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Rental Housing Journal On-Site

April 2014 - Vol. 8 Issue 4 14. Market Trends Update 15. It’s Tough to Afford to Be a Renter These Days 17. When Screening Applicants Remember the Fair Credit Reporting Act 24. Three More Ways to Fill those Vacancies 25. Rent Checks Stolen from Property Manager’s Lockbox 26. How the Internet of Things Will Change Property Security and Monitoring

3. The Mortgage Market is about to Get Smaller 5. Spring Cleanup has Arrived 7. Dear Maintenance Men: 8. Become a Daily Learner…Today! – Ernest F. Oriente 9. Touch Points: Intentional Customer Interactions 10. Shoptalk 11. Exit Strategy Pt. II: Repositioning Your Real Estate Assets to Simplify Your Life

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Do You Appreciate your Tenants? By Marc Courtenay

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s property managers, we’re all aware of the multitude of issues that frequently arise with unreliable tenants. Late rental payments, disturbing the peace, illegal activity, and a general disregard for the property are all problems that typically arise in the property management industry. Many times, we’re so focused on dealing with the problems prevalent in the property management industry that we overlook the tenants that always pay on time; the tenants that take good care of their property, the tenants that are considerate of their neighbors. How do we make sure that those tenants are happy? That they feel appreciated? That they know that we want them to remain tenants as long as possible? Chances are those good tenants are feeling unappreciated right now; which means that they will have no reason to stay at your property if a better opportunity opens elsewhere. It’s so important to remember that a rental agreement is between two separate parties, and just like any of us, our tenants like to know that they’re appreciated. continued on page 7 Professional Publishing Inc. PO Box 6244 Beaverton, OR 97007

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Puget Sound Apartment Owners, Property Managers & Maintenance Personnel

Market Strengthens; 46,755 Units in the Pipeline By Tom Cain Apartment Insights Seattle - Latest quarterly Apartment Insights survey shows rents up 1.6%, vacancies down .25%, and 46,755 units in the new construction pipeline according to Tom Cain of Apartment Insights. The data are from his Seattle firm’s 1st quarter statistics and trends on 50+ unit properties in the King/Snohomish market. VACANCY: 4.38% The vacancy rate for our nonrandom survey of conventional, stabilized 50u+ properties in the King/ Snohomish market is 4.38%. This is virtually the same rate of six months ago, and an improvement from the 4.63% in the fourth quarter. A year ago it stood at 4.58%. The overall vacancy rate which includes properties in lease-up and out-of-service increased from 6.15% to 6.24%. King County has a vacancy rate of 4.38%, the same as the overall rate. Snohomish County is at 4.35%. This is a tad lower than the overall rate, but not low enough to affect it because only about 20% of the properties are in Snohomish County. Based on vacancy rates, renters are favoring apartments in the most affordable submarkets. Burien, SeaTac, Tukwila and Marysville have some of the lowest rents and lowest vacancy rates, ranging from 1.83% to 2.86%. Other markets under 3% are Mountlake Terrace (2.75%) and the

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U. District (2.90%). The weakest areas are both over 6% vacant. The Eastside South submarket is at 8.93%. We pointed out in our last report that several major corporations had vacated a massive amount of space in the I-90 corridor office market, contributing to apartment vacancies in the immediate area. Ballard is the other submarket over 6% vacant. This is not a case of too few jobs, but rather too many new apartment units. The vacancy rate in Ballard is 6.77%. RENTAL INCENTIVES: $15 (1.1 4%) Rental incentives remain unchanged at $15 per unit. In the twocounty area 25.2% of the proper-

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ties are offering incentives, up from 24.0% last quarter. ABSORPTION: +1,604 Units There were +1,604 units absorbed this quarter, up from +1,030 units last quarter. RENTS: $1,233 per Unit $1.47 per Square Foot Rents climbed $19 to $1,233 per unit and $1.47 per square foot. This represents a 1.56% increase. This is a welcome relief after rents dropped $5 last quarter. Rents increased 6.8% over the past twelve months. The highest per-unit rents are in downtown Bellevue where they increased $40 to $1,846 per unit and continued on page 4

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The Mortgage Market is about to Get Smaller By by Marc Courtenay

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s 2014 begins a bureau created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, The Consumer Financial Protection Bureau (CFPB), will set new rules concerning mortgages. Lenders will be required to verify and inspect borrowers’ financial records. The rules discourage lenders from allowing borrowers to carry total debt payments totaling more than 43 percent of the person’s annual income. That debt also includes existing debts like credit cards and student loans. Starting January 10th the CFPB will put into force a national standard for issuing mortgages that could help prevent the housing crash of 2008 and 2009. Earlier in 2013 CFPB director Richard Cordray called the new rules “the true essence of ‘responsible lending.” All kinds of consumer advocates and mortgage professionals are lauding the new CFPB requirements. The new rules not only provide more responsibility for lenders, but it also protects them from lawsuits. “Lenders are going to be crossing their

t’s and dotting their i’s like never before” said Bob Walters, the chief economist for Quicken Loans. On the downside, there will be a big number of people who should have been able to qualify for mortgages that won’t be able to and will be shut out of the home-buying market. If you add to that the fact that mortgage rates have risen in the past 6 month and are predicted to gradually move up to the mid 5 percent range by the end of 2014, you can see that the mortgage market will be shrinking. Others have commented that there’s a good chance that limits on the size of some popular mortgages will be lowered during 2014. CFPB director Corday noted that in the years leading up to the 2008 financial crisis, consumers could easily obtain mortgages that they could not afford to repay. In contrast, in subsequent years banks tightened lending so much that few could qualify for a home loan. The new rules seek out a middle ground by protecting consumers from bad loans while giving banks the legal assurances they need to increase lending, he said in a press con-

