Lane County and throughout the state. The law is affecting tenant-landlord relationships, rent hikes, and the actions landlords can take against rental contract violations. As an apartment investor, it’s wise to learn about the various effects and how you might take advantage of the disruption.

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Rent Control in Oregon and Its Impact on Multifamily Properties

Barry MacGuire: Welcome to the Disruptions in Oregon Real Estate podcast with your host, René Nelson, helping you stay in the driver’s seat of your investment portfolio. As a commercial real estate broker and investor herself, author René Nelson’s passion is to keep your hard-earned real estate investments working for you.

Her goal is to help Oregon real estate investors analyze and measure the value of their current real estate portfolio while exploring available opportunities. And now your host, René Nelson.

René Nelson: Hi, this is Rene, and I’m here on my weekly podcast about disruptions in Oregon real estate and what you need to know in order to stay on top of your game as a multifamily owner. Today in this episode we’re going to talk about rent control in Oregon and how Senate bill 608 is impacting multifamily properties in Oregon. I’ve asked my producer, Barry MacGuire, to join me and we’ll have a round of series of questions and talk about rent control.

Barry MacGuire: Thank you so much for having me, Rene. So big things happened in 2019 as far as rent control came down. This is back in February, right?

René Nelson: Yeah. Rent control was passed in February. It was passed the year before in Portland in Multnomah County primarily, so we had a little bit of a preview of what to expect. But then rent control statewide for the whole state of Oregon was passed in February of 2019, and we’ve seen some pretty big sweeping changes this year.

Barry MacGuire: So the question is, how has rent control impacted landlords here in the state of Oregon?

René Nelson: Well, in my opinion, it’s substantially altered the relationship between landlords and tenants. And for a lot of landlords, they’re confused about what the rules are, how it applies to them. Some of the landlords are also operating from a state of fear because they’re concerned that they’ve got a target painted on their back.

A lot of tenants are concerned that they’re going to get the boot, that they’re going to get kicked out of their units. So I think what we should do is just break it down and talk about some of the nuts and bolts of the rent control and how it impacts both the tenants, as well as the landlord.

Barry MacGuire: Well, that’s surprising. So rent control actually impacts tenants as well?

René Nelson: It does, but it ironically, it gives them a little bit of a benefit because there’s rent control now where their rent cannot go above 10.3%, and when the rent control was passed statewide, one of the things that they kind of took away from landlords was the ability to give a no cause notice.

So in the past, as a property owner, as an apartment complex owner, if I had a tenant that was creating a problem, I would just give a no cause notice to that tenant and say, “Hey, I’m sorry but you have to move.”

That made it livable for the other tenants in the complex. So if you had somebody that had late night parties, loud music, and you just didn’t want to really deal with that, you’d just give them a no cause notice and say, “Hey, you got to move.” Now they’ve changed that. You no longer can give a no cause notice. Now you have to give them-

Barry MacGuire: At all?

René Nelson: At all.

Barry MacGuire: Really?

René Nelson: Yes.

Barry MacGuire: Well, what do you do now?

René Nelson: So now you have to give them a reason. You have to give them a cause and say “You’re violating your rental contract. Here’s the reason that I’m giving you this notice for cause.”

Barry MacGuire: Do you know the reasoning for this?

René Nelson: Well, basically what happened in 2016 and ’17 when the real estate boom hit, primarily in Portland, there were some out of town investors that went into the Portland market and would give whole apartment complexes a 30 to 60 day, no cause notice and just say, “Everybody move out. We’re going to rehab this whole complex.” And they doubled rents.

So in one particular situation that was really the tipping point, they kicked out, or gave notice to, quite a few tenants and instead of really going in and rehabbing the whole complex, they basically did paint and carpet, and then they doubled the rents.

Barry MacGuire: That’s it. Okay.

René Nelson: That’s it. And so that was brought to the attention of some legislators. And of course those tenants were irate because they had to move. It was tough. There was not a lot of available options for rent in Portland and their rent was substantially higher.

So not everybody could qualify to move. Not everybody could find a place to live. And so a lot of those people created a grassroots movement in Portland to start the rent control situation. And from that grassroots then it went to the legislators and it was brought to their attention.

