Should I Sell active real estate in trade for passive real estate?

Reasons for considering a trade of one or more assets for another asset of the same class:

• Selling in a depreciating area to purchase in an appreciating area. Consider selling in a glutted market in order to leverage the equity into an apartment complex at a discount in a market affected by lack of available financing to increase cash flow and hedge against further loss of value
• Estate planning. Exchanging several homes into larger apartment complexes so that the apartments later can be sold by the estate and the value split equitably amongst the heirs, or so that the asset may later be transferred into a trust for estate planning purposes.
• Increased cash flow. Single family residential can be more expensive on a price per square foot basis, exchanging for apartments or NNN commercial can reduce maintenance expenses and increase cash on cash return.
• Termination of active management duties.  Apartments and NNN commercial complexes are easily outsourced to management companies so that the owner may travel, etc.
• Moving equity into a property that can be refinanced.  Many owners of bare land have not considered the income stream that can be created by exchanging into an income producing apartment which would provide income in retirement.
• Moving equity into property or properties that are considered more liquid – an example would be exchanging two apartment buildings for single family residences in urban neighborhoods close to the city center.
• A hedge against inflation – In uncertain economic time’s one thing that is certain is that rents tend to rise.  You can safely plan for moderate to aggressive rent increases that improve your financial performance.
• Leveraging relationships – Contracting with a professional management team will give you direct access to the immediate attention of their vendor relationships saving you costly time and repair dollars during ownership.

Case study: Mr. Jackson is considering converting several single family residences into one large apartment.  He has been an active landlord for thirty years and feels safest in real estate because it is a commodity he understands.  He has had several health issues and maintaining several rentals has become a strain.  He has reasonable income from the homes but no longer wants active real estate responsibilities.  Mr. Jackson takes the homes and sells them totaling one amount of relinquished debt and one grand total of sales price.  Within the timeline of his exchange, he identifies an apartment complex in an area of town close to the tech sector with healthy wages.  His cash on cash return increases because of increased rent per square foot and a lower cost per unit acquired in the apartment.   This value is net of the cost of active management.  Mr. Jackson elected to employ a new management firm and deliver to them management standards so he could travel without worry.  The new management is active in the field and aggressively markets, providing Mr. Jackson with a lower vacancy rate than he himself could obtain.  His asset is protected by their effective maintenance relationships and practices.  Monthly reports and income checks are now the extent of his participation.

Sales – the art of responding to objections as a rental owner

Are there aspects of being a rental owner that were not explained as “part of the job” when you purchased your first rental?  Things like finance 101 and true costs associated come to mind.  Many don’t understand the 360 degree job of being a landlord.  Are you a landlord by default?  Find yourself as a rental owner because your home didn’t sell?  In this market perhaps the most important aspect of owning a rental is understanding how the interaction with a potential resident is a sales opportunity – yes, your job description now includes sales!

The vacancy rate has increased during this “perfect storm” of economic woe.  It is time to get very proactive when showing your homes for rent.  You may notice many more showings and less applications – natural consequence of the market.  This is your que to ask questions about the likes and dislikes of the visitor, phrasing them in open ended sentences such as:

If you were to rent this home are there things that you anticipate needing?  Are there features you find attractive?  How would your furniture fit inside the home?

When you get a response such as “the bathroom doesn’t have any cabinetry.” you will want to act proactively in the moment responding with something such as “we can purchase an organizer to hang above the toilet, would that take care of this for you?”

Often you may need to overcome objections to an upper level unit.  If this is preventing the rental of the unit what can you do?  Think creatively!  Hire movers to bring the large items from the prior residence and move them into the new residence as a part of your sales incentives at the property.

What if the concern is crime or safety?  This is a concern that a rental owner needs to be careful responding to.  No person can suggest a property is safe, so rather than respond to a subjective question offer sources of information.  In Portland, Oregon we can recommend a resident go to www.portlandmaps.com for crime statistics and comparison.

Knowing your property and area can be the best asset to overcoming objections you have.  Obtain information on schools, amenities nearby such as shopping and parks, and have it available for the residents. 

Being proactive, asking questions, and responding with solutions will have you leading the pack to fill your vacancies.

Foreclosure definitions, part 1

ASSIGNMENT OF DEED OF TRUST:

A document that transfers the lender’s (beneficiary’s) interest in a deed of trust.

BANKRUPTCY: A legal process that allows a debtor to discharge certain debts without paying the total amount due.

BENEFICIARY: The lender or person to who the obligation is owed.

BIDDING INSTRUCTIONS: An authorization form signed by the beneficiary authorizing the trustee to make the initial opening bid at a trustee’s sale and subsequent bids.