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ference at the start of 2013. The new rules will limit offers like teaser rates that adjust upwards and large “balloon payments” that must be made at the end of the loan period. They include several exceptions aimed at ensuring a smooth phasein and protecting access to credit for under served groups. For example, the strict cap on how much debt consumers may take on will not apply immediately. Loans that meet separate federal standards also would be

permitted for the first seven years. Balloon payments would be allowed for certain small lenders that operate in rural or under served communities, because other loans may not be available in those areas. The bureau also proposed amendments that would exempt from the rules some loans made by community banks, credit unions and nonprofit lenders that work with low- and moderate-income consumers. Continued on page 4

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Market Strenthens ...continued from front page $2.09 per square foot. Downtown Seattle with its relatively smaller units has the highest per-foot rents. Here rents bumped up $10 to $1,728 per unit and $2.32 per square foot. As stated above, renters are favoring areas with low rents based on occupancy rates. The lowest rents are in SeaTac where they average $885 per unit and $1.13 per square foot. Other areas where rents are under $950 per month are Burien, Des Moines and Tukwila. All of these submarkets are in South King County. NEW CONSTRUCTION There are currently 14,884 units under construction, up slightly from 14,139 units last quarter and 12,006 units a year ago. Sixty-three percent of these units are in the city of Seattle; 22% on the Eastside; 11% in Snohomish County, and 4% in South King County. Together with the 2,801 units that have opened this year, the projected total for 2014 is 11,702 units. Compare this volume with the 6,015 units that opened in 2013, and you can see that this will be a monster year. We have found that developers' estimated completion dates are oftentimes extended due to unforeseen problems. However, we expect that 2014 will surpass the previous high that occurred in 1989 even though not all

of the 11,702 units will likely be completed. The 76-unit Collins on Pine which is featured in the photo opened recently on Capitol Hill. It was developed by Metropolitan Companies and is managed by Indigo Real Estate Services. There are currently 5,501 units under construction with a 2015 completion date. Additionally, 5,183 units are scheduled to begin construction with completion targeted for next year. This would make a total of 10,684 units for 2015. At this juncture we have information on 2,861 units that are either in the ground or scheduled to begin for a 2016 completion. In addition there are 5,943 units that are in the design review or later stages. Lastly, rezoning has been granted to developers on sites totaling 18,373 units. The grand total for all of the units in various stages of the pipeline is 46,755 units. A year ago it was 31,790 units. We would like to acknowledge the extraordinary work our staff has been doing in tracking all of these units as they move through the construction pipeline. OBSERVATIONS Last quarter rents dropped $5 and the vacancy rate increased a quarter of a point. This was after the market really took off in the second and third

quarters of 2013. The market has regained its footing this quarter by recouping its vacancy loss and getting a 1.56% rent increase. We are very pleased that the rental market is performing so well in the face of all the new units opening. Frankly, we didn't think it would be as strong as it is at this point when we were looking ahead not too long ago. We are fortunate that metro Seattle is outperforming the state and national economies. Other factors contributing to the strength of the rental market are favorable demographic trends, a preference for renting and barriers to entry into home ownership. Confidence in Seattle's economic strength and potential among investors, lenders and developers is evi-

apartment market trends in the Seattle area since 1978. His company surveys the five counties in Central and South Puget Sound. This article highlights survey results that subscribers can access from an online database of all 50u+ properties. Apartment Insights also provides customized rent reports and market reports. www.apartmentinsightswa.com 206632-2220

denced by the swelling of the new construction pipeline. It appears that their enthusiasm will most likely remain unabated until such time as the rental market softens.

Tom Cain of Apartment Insights Washington is a member of the nonprofit Central Puget Sound Real Estate Research Committee in charge of providing apartment rent and vacancy data. Tom has been a member of the Committee for over 25 years, and has been researching

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Spring Cleanup has Arrived

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inter is finally over—at least according to the calendar! We can surely be thankful for our mild winter especially when we hear and see what the rest of the country has experienced. Now that spring is here, it is time to consider the yards surrounding our properties and the exteriors of our buildings. Are the bushes out of control? Do tree branches hang over roofs? Are the beds overgrown? It is time to do a drive-by inspection and evaluate the status of your yards. Stop and consider curb-appeal from the street. Do the building and yard look inviting? While you are at it, recall the mild moist winter we have experienced. Moss and mildew have prospered and grown as well. Check out your driveways and sidewalks. Do they look black from moss? Are they slick? Remove the moss by pressure washing. By doing so, you increase the attraction of clean sidewalks, demonstrate that you are a landlord that cares, and eliminate any dangerous mossy surfaces. If tree roots are lifting sections, make sure to minimize the possibility that tenants