The legislators were already aware of the housing crisis and the fact that, you know, we need more housing with density and some different things. Developers in the past have been not super excited to build brand new apartment complexes because it’s really expensive.

By the time you pay all the development fees to the city, it’s really expensive. So kind of the inventory that we have is what is there and what’s available. So as these out-of-state developers came into Portland and kicked out all these tenants, did paint and carpet and then doubled rents, the legislators started to see a pattern there and they realized, “Hey, we have to make some rules in order to protect the tenants.”

So they created rent control and basically what they said statewide for this year when they pass rent control is they said rents cannot go higher than 7% plus CPI, which stands for consumer price index. And the CPI right now is 3.3, so rent cannot be increased more than 10.3% annually every 12 months.

Next year in 2020 it’ll be 9.9 because CPI has dropped a little bit. So that’s a protectant for the tenants. And frankly, Barry, you know, most landlords, they have not raised their rents 10% every year like clockwork.

Barry MacGuire: I was just about to say does that seem like a pretty fair window, though? You know, up to 10% above that would seem kind of extreme, wouldn’t it?

René Nelson: It is. It’s actually gracious because, you know, most landlords have raised their rents, maybe like 25-50 bucks. You know, I’ve got one tenant that’s lived with me in one of my properties for 15 years, and I probably have only raised her rent twice, maybe three times in total in that 12 to 15 year time period.

She’s a great tenant, pays on time. I just love her and her family being in my property. They take really good care of it, and I have not wanted to rock the boat, so I have not raised her rent. And there’ve been lots of landlords that have been in that situation where we just haven’t wanted to raise rent.

Now if somebody moves out, then of course you look at market rent and you raise the rent then. So when we heard that the legislators were going to say, “Okay, rent control is 10.3%,” we didn’t feel like that that was going to be a detriment.

We felt like it was fair to both sides, both the tenants, because now they know what they can expect for rent increases, and it was fair to the landlords because now they had a benchmark and they knew what their limits were going to be. But where it really became detrimental for apartment owners, when they took away the no cause notice because now it makes it extremely difficult to deal with trouble tenants.

Barry MacGuire: Well, that’s a lose-lose situation there. It’s not only bad for you as the landlord, but it’s bad for the rest of the tenants that are doing the right thing.

René Nelson: It is. So in the past we would have good tenants that would go to the property manager or the owner and say, “Hey, I hate to complain, but this guy is playing loud music, and I have to get up in the morning and get my kids to school and then go to work. And he’s playing music till three or four in the morning and this has been going on.”

So you give that tenant a notice or a warning, and normally they’ll correct their behavior. But let’s say they don’t and you just say, “Okay, enough,” in the past you’d give them a no cause notice and just say, “I’m not really going to get into details. You just have to move. Here’s your notice.” And it was typically a 30-day no cause notice that you would give them.

So the situation would go away pretty quick, and you would keep your good tenants. Now that no cause notices have been banished, now you’ve got problems where if you tell somebody, “Hey, you’re violating your rental contract for a noise complaint,” all they have to do is correct that for that time period, and then maybe they do it again in a week, and you’re back to having to re-notice them.

Barry MacGuire: There’s got to be some line in the sand where okay, at some point there’s got to be some way you can get rid of this tenant.

René Nelson: There are, if they violate their rental contract, then yes. So as an example, if they don’t pay their rent on time, then they’re violating their contract and you have cause and you can notify them. If they leave junk out on their balcony, then you can give them a cause notice and say you have to clean up your unit. But overall if it’s like a noise complaint, those are going to take a process.

So now what happens is you have to keep track of those and the three strikes and you’re out rule applies. So if they violate their contract three times in 12 months, then you can notify them, “Hey, you violated. Your tendency is being terminated.”

But let’s say you show up because they’re having a loud party, and so there’s underage drinking, there’s 40 people in the unit, and there’s no smoke detector batteries in the smoke detector. You can’t give them three notices on that one violation. You can only notify them for one thing.

So in that situation it would be too many people in the unit or a noise complaint. You’d have to go back several days later and check the smoke detector batteries and let that be a second violation. But you can’t pile them all up for one situation and give them a three strike, you’re out.

