Property Management 2.0

Is renting an apartment a better option than buying a house?

This article that I found on The Real Estate Channel's website seemingly creates a set of mixed emotions for the multifamily and residential rental industry.  While we, as property managers and investment property owners want rental demand to increase in our apartment buildings, we do not necessarily want this increase to be at the expense of our single family home investments - or do we?  If our portfolios are weighted more towards multifamily, then perhaps this article is good news... What are you thoughts?  Are we seeing the first signs of a multifamily dominated real estate market?

-Trevor Henson

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Will Growing Rental Trends Undermine U.S. Home Sales?

By Keith Jurow

There is a far-reaching change occurring now which threatens housing markets around the country. A survey conducted by Harris Interactive for the National Apartment Association in May 2010 found that 76% of those surveyed now believe that renting is a better option than buying in the current real estate market, up from 71% in 2008.  Especially sobering was the fact that 78% of those surveyed were homeowners.

David Neithercut, CEO of Equity Residential, the nation's largest multi-family landlord, believes that there is a "psychology change" in the mind of consumers.  In a June address to an industry conference, he declared that there is "a change in one's thought process about the benefits or wisdom of owning a single-family home."

Given this introduction, let's take an in-depth look at whether there is a movement away from the idea of homeownership as a worthwhile goal and toward the benefit of renting.

End of the Housing Bubble Led to a Surge in Houses Available to Rent

As early as the summer of 2005, the slowdown in speculative buying in the hottest metros caused a flood of investor-owned homes to hit the rental market.  In August 2005, an article in the Wall Street Journal entitled "Speculators Push Rents Down" pointed out that the supply of rental homes in the Phoenix area almost doubled from a year earlier.  Average rents for these houses dropped by nearly 10%.  Similar situations were found in markets as diverse as Fairfield County in Connecticut, Kansas City, Las Vegas, San Diego and Palm Coast, Florida.

Even more ominous was the fact that 1.34 million single-family home rentals stood vacant.  This had risen from only 900,000 in 2003 according to Harvard University's Joint Center for Housing Studies.  Many of these homes became rentals because the investor was unable to flip the property.  By the end of 2006, the number of vacant homes for sale had skyrocketed to 2.1 million according to the Census Bureau.    

As I pointed out in a previous REAL ESTATE CHANNEL article, the glut of rental homes in bubble markets such as Phoenix had caused rents to plunge to half the cost of owning that same home by the beginning of 2008.  The press began to notice that the soaring number of homes and condos for rent was providing an attractive alternative to buying. 

A June 2008 Associated Press article posted in the Los Angeles Times emphasized that these rental properties were attracting "displaced homeowners" who preferred them to an apartment.  As foreclosures soared, these displaced homeowners continued to opt for rental homes.  A January 2010 article about the Denver rental market posted by Inside Real Estate News pointed out that "if a family loses their home in a foreclosure, instead of leasing an apartment in a building they will rent another home."  What happens after a single-family foreclosure is that "the family moves into a rental house down the street."  The author noted the irony in the fact that the home they are moving into may also be a foreclosure that had been bought by an investor.

2010 - Homes for Rent Continue to Increase and Rents Continue to Weaken

With the collapse in Florida home prices over the past three years, you would think that house rents might have begun to firm.  No way.  An article published in January 2010 in the online Herald Tribune painted a dismal picture of the rental market.  One landlord who owns more than 150 single-family homes lamented that "There isn't the demand that there was a few years ago because we've lost our construction workers ... We certainly have a lot of empty units."

Another owner of ten rental homes stated that she and other landlords had had to reduce rents by "at least a third."  A house that commanded a rent of $900 a few years ago gets only $500 now.  There are simply not enough potential renters who can afford even these slashed rents.  Because many of these smaller professional landlords are also faced with rising vacancies, a growing number of them are seeing their properties fall into foreclosure.

A month later, an article appeared on iMarketNews.com which reviewed the house rental market around the country.  The picture was nearly as grim.  In Brooklyn, New York, whose market has held up better than most, rents have slipped by roughly 20% since early 2009.  A similar percentage drop was seen in the California communities of Venice and Santa Monica. 