DECLARATION OF DEFAULT: A document signed by the beneficiary instructing the trustee to prepare the Notice of Default should the borrower not bring the loan current, to sell the property, encumbered by the loan, in order to satisfy the unpaid debt. This document is not recorded.

DEED OF TRUST: A written document describing the real property being given as security for an obligation.

EXTENSION AGREEMENT: An agreement that extends the due date of a note.

FORECLOSURE: Enforcing a lender’s rights upon the default of an obligation that is secured by a deed of trust. A deed of trust must contain a power of sale clause to enable the trustee to initiate a non-juridical foreclosure.

FULL RECONVEYANCE: A document prepared by the trustee or substituted trustee, when the obligation secured by the deed of trust is paid in full. When recorded, the reconveyance takes the deed of trust off record.

NOTICE OF DEFAULT: A written document that is recorded, published, and posted giving notice of public record that a borrower has failed to perform his or her obligation under the terms of the promissory note. This document is recorded.

April Residential Highlights are in from RMLS

While sales activity continued a steady month-over-month increase in the Portland metro area, it still fell short of 2008’s same month marks for April.  Comparing April 2009 with the same month in 2008, pending sales were down 10.1% and closed sales decreased 17.7%. New listings also dropped 28.1%. 

On the other hand, comparing April 2009 with March 2009, pending sales grew 13.6% (1,860 v. 1,637).  Closed sales also rose 10% (1,302 v. 1,184). New listings increased 3.3% (3,808 v. 3,685). Pending sales continue to rise month-over-month at a steeper than usual rate (13.6% in 2009 vs. 6.8% in 2008 and -2.3% in 2007).

Inventory also dropped to 11 months and this is the first time it has dropped from March to April since 2004. Active residential listings in April numbered 14,328 – up from 14,158 in March.

The average sale price for April 2009 was down 10.4% compared to April 2008, while the median sale price dropped 9.1%. 

Month-to-month, the average sale price and median sale price were mixed when compared with March levels; the average sale price decreased 2% ($291,100 v. $297,000) and the median sale price was up 1.4% ($249,900 v. $246,400).

Inventory in months

              2007 2008 2009

Inner Heart Acupuncture

This is a great woman owned, locally owned acupuncture clinic that focuses on women!  Lisa Tongel, owner, is great with pregnant women.  Her clinic is peaceful and her staff is very friendly.  Come out and try this exceptional acupuncture clinic at 1607 NE 16th Avenue, Portland, Oregon 97232 at Weidler Street.

BiPartisan Cafe

This is a great coffee and eats shop.  The interior is hoppin’ and friendly with great political memorabilia!  The food is fresh, healthy (think lettuce wraps instead of sandwiches – just for asking), and the coffee is great!  Wi-Fi and people watching are the best entertainment here.  Take a few minutes to enjoy lunch and then hop across the street for a movie at The Academy Theatre.

Tips on resident retention

In this precarious rental and real estate market, are you watching out for your best asset?  Just like employees are the most valuable part of any company, a resident is the most valuable component of a good rental or portfolio.   Without a resident, who pays the mortgage?  The owner, out of the money that could otherwise go toward reserves or personal gain. 

In light of how important the resident is (read how important the cash flow is), take these tips and implement them into your regular practices:

1.  Check in with residents.  Consider doing an online survey to determine satisfaction of the residents.  If online is not your strong suit, pick up the phone and call.

2.  When you have an opportunity to converse with your resident, get to know them!  Nothing helps with resident retention than an owner that cares about the life of the resident.  Ask about their work, what their families are up to, what entertains them.  Correlate it to your own life experiences.  Next time you check in with the resident, be sure to refer to the interests or lifestyle discussed.  Your bottom line will be glad you did.

3.  Consider holiday greetings.  How many of you send Christmas cards to your residents?  Why shouldn’t you?  Perhaps holiday cards are more politically correct, I leave this to you to decide.  The resident will appreciate being remembered a few times a year and to know that it is not always about “business.”

4.  When a new resident moves in they should be given a welcome packet full of friendly advice on restaurants, schools, utilities, and more.  What about the existing resident?  Couldn’t a quick letter with new restaurant information, helpful money saving ideas in the area, or beneficial services show that you are going the extra mile?

More ideas like these will follow in the coming weeks.  Check back or see more information on where to get landlord training and real estate information at www.landlordstudyhall.com.

What about the investor that wants to sell into a passive investment?

Case study:  Mrs. Choo has 7 rental properties, 5 of them houses she bought over time and two of them duplexes that she built.  She knows she wants to retire in 15 years at age 50. 

Margaret could choose to pay additional to the principal of the loans to pay them off at a 15 year amortization during the time she is earning a steady income.  At the time of her retirement, Mrs. Choo places the properties for sale with a broker specializing in land sales contracts or mortgage and trust carried by an owner. 