Barry MacGuire: Three strikes, you’re out. In the meantime you’ve got the good tenants leaving.

René Nelson: Yes, we are starting to see that.

Barry MacGuire: That’s just a messed up situation. Sorry, can’t think of other ways to put it. But this whole idea of rent control here in Oregon, it just seems like one or two bad apples, some out-of-state investors that, like you said, just threw on some paint and did the carpets and unfairly raised the rents. Well, it just ruined it for everybody else, didn’t it?

René Nelson: It really did. And what happened when they created these laws is the legislators got together, and they really didn’t take the input from the landlords. The landlords tried to give the input and say, you know, “Please don’t take the no cause notice because here’s what it does from our situation.” And frankly I don’t think the legislators really listened. They kind of had the bit in their teeth and said, “Nope, this is what we think the law needs to be.”

But what I’ve seen for a lot of apartment owners is it’s backfired because for the tenant situation, a lot of landlords are deciding to sell because they don’t want the legislators to be in their business. They don’t want the government control. And so they’re deciding to sell and get out of the market.

So as property owners put their property up for sale, what I’m starting to see is more of those two to four units, in particular, those are being sold to owner occupants, and it’s diminishing the available units that are out there for rent. So if a tenant is told by their landlord, “Hey, I’m going to sell this property, and you need to move,” and the tenant now tries to go find a new place to live, there’s not a lot of inventory out there for rent. There is for sale.

24 months ago there were probably, you know, one or two duplexes at any given time listed for sale. Now you look in the multiple listing system, and there’s probably six to 14 that are listed at any point in time right now because there’s that many owners that are saying, “I’m getting out of the market.”

Barry MacGuire: It sounds like everything is reverberating real quickly.

René Nelson: It is. It was really a knee jerk reaction. When the legislators passed these laws a lot of the landlords just decided quickly, “Okay, I’m getting out of this market.” Because for a lot of the small mom and pop operators, they’re in a situation where they either have to become super knowledgeable on what the tenant landlord laws are because the penalties are stiff.

If you make a mistake and you give a tenant a no cause notice, then the tenant can actually sue you for damages, and it’s really expensive if you make a mistake.

And so for a lot of mom and pop operators that have rolled up their sleeves, shirt sleeves, and they’ve self-managed, and they’ve not had a property manager, and they’ve basically taken that money that they would’ve paid to a property manager and they’ve received it as profit, now they have to weigh it out, “Okay, is it still profitable to own this property and now run the risk of either getting sued if I make a mistake, or do I need to hire professional management and let a professional manager take care of noticing, dealing with tenants, screening tenants, and trying to fill my units?” And for a lot of people they don’t want to deal with a property manager, and so it’s just easier for them to sell the property and get out.

Barry MacGuire: With rent control have you seen a correlation between the rent control and vacancy rates here in the state of Oregon?

René Nelson: We’re starting to see higher vacancy rates occur in Portland, and in the past vacancy was pretty slim in the Portland market, and we’re starting to see that there are some vacancy occurring in Portland. And Eugene is still kind of on the bubble. Right now what we’re seeing is there are people that are trying to move, and they’re waiting for units to become available.

We’re starting to see some new inventory come on the market, but you know, those are in the $1400-1600 range and not everybody in Eugene-Springfield can afford that higher rent.

Barry MacGuire: Just curious, how about around the University of Oregon campus?

René Nelson: We’re definitely seeing some vacancy in that area right now. Primarily because of the overbuilding that’s happening. There’s a lot of national student housing developers that are still coming to the market that want to build those big institutional style properties where, you know, it’s 500 beds to 1,000 beds in those units.

And ironically the enrollment at the U of O level seems to be pretty consistent, almost stagnant. I mean, you know, we haven’t built a ton of classrooms, so it’s not like we’ve had a big explosion of students coming to the market. It seems pretty consistent. And so to know that we’ve got probably 1500 to 3000 beds that will be built in the next 24 months in the U of O area-

Barry MacGuire: Over-supply.

René Nelson: We’re going to have an over-supply.

Barry MacGuire: Okay. What’s the next step? Incentives?