The owner of a property management firm in St. George, Utah stated that home rental vacancies were the highest he had seen in the last thirty years.  Another property management owner in Portland, Oregon bemoaned the fact that frustrated sellers have been throwing their properties onto the rental market, adding to the glut.  The same thing was happening in the California Inland Empire city of Temecula.  One close observer of that market noted that the asking rent for single-family homes had slipped below apartment rents which was almost unthinkable only a year or two earlier.

More recently, the May 2010 Las Vegas Rental Home Market Report stated that median house rents were down nearly 10% from a year earlier even though leasing volume was up by 20%.

Those Who Can Afford to Buy Are Extremely Reluctant to Do So

While surveys and statistics can be very revealing about the housing market, you cannot really get a good sense of the changing mindset of Americans from them.  To do that, you need to spend time reading comments written on some of the housing blogs and in response to online articles.

Let's start with a blog called Metropolis which covers the Philadelphia region.  A mid-July posting by the roughly 30 year old editor discussed the question faced by her and her husband since they moved from Boston.  Clearly, they had the combined income to afford to purchase in the pricy Center City.

Yet they decided to rent even though rents were high.  As she explained the decision, "Part of the appeal of being young, urban and childless is the freedom to travel frequently, relocate on a whim, and throw all of our disposable income at shiny new consumables."  She went on to ask, "Do I want the responsibility of owning a home?  Not in the slightest."  Though she admitted that she and her husband might purchase a property, she ended the article by declaring that "Until then, I'll be proudly writing my monthly rent checks."

One of the commenters on the article advised the author that there were plenty of affordable nice rentals with great amenities outside of Center City.  Another commenter with a new baby felt the pressure from everyone to buy a property in the suburbs.  But that was not what they wanted.  As she put it: "We're moving this fall from one rental to another, and I like the feeling of having something new.  With a pool I don't pay for, a gym that's open 24 hours a day, and emergency plumbers on staff at 2 a.m., I have enough responsibility in my life that I don't need a home."  She closed by declaring that "my rent payment gets me ... the amenities I've grown accustomed to ... and the peace of mind that someone else is responsible for maintenance."

Another blog raised the question of whether it made more sense to rent or buy.  A Chicago commenter said unequivocally that "I think we might be renters forever.  My husband and I love sitting ... in the park reading the Sunday New York Times while our landlord is stuck fixing the garbage disposal.  Time is priceless.  And we are nowhere nearly as freaked out about finances as our friends are."

Another commenter explained unequivocally that "Renting is a service I gladly pay for. We spend about $40 a day for use of a nice three-bedroom townhouse on a quiet street, with a private yard, a larger park for kids in the complex ... I like having money set aside for a surprise like a weekend trip to Manhattan or a night at the Opera instead of a blown water heater or a leaky roof."

Finally, an article on the online Wall Street Journal in early August discussed the glut of homes for sale.  One commenter proudly boasted that "I sold my home four years ago in south Orange County [CA] and have been biding my time as the market props run their course."

Another commenter declared that "[I] have close to 200k household income, 100k down payment waiting in the bank, but any home I'm interested in is close to a million or more.  Sure, I could afford a condo or home in less desirable areas, but I prefer to live near my socio-economic peers.  I don't understand how families can afford to buy 700-800k homes on 70k household incomes.  Until things make sense, I'm not buying.  I'm happy to continue renting in a nice neighborhood close to work, and use the left over cash to feed my nest egg."

The Caretaker Alternative

For those of you who may be reluctant to buy but are hesitant to sign a lease of one year or longer, an alternative known as a caretaker could be worth looking into.  To deal with the growing number of vacant, habitable homes which the owner would eventually like to sell, an industry known as home tending has blossomed in the last fifteen years.

The concept is a simple one.  Vacant homes often attract vandals, thieves, drug dealers and even squatters.  Home tending companies provide clients such as individual owners, real estate agents, builders with vacant homes built on spec, remodelers fixing up a property to flip, and occasionally banks with a carefully screened live-in caretaker.

The home tender firm does not charge the client anything.  How do they make money?  Caretakers gladly pay a reasonable fee to live in a very nice home with their own furniture.  According to one home tending company owner in San Antonio, the caretaker may pay about $750 a month to occupy and care for a house worth $400,000.

The monthly payment is not rent according to a company owner in the Phoenix area.  As she explains it, the caretaker is a subcontractor of her firm who understands that there is no fixed time commitment for staying in the house.

