Is It A Bubble? Is It A Trend? How Can You Profit?

We’re the Eugene-Springfield area multifamily experts. We know where the market is headed because that’s our specialty. You can’t afford not to know what your investment will be worth next year, or in 5 years.

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Today, we’re talking with René Nelson, CCIM. A well known multifamily expert and commercial real estate broker, about commercial real estate in Eugene. This special series focuses on issues related to multifamily properties, that many investors aren’t as familiar with as they should me.

René, what factors are driving multifamily values upward?

René: You know Patrick, multifamily has enjoyed years of rapid growth due to the expanding population and most recently, rising minimum wage and the employment opportunities. With unemployment numbers low and lots of businesses expanding, it’s creating more jobs and that allows people to then go out and rent. So vacancies are at an all time low. In a recession, people have a tendency to double up, young people often move home to live in mom’s basement in order to survive but in a robust market, people, especially Millennials, want their own space, so they’ll push the rental market and right now, they’re creating historic highs for new households created.

Strong economic growth will typically spur the multifamily market as hourly wages continue to go up. It’s a strong sign that the labor market is rebounding and that we’re going to continue on this pace for some time. The anticipation is that over the next ten years, we will probably see between 5 to 6 million new renter households. So, clearly this shows a growth of demand for home ownership and renters among the younger households.

Well René, that begs the question, when is the trend expected to flatten out and why?

René: Well, the rental market is not recession-proof. We saw that in 2006 to 2008, but you know, due to a large demographic shift and lifestyle preference right now, we’re continuing to see a strong rental market. There are three things that play into the escalation of the renter households, that we’re definitely going to see in this next coming year. We’re going to see a tightening of the credit market from lenders. We’re going to see lower income not allow people to qualify because housing prices are still climbing, so lower income in relation to house prices and then larger required down payments to buy a house.

So, it’s going to keep a lot of people as renters, and some people just don’t want the hassle of owning a home but overall, renters are going to have the income, the disposable income to be renters, but they’re not going to be able to afford to buy a house because that housing market just continues to climb at this point. So, unless the Fed starts to really increase interest rates, which will typically slow down a business from wanting to expand or grow, or the housing market collapses again, which I really don’t think will happen. I think we should be on this growth pattern for at least the next 12 to 18 months minimum, maybe as long as even 24 to 36 months but definitely, a strong market for the next 12 to 18 months.

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

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How You Handle Them Is What Matters

We know the up’s and down’s of multifamily ownership. We know how successful multifamily owners handle them. You need to know best practices to get the most out of your investment.

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Today, we’re talking René Nelson, CCIM, a well-known, multifamily expert and commercial real estate broker about commercial real estate in Eugene. This special series focuses on issues related to multifamily property that many investors aren’t as familiar with as they should be.

René, how are tenant, toilets, and trash taking a toll on your property?

René: Well, Patrick, let’s start with security deposits. A security deposit is normally collected by a landlord, and it’s above and beyond say the first and last month’s rent, and the security deposit is returned to the tenant when he or she moves out at the end of the lease. However, if the tenant is really rough on a property and creates damage, the landlord has every right to use that money to fix the repairs. Many tenants are surprised when they move out and they don’t get their full refund back.

Landlords and property managers will typically hold out a fee for shampooing carpets, do some minor repairs, but if you punch a hole in a wall or something like that, they’re absolutely going to charge you for that.

Interestingly enough, potentially next year, when the legislation come back, and they look at the new landlord-tenant laws that we know are going to come back in round two, they may set a new depreciation schedule of what can and cannot be considered for wear and tear, so they may say, okay carpets have a lifetime shelf life of five years, and after that, a landlord would not be able to charge a tenant for any damages, but to answer your specific question, by far, when you’re dealing with tenants, move out and move in are the hardest things on a property.

René, what are the most significant effects of bad tenants?