René Nelson: I think we’ll see incentives in the campus area. I don’t think we’ll see incentives for market rate. And when I say market rate, that’s away from campus and that’s where just the average person would live that’s not a student. I don’t think we’ll see incentives in the near future because I still think there’s a healthy supply and demand in the market. For a lot of owners, though, that are just trying to figure out, “Okay, what do I do next?” For them, what they need is to know kind of some strategies.

So one thing that I do for a lot of my clients is help them figure out the value of their property so they can really look at their asset and look at their apartment complex and say, “What’s it worth in today’s market?” And then “What could I earn if I increase my rents by 9.9% next year, and what could I go into if I decided to sell this property? Where could I go? What product type could I go into? How much income could I generate? Could I get out of multifamily and go into a different product type?”

So when I talk about product type, what that looks like is somebody that would come out of multifamily and may go into least commercial. So they may consider office or a retail type of property.

Barry MacGuire: Storage?

René Nelson: Yeah. Oh, many storages in high demand right now. That’s really a great industry that a lot of people are trying to buy that type of product.

Barry MacGuire: So there is hope for real estate investors, though, isn’t there?

René Nelson: There is. You know, I don’t want this to sound all gloom and doom today because it’s really not. I have a lot of investors that I work with that are Oregon investors.

We’ve started to see out-of-state investors primarily out of the California market that have slowed down, so when rent control was passed, we saw about a 38% decrease of investors coming into the Oregon market. That was by the CoStar group that provided that information and those statistics, but they did say that out-of-state investors dropped by about 38% coming into Oregon.

Barry MacGuire: That’s pretty significant.

René Nelson: It is, but that’s also good news because that means Oregon investors that own apartments right now, they’re not going to have as much competition. In the last two years, what we watched was there was very little inventory on the market, and California investors that were coming into the market, especially 1031 buyers, they were driving the sales prices up because of demand, so not much inventory on the market.

When you’re in a 1031 exchange, you have a very short window to find a property and identify what you’re going to buy, so they would really drive prices up. And a lot of apartment investors and owners in the Oregon market said, “I can’t compete with these guys coming out of California that have been receiving a three and a half percent cap rate, and they think that’s a great return,” where in our market we see cap rates more in the five and a half to 6% range.

So as the California investors started to slow down and their appetite changed with rent control, we started to see them gravitate to markets like Phoenix. A lot of them went to Seattle, Tampa, I mean just out of Oregon.

And so the benefit for Oregon apartment owners is we’re starting to see inventory and available product, especially apartment complexes for sale in the area and in the state of Oregon that have not been available in the past, and there’s not that pent up demand like it has been in the past.

So prices are more reasonable, sellers are more willing to negotiate on price. Where in the past it was, “Hey, take it or leave it. I’ve got the one and only 40 unit apartment complex for sale on the market. Take it or leave it. Here’s my price.” And now because there’s competition and there’s apartments for sale, sellers are more reasonable, and I feel like buyers can find a better value right now.

Barry MacGuire: You are just a wealth of knowledge. You could tell. This is not her first day doing this kind of thing. How long have you been doing this?

René Nelson: I’ve been doing this 16 years, and prior to that I was a mortgage lender for 23 years. So I’m pretty passionate about what I do because I really want to help people understand their value of their portfolio and what they own, and if they could improve it, look at different strategies and options on how to do that.

Barry MacGuire: I can tell you the passion definitely comes through. The book is called Disruptions in Oregon Real Estate, and if people want a copy of this, how can they do so?

René Nelson: You can go to my website, which is eugene-commercial.com. Again, that’s eugene-commercial.com, or go to my website, disruptionsinoregonrealestate.com.

You can put your name and your email address in there and download a copy of the book, and I will also mail you a paper copy if you’re one of those that likes to read at night and you want an actual paper copy. So you can download it online and get a free ebook, or I’ll mail you a copy.

Barry MacGuire: All right. This has been the first… How did it feel? Our first podcast together. Felt pretty good to me.

René Nelson: It did, Barry. Yeah, feels great.

Barry MacGuire: This has been the Disruptions in Oregon Real Estate podcast. We’ll talk to you soon.

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