The caretaker is responsible for keeping the house clean and maintained and the yard mowed and manicured so it can be shown to a prospective buyer at a moment's notice.  The Phoenix firm does a background check and requires caretakers to complete their training program.  The caretaker must also carry a minimum of $300,000 in liability insurance and $25,000 personal property insurance. 

When the house is sold, the caretaker is usually given 10-14 days to vacate.  One of the largest firms, located in Utah, will sometimes shift a caretaker to another property when the one they have been occupying is sold.

Who are these caretakers?  Many of them are professionals who are relocating and either need a temporary place to reside or want to learn more about an area before deciding where to live more permanently.  They also include former homeowners who have lost their property to foreclosure and need a place to live until they can get back on their feet.  Some are divorced men or women in transition and looking to start a new phase in their lives.  Others are renters trying to save enough money for a down payment on a house they hope to buy in the future.

Why Renting Will Be a Popular Alternative to Buying for Years

Some housing analysts argue that the American dream of home ownership is still alive and well and will reassert itself when the economy and housing markets recover.  This is little more than wishful thinking.

The housing bubble of 2004-2006 was the climax of a powerful belief which had formed over decades that residential property prices always go up.  The collapse in home prices around the country since late 2006 has shattered this assumption.  Zillow's latest Homeowner Confidence Survey for this year's second quarter reported that one-third of all homeowners do not believe that home prices have reached a bottom.

The change in attitude toward owning a home cited in the beginning of this article has now reached the blogosphere.  A Google search I ran on renting vs. buying found a website which posted links to 48 blogs that touted renting as the preferable option.  How many of them were there during the peak bubble years?

The attraction of renting now is boosted by the growing vacancy rate for both houses and apartments.  The following chart posted recently by the Calculated Risk blog shows the long-term upward trend. 


 
With nationwide vacancy rates now well over 10%, it is extremely difficult for a landlord to even consider raising rents.  Since roughly 25% of all home sales are currently going to investors paying cash, large numbers of homes will continue to be thrown onto the rental market.

The one major market where there is apparently a shortage of nice 3-4 bedroom rental homes is Phoenix according to the Cromford Report.  If this claim is accurate, it is due to thousands of former homeowners who have lost their house to either foreclosure or a short sale and are looking for an attractive home to rent.  The supply is down because, as I have reported in a previous article, banks are withholding most repossessed homes from the market.

For all the reasons discussed in this article, the attractiveness of renting will be a serious impediment to the return of potential buyers to the housing market.  The change in consumer attitude is well summed up in this March 2010 post on a Zillow advice thread:

"We cannot wait to rent and walk away from this upside down/underwater bad investment.  And while we go through the process (foreclosure) 6 to 8 months, we will be socking away the $2600+ mortgage payments preparing for our rental.  Even $1500.00 for the rental of a home as nice or even nicer is $1100.00 per month ahead. Just think, no property taxes, no HOA dues and when something goes wrong, call the landlord.  We can handle the credit hit.  Currently we have about 840 FICO.  The way things are going we will be able to save enough cash to just buy a house in a few years."

How to increase NOI by installing electrical sub meters (Part 3 of the Adding Value to apartments discussion)

As an landlords and property managers, we are always looking for way to increase Net Operating Income (NOI) for the long term profitability of an multifamily asset.  In my previous post, we discussed the possibility of raising apartment rents despite the obvious recession situation.  Increasing rents, however, is only one way to improve your revenue flow.  Another method to is to take a look at the current utility scheme of your building:  is it "all utilities paid by owner" or have all or some of the utilities been sub-metered and the costs passed on to the residents?

In general, most newer buildings will already be built with individual electrical meters so that residents are responsible for their own power use.  The opportunity to convert to individual meters usually lies in apartment buildings that fall into the "older construction" category, which is the focus of this discussion.  If you have a multifamily apartment building that has not yet been sub-metered, installing individual electric meters is an excellent option to help decrease utility expense and increase your bottom line.  The conversion process is not difficult and - if done correctly - can be very cost effective.  Our property management company has been able to contract the installation of electrical sub-meters at a cost of $350 to $600 per unit here in Los Angeles.  Check with your local licensed electrician for more details.  