René:  Well I tell you what, a bad tenant can cost you your entire good tenant base in your complex. Last year, the landlords fought really hard against the proposed changes for the new tenant laws, because part of those changes were that you could only give a tenant a with-cause notice. Otherwise, if you gave them a no-cause notice and said, I’m not telling you why, but I just want you out, you would have to pay them the relocation money to get them out, and the rule that they were trying to implement was you have to tell them why you’re asking them to move.

Well, the problem with that is the landlord now has to give them cause, which means two things. One, the neighboring tenant who would normally be coming to you to complain about their neighbor, is now in an extremely tough situation because they might potentially put that tenant in jeopardy by ratting them out to the landlord. I’ve seen neighbors who are angry and retaliate. It can get ugly. [inaudible 00:02:57] if you give a tenant a reason why you’re evicting them, they have the right to cure that.

So, if the new relocation and landlord laws change next year in favor of the tenant, I think what we’re going to see is professional tenants who move in, start playing a trumpet or loud music at 2 a.m., and you’re going to want to kick them out, and then you’re going to have to dig in your wallet to pay them to get rid of them.

Otherwise, your good tenants are going to move out. So it’s super important for landlords to pay attention this next year and make sure that we defeat this initiative because if we get stuck with bad tenants, it’s really going to wreak havoc on our tenant pool and who’s going to want to live in our properties.

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

Where’s Your Property In The Real Estate Life Cycle?

We know multifamily and part of that is knowing where properties are in their life cycle. We know that’s an important part of how the investment is managed. Not knowing this puts you at a disadvantage to more successful investors.

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Today we’re talking with René Nelson, CCIM, a well known multifamily expert and commercial real estate broker, about commercial real estate in Eugene. This special series focuses on issues related to multifamily properties that many investors aren’t as familiar with as they should be.

René, what are the three life cycles of real estate?

René: Well, I tell you what Patrick, this is my favorite topic. I am passionate about this because this is where we see a lot of multifamily owners make some big mistakes.

First cycle is the life cycle of ownership. I see people [inaudible 00:00:37] having to sell when they have not thought out a plan and they don’t know an alternative, and it puts them into a hardship because they might have a partner that now wants to bail out on them, and either have to go take on more debt or they have to sell the property. Now they’re forced to pay a tax consequence or figure out if they want to go in to a 1031 Exchange with this other partner. Most of them, if they’re trying to separate their partnerships, they’re just trying to get away from each other. Death, divorce, different things create issues there with partnerships. But the first one is the life cycle of an ownership entity.

The second one is the life cycle of the asset. Mismanaging credit loss, vacancy and repair, I see lots of owners who try to eke out every dollar in rent and they’re slow to put money back into their properties for updating or remodeling. That catches up with them in the end when they try to sell that property because they’re going to see a definite hit in the sales price compared to other properties that maybe a 1970s 40-unit apartment complex. But if they haven’t put money into it, they’re going to see that in the bottom line when they go to sell.

Then the third one is the life cycle of the market. Mistiming cap rates and value trends in the market. If you’re unfamiliar with any of these three cycles, it can cost you a lot of money. We just see people misguide themselves and misjudge what they should do and then in the end, it winds up costing them quite a bit in value.

René, how do you know where your property is in the three life cycles of real estate?

René: Well, as an example if you have a partner, do you have a written by-out plan? Do they have to give you X-number of months of advanced notice so that you can come up with a plan on how you’re going to buy them out? Or if you plan to leave your real estate portfolio to your kids, do they understand what you’re passing on to them? Because a lot of people build a portfolio and they’re going to leave it to their heirs, but their heirs really are not in tune with the real estate portfolio and how to handle it.

The life cycle of the asset, have you factored in, what I call Cap-X, in repairs? Roof, HVAC system, new carpet, new finishes, you need to factor all that in. And there’s three things that I tell my clients to look at: What will it cost you? How long will it take? Because you’re going to be losing rent while it sits vacant and the handyman or the contractor does the repairs. Then how how do you do this with tenants in place? Because you don’t want to have your whole building vacant all at the same time.

