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.
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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.
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