Once the sub meters have been installed on your investment property, you will need to adjust the rent amount that your residents are paying.  This decrease in rent is to compensate occupants for the fact that management is no longer paying their electric bill and that the cost will now be incurred by each individual tenant.  A general rule of thumb is to discount each resident's rent by about 70% of the average electric bill per unit.  The assumption being made here is that once the residents actually have to pay for thier power, that they will become more conservative with their energy use by a factor of 30%.  (Disclaimer:  these averages are based on sheer experience.  I do not have a source to cite other than the hands on knowledge of our Rob Freedman, First Light's Broker and real estate expert).  Here is a quick example to help clarify my point:

Let's say that the average electric bill per unit is $80. $80 x 70% = $56, which means that you will want to reduce the rental rate of each of your units by $56.  The result?  You, as owner, will realize an instant operating expense savings of $24/unit/month.  If our example is applied to a 100 unit building, your yearly revenue will be increased by $28,800.

Does this make sense from a financial point of view?  In my opinion yes, if you are planning keeping the building for another 3+ years.  Have we created some resident turnover when these sub meter conversions have been implemented?  Yes. But the turns were expected by the principals and planned for accordingly.  Let's face it, some folks just prefer to have "all utilities paid by owner" and will move on to buildings that offer such.  Overall, the building became more profitable. What are your thoughts on sub metering out your master-metered properties?  Is it a bad time to discuss such improvements in the midst of a recession?

-Trevor

How to increase rents in a recession (Part 2 of the Adding Value to Apartments discussion)

Increase apartment rental rates in a recession? Preposterous, you say! Yes, it is - IF you have not been keeping up with the maintenance needs of your tenants and over all customer service. If your property management company has not been responding to the everyday ebb and flow of maintenance and upkeep of your investment property, than you can rest assured that when you post that 30 or 60 day "Change of Rental Terms" notice, that a series of "30 Day Notices" from your tenants will soon follow.

What is the answer to raising rents in a tough apartment market such as Los Angeles? Responding to maintenance requests. The residents of your investment properties will always appreciate quick turn around of their maintenance requests and will remember such service when the it comes time to keep rents up to market. I am not talking about a super significant raise here folks - just a gentle increase to help you, the landlord, keep your NOI through these trying time. In my experience here at First Light Property Light Property Management, Los Angeles, a resident seldom moves out of a building for a subtle increase of 3% to 5%. Early on we did, however, find that if we as a property management team happened to have overlooked a resident's maintenance request, that this overlooked request was the FIRST thing they brought up when the rate increase letters went out. The outstanding issue was promptly resolved, but it would have been much easier on to have handled it within the first 24 hours and exceeded the expectations of the renter.

Is it good business practice to raise rents in a bad economy? My opinion is yes, but only if your property management has kept a very tight ship with customer service to tenants and have kept up with their maintenance needs. If your investment is providing superior service to your tenants then it deserves to be compensated. What do you guys think: raise or sustain? What are you doing in your communities?

-Trevor

Property Management Webinar: Resident Retention

I had the pleasure of attending Multifamily Insider's webinar yesterday on resident retention in apartment buildings.  The presentation was full of very useful research, facts and suggestions for the property management industry.  In particular, I feel that the information in regards to maintenance requests and how they correlate to tenant satisfaction is very useful to property owners and managers.  Check out the presentation below and have a great Friday!  -Trevor

Resident Retention Rehab - The Cure For Reluctant Renewals

View more presentations from Multifamily Insiders.

You might need a property manager when...

A friend of mine recently bought an apartment building here in Los Angeles and asked me "How do I know when/if I need property manager?"  To which I told him there were several reasons to hire - or at least consult with - a management company.  I then proceeded to rattled off my top ten list of "you know you need a property manager when:"

1) If you find yourself taking calls at 1am to fix a broken water pipe in your building - you might need a property manager.

2) If you don't remember the last time that really nice guy in unit #108 paid rent - then maybe you need a property manager.

3) If most of your residents have pets and you have never heard of a pet agreement or pet deposit - you might want to hire a property management company.

4) If you just realized that the residents in unit #207 moved out TWO months ago - it might be time for a property manager to take care of your building.

5) If you find yourself spending more time at your apartment building coordinating maintenance than you do with your wife, kids or friends - you should call a property management company.