This process just requires a conceptual plan for the rehab. Then planning how are you going to implement, then staging with the leasing, and making the improvements to each of those units. But on the flipside, if you put about $5,000 of renovation in to each unit, you’ll typically see a minimum of $20,000 in increase in capitalization right off the bat. It’s definitely worth it to upgrade the units because you’re going to see increased rents, tenants are going to stay longer, and then that adds right to your bottom line with you go to sell it because your property is updated and in a good situation.

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

What Do You Know About Passive Income Properties?

We know commercial real estate, both multifamily and triple net passive investment properties. We know the plusses and minuses of each, and what kind of returns you can expect. It’s knowledge every savvy commercial real estate investor needs.

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Today we’re talking with René Nelson, CCIM, a well-known multi-family expert and commercial real estate broker about commercial real estate in Eugene. This special series focuses on issues related to multi-family properties that many investors aren’t as familiar with as they should be.

René, what are the benefits of passive income property?

René: Well, Patrick, we’re seeing an interesting trend right now. Many investors are starting to get cold feet on the multi-family market knowing that potential rent control and relocation fees could be passed next year by the legislation. So many are starting to ask themselves, “Is this really worth the risk?” And they’re starting to get out of the multi-family market while there’s pent up demand. There’s still people that are sitting on the sidelines with cash that want to buy multi-family, so a lot of investors are selling now and getting into passive real estate by doing a 1031 exchange.

The benefit of passive real estate is it’s typically a single-tenant building, like an AT&T store or a Verizon store, an Oil Can Henry’s or a 7-11 or a Dollar General Store. Most of these offerings come with a secure, long-term lease that’s typically corporately guaranteed on a national level by a triple-rated company that’s traded on Wall Street. You’ve got security, you’ve got proven income, and the tenant typically is responsible for the majority of the maintenance. So the multi-family owner that used to have to deal with tenants, toilets, and trash is now just getting a check in the mail and doesn’t have to deal with any headaches like they previously were dealing with.

So, René, how does passive income property compare to multi-family?

René:  Well, we use a cap rate in commercial real estate to measure the value of a property. It’s used to measure the investor’s potential rate of return on their money. Multi-family cap rates in the Oregon area, Eugene’s a little different from Portland. Portland has really hot market right now, so they’re a smidge lower than, say, Eugene and locally in this area, and it really depends on the age of the property, the condition of the property, and how much passive income it’s creating. But the average cap rate right now for multi-family is around 5-1/2 to 6%.

Now if you compare that to a single tenant lease property, cap rates in the mid 5 range, 5 to 5-1/2, and they’re high demand because of the fact that the tenants do most of the work with being responsible for the maintenance of the property. And these properties have a tendency to hold their value longer, because you’ve got one solid tenant in that building as opposed to a bunch of tenants in a multi-family situation that are moving out and just kind of hard on the property overall. A single tenant situation, those buildings are more of a commercial nature, and so they hold value for much longer. And there’s a please recall hot demand right now for those type of single tenant opportunities.

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

Is Rent Control In Eugene’s Future? Stay Tuned.

We’re in tune with everything affecting multifamily. We know what’s driving current movements to pass renters’ rights legislation in Oregon. You need to know too. It could have a huge impact on the value of your investment.

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Today we’re talking with Rene Nelson, CCIM, a well known multi-family expert and commercial real estate broker about commercial real estate in Eugene. This special series focuses on issues related to multi-family properties that many investors aren’t as familiar with as they should be.

René what’s being proposed in new Oregon landlord-tenant laws?

René:  Well Patrick, let me give you a little back history on how we are at this point. So in February of this year, Portland passed a new tenant-favored law under an emergency housing guideline and basically the new law requires that if you give your tenant a 90-day no cause notice, or if you raise rent by more than 10 percent, and the your tenant gives you notice because they can’t afford the rent, then you have to pay them relocation fees. This is in the city of Portland and it ranges anywhere from $2,500 to $4,300, depending on the number of bedrooms.