Seven buyers are found with attractive terms to Margaret.  The down payments total $220,000, which she is able to invest with her financial advisor in the stock and mutual fund market, and the payments from the land sales contracts have in turn created a stream of income to her of a total amount of $10,000 per month. 

Mrs. Choo graduates her sales clauses in each contract so that she is paid off in graduated steps, according to the wishes of her tax advisor; likely in step with the reduction of her other taxable income or to offset anticipated future losses.  The money from each satisfied contract is invested with her financial advisor.  The additional money is invested to create an additional stream of interest income and increased principal investment in the account.

What makes a smart real estate investment nowadays?

It all depends on if you want cash flow, write off, appreciation.  What is your objective and what is your financial condition?  The best of all investments will give you good cash on cash return (the function of your down payment as related to the annual income after expenses), good value retention and appreciation, low maintenance, and tax benefit.  But how do you get there?

Many of us don’t have a pile of cash laying around to get us started.  I personally am not a believer in the get rich quick antics that I hear about on TV.  I believe in simple hard work and smart investing, so here is how I got to where I am.

I started by making my first home a rental after I had owned it about a year.  I moved because I didn’t like the area, but for some reason liked the concept of real estate as a wealth building vehicle.  When I turned this house in to a rental I had to buy another one to live in.  Owner occupied financing is more affordable so this was a great option.

About 1.5 years later I bought another house.  This one was an impulse purchase!  It had good potential (a fixer, indeed), and the house I was living in had grown small.  This third house was in Woodstock, a still sleepy urban neighborhood that had promise.  I fixed it up, fell in love with living in that great walkable neighborhood, and decided I had enough of moving.  I settled in and stayed over 10 years, while I did more investing.

About a year later I tried my first tax deferred exchange (a 1031 exchange), and sold that first house to get a better house in a better neighborhood.  With each of these houses I tried to get the rent to pay the payment.  Within reason, as long as I was not tapping the equity, these houses came close to paying for themselves when comparing cash flow only.  When tax write off and appreciation were taken in to effect, they were all adding up to growth in value and potential for wealth.  With all of these houses I put relatively little down, which helped with the cash on cash return.

What should you take in to consideration when deciding to invest?

1.  Amount of down payment

2.  Loan terms

3.  Area

4.  Design of home or investment

5.  Realistic rent

6.  Expected vacancy rate

7.  Minimum return on investment desired

8.  Length of time you intend to hold the home or investment

9.  Capital improvements required

10.  Reserves for replacements

This list is just a start.  There are infinite considerations when purchasing real estate.  Feel free to meet up with me at my monthly forum, Landlord Study Hall.  We have been meeting monthly for over 6.5 years and welcome your attendance.  Read more at www.landlordstudyhall.com.  This month we will delve into notices, terminations, and evictions.

More on this story next blog post!

Resident Retention

How on top of the market are you as a landlord?  If you are aware of current conditions you know that the key phrase in spring 2009 is “resident retention.”  The act of preventing your good paying tenants from leaving is the way to prevent increased vacancy and turnover cost.

Why is resident retention so important?  Now more than ever other homes are competing with yours.  The economy in Oregon continues to deteriorate to the tune of top unemployment in the nation per the Oregon unemployment department (adjusted March numbers).  While Oregon was slow to lose ground in the rental market, with the increased and sustained “shadow market,” the playing field is tipped against each and every rental owner.

What does this mean for you the landlord with occupied units?  Activate a plan of action to keep those residents happy!  Start by getting to know your residents better.  Take time to check in with them and see if they have any problems with condition or convenience.  Is there a way that they can pay their rent payments online?  Would this make their life easier?  Are the windows too drafty?  Would an improvement to the property improve their comfort and your resale value?  Take time to explore these questions at your homes and you will have greater worth and the resident will be happy.

Is your resident feeling the pain of the recession?  Perhaps by discussing options with them you can prevent an eventual vacancy.  What if the resident doesn’t consider getting a roommate?  Are there community resources that you are aware of that could help them?  Providing resources such as 211.com can mean the difference between occupancy and vacancy.  Being proactive is the key.

What about conditions of tenancy beyond rent payment?  Would allowing a pet make the resident happier?  What if you have two years of good resident history – can you make an exception if the pet increases the resident’s comfort at home?  Making pet visits are always a possibility to ensure that the pet is well behaved.  Also maintaining a rule such as 2 years and older on pets can eliminate many problems.

Check back for more useful tips in today’s rental market and plan to attend Landlord Study Hall on May 13^th where Amy Barnhouse will speak about notices, terminations, and evictions.  For more information call 503-997-9035.