6) If you think your apartment building MIGHT be under rent control, but you are not sure what that means - you should call a property management company (or your lawyer) immediately.

7) If you do not know what your Net Operating Income (NOI) is or how to find out - it may be time for a property manager.

8) If a resident moves out and it takes your handy man 2 weeks to touch up paint and clean the carpet – you should consider a property management service.

9) If you are not sure how much rent to charge for your newly vacant apartment or single family home - perhaps you should think about a property manager.

10) If you moving out of the city, state or country and plan on keeping your investment property - you DEFINITELY should speak with a property management company.

The point that I was attempting to drive home to my now landlord-of-a-friend was that there is quite a bit more to property management than simply collecting checks and repairing toilets.  An investment property is a living, breathing entity that requires a significant amount of time and attention.  If my friend was not ready, willing and/or able to take on the responsibility, then there was most certainly a property management company in his area that would be more than happy to help him out.

Property manager recommendations: A letter from a resident

This post is recognize one of our best team members for her work as Property Manager in the San Diego area.  Julie truly cares for her residents and her communities, which is evident in the letters we receive from current and departing tenants (see below).  It gives us great pride as a property management company to have her on our staff.  Thank you for all your hard work, Julie!

-Trevor and the rest of the First Light Team.

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To Whom it May Concern:

I am writing this letter to compliment Julie, the manager at 4438 Ohio St. complex. A year
ago, I began looking for apartments in the San Diego area. This was a difficult task being a Los
Angeles native for 30 years and knowing nothing about the San Diego area. My husband was
being stationed to San Diego after living on the east coast for 5 years, and I was looking for a place
to call our home before he arrived. After viewing different listings on Craigslist, I came across
Julie’s listing on an apartment complex. After showing me a few different places that were ok, but
just weren’t what I was looking for, she knew the one on Ohio St. would be it. She couldn’t be
more right! As soon as I saw apartment #5, I was sold! This would be our new home in San
Diego, the one my husband could come home to after 6 long months at sea. Julie was great and
worked with me to ensure everything would go smoothly with the application especially since I had to return home to Los Angeles that day.

Throughout our year of living in the Ohio St. complex, Julie was very helpful and attentive to our
needs. Whenever she was on the property, she would check in on us to see how we were doing.
She always wanted to make sure that our requests were completed to meet our standards. We
enjoyed living at the complex managed by Julie. We were ready to buy our first home, and it was
time to leave our beloved home on Ohio St. As a first time renter, I was very pleased by Julie’s
attentiveness and kind demeanor. I would recommend anyone to rent from any property managed
under Julie.
Sincerely,
Eva

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If you would like to see what apartment units are current available in Julie's area, take a look at our current listings in San Diego.

10 ways to add value to apartment buildings in Los Angeles

Despite the current market conditions, opportunities to invest in a multifamily apartment building in Los Angeles exist if you know where to look (and who to talk to).  Having a solid multifamily broker, commercial lender and property management company on your team can aide your search incredibly.  This real estate team will provide you with market and financial analysis, pre-qualification for funds and critical operations insight into potential multifamily investment deals. 

Once an apartment building has been located, you will want to asses the potential value that can be unlocked from it.  Creating value in multifamily apartment buildings in Los Angeles (or any other city for that matter) can be accomplished by asking on question:  "what about this building can I change to make it better?"  In other words, how can you increase the income, decrease the expenses and/or increase curbside appeal and aesthetics?  The location of the property is very important, however it is not considered a variable that can be changed in an effort to add value.

Of all the variable components of a multifamily income property, we - as property managers and investors -  have identified 10 that have the greatest potential value impact:

1. Increase rental rates.
2. Electrically sub-meter the apartment building.
3. Add vending services (Coin-op laundry, soft drink and snack machines).
4. TV service providers: contact local TV companies and offer exclusive rights with revenue sharing.
5. Satellite service providers: contact local satellite TV companies and offer exclusive rights with revenue sharing.
6. Cell service providers: open your building's rooftop space for the installation of a cell phone relay tower.
7. Own two or more apartment buildings?  Consolidate like services to achieve efficiencies.
8. Convert unused or excess storage areas into rentable living units.
9. Install water saving shower heads and low-flow faucet aerators in all units. 
10. Have a tax attorney protest tax valuations to have them lowered.