That is a substantial hit for a smaller investor who, could you imagine cutting a check for $4,300 out of your pocket? So what’s happened is after that built momentum in Portland, then the House speaker Tina Kotek decided that she was going to push that through the House of Representatives, and she created a similar bill and tried to push that through for the entire state of Oregon.

Luckily for multi-family owners it was defeated in the Senate in July of 2017 as they were just ending for their summer session; however, we know that the tenant advocacy groups are going to try to bring this back to the table when the legislation reconvenes again, so we know round two is just around the corner and it’s going to be a lot tougher to fight it and defeat it this time.

René, will Oregon roll out rent control any time soon?

René: When they rolled that out to the House of Representatives, trying to do it on a statewide level, that was one of the things that they were debating was rent control. That would be for the first time since 1985 that the legislation was trying to look at lifting rent control. We’ve always had our rule that we want to keep things steady, and now they’re looking at letting each city make that decision on whether the city wants to control the rent control and who’s to say that if they say, well you can raise your rents by no more than five percent this year, that they wouldn’t say well next year you can only raise your rent the three percent.

And nationally we’ve seen that rent control is just a disaster in cities like Chicago and San Francisco because once rent control goes into place, the property owner is demotivated to fix things up and improve the property and really the sad thing is the biggest impact is on the tenant and I just don’t think many tenants realize what they’re trying to advocate for rent control, that it’s really going to probably have a big impact on them because multi-family owners are not going to be motivated to improve their property, because the government is going to try to tell them what they can charge for rent.

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

Property Performance: What You Don’t Know Can Hurt You

We’re experts in multifamily investments. We know what makes the difference between properties that make their owners top dollar and those that don’t. And frankly, you can’t afford not to know.

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Today, we’re talking with René Nelson, CCIM, a well known multi-family expert and commercial real estate broker about commercial real estate in Eugene. This special series focuses on issues related to multi-family properties that many investors aren’t as familiar with as they should be.

René, what is the most important measurement of your properties performance?

René: Well, Patrick, we look at several things that go into this measurement including market rent and operating expenses; but, hands down, one of the most important measurements is net operating income. Here’s why: rent can vary all over the board. It can lean on age of the property, location, condition of the property, and operating expenses can vary all over the board. Some people self-manage and other people use a professional management company. That right there can make a difference between, say, five to eight percent of your overall operating expense.

There are also some factors like vacancy and credit loss that can weigh in. Net operating income is the most important measurement to gauge how effective your passive real estate is working for you.

What should a property’s occupancy rate be?

René: Well, appraisers and lenders use an industry standard of five percent for a vacancy factor. Most investors will typically apply their own formula. If nothing is reported, or if I have a client that’s looking at a property and the owner is a little vague on what is vacancy has been, and my investor is trying to look at the property to decide if he wants to buy, typically, what we’ll do is we’ll get a rent roll and we apply whatever vacancy factor my client is comfortable with. Often in aggressive markets, we’ll see it be as low as three percent, like in a campus area. All the way up to 10% for rougher properties where it’s a value-add situation or a really rough neighborhood, less than desirable.

But, part of that fact that rules into that is slow performance in preparing properties to have them go back out on the market. If a tenant moves out and it takes your property manager, say, two weeks to turn that unit and get it ready to put it back on the market, and then another two weeks to fill it with a good tenant, you’ve just experienced a four percent vacancy factor because every week of vacancy equals two percent per annum for a vacancy factor.

The faster you can turn around a unit, obviously, the less vacancy you’ll experience. There’s really no exact number due to all the variables, but I would say that the industry standard is really three to five percent for the vacancy factor and your occupancy. You’re ultimately shooting for 100% occupancy, but you do have some of those turnover issues that you have to contend with.

Thank you, René. Now our listeners know what’s new with commercial real estate in Eugene right now. If you need more information go to Eugene-commercial.com or call René at (541)687-5871.