Do you have additional ways to create value in your apartment complexes?  I would love to hear others experiences in nationwide markets!

(PS - In forth coming blogs, we will explore each of these variables in greater detail)

Leasing Apartments in Los Angeles Using Video (Part 3 of 3)

  In my last two posts, I talked about how and why to create an  apartment leasing video.  Now lets spend a final moment talking about where this video lives in your online apartment marketing scheme.

Once the video is created, it must be distributed.  Our property management company  posts them on our site, under each property's individual page. We also have a Youtube channel where we post the videos. Using Youtube, the video officially becomes “public”. Which means anyone in cyberland can watch it.

The beauty of Youtube is:  1) the interested viewer can follow a link to our site and take the steps to rent the property AND 2) Youtube automatically creates a URL that can be pasted on any site, all the while the video lives on Youtube’s servers, not yours.  The other distribution channel we use is good ole Craigslist posts. Craigslist allows URL’s to be pasted into the normal rental ads we place.  With this a prospect again goes right to the source to rent the property. A few other tactics we use are placing the video links (again created by Youtube) through Apartments.com, Move.com.  

The quicker a unit is rented, the less rental money is lost to a vacancy factor.  By creating simple videos to showcase vacancies, you are creating yet another avenue for prospective to find - and fall in love with - your property.

Leasing Apartments in Los Angeles Using Video (Part 2 of 3)

The whole idea of using videos to lease apartments came about when I came across the well known blogger and social media guru Chris Brogan.  Chris created a “what if” situation. This was “what if he were in real estate”. Moving forward, he suggested a video walk through as a tool for selling houses, apartment buildings, any other type of real property.

This is nothing new. Realtors around the globe continue to create fancy “virtual tours” all the time. But this costs money, sometimes lots of money. The large cost is in creating the flash of the virtual tour. Flash is one of those pieces of software that is only understood by a few. What we are talking about here is a REAL virtual tour without the fancy flash. We are talking about the owner who wishes to lease his 1,000 square foot apartment by showing the apartment as if he/she were walking a prospect through it. This could also work for the owner who has 100, 1200 sq ft apartments in a single building. Anyone who has ever lived in an apartment building knows that most every apartment looks the same and has a few different floor plans. The beauty of the REAL video walk through is that is raw, not airbrushed...the prospect sees the real thing. Of course we make the video well. It is steady, pre-planned, and choreographed. Rarely will a prospect rent the unit off the video. The tenant will more than likely want to come see it for their self.

With the video tactic I describe above, we put the vacant unit’s best foot forward and also eliminate surprises for the prospect. In doing this, we increase our chances of leasing the property after the prospect sees it. For what potential renter drives all the way across town unless they are really interested? We increase our chances of closing the deal and making our clients more money, quickly.

Try it and let us know your experience.  I will talk about  a few avenues of video distribution in the next and final post. 
_TH

Leasing Apartments in Los Angeles Using Video (Part 1 of 3)

Real Estate Marketing is constantly evolving. We must continue to be vigilant with our marketing strategies to bring in tenants and rent properties quickly. In the current saturated leasing market, to lease properties quickly and efficiently, you must use every tool available to reach your potential prospects. The “real video walk thru”  is a very powerful tool in marketing properties for rent.

1. Acquire a simple digital camera (such as FLIP)
   
2. Turn on the lights in the vacant unit you would like to shoot.  By doing so, the lighting for the shoot becomes more consistent.  If you point the camera directly at an open window in the middle of the day, you will get a lot of glare and the camera will go out of focus if it was dark in the unit.
3. Create a pre-scripted narration (or remain silent - which is how we choose to shoot) **A script can simply to point out features of the unit or describe suggested uses for the particular space ("Large dining room, great for holidays or dinner parties...")
4. Plan out the path that you will walk for the shot - this will allow you to avoid having to back track or make your viewers dizzy as you spin around in a room trying to get everything in.
5. Edit in any type of video editing software (Adobe Premier Elements, Final Cut Pro or Express, Imovie, Sony’s Vega or similar)

*Note: we did not edit or adjust the lighting in any our test videos, which was very obvious by the slight darkness of the shots.  The video in the link above has been corrected for lightness, contrast and cut for perspective.

6) Create a YouTube channel and organize the vacancies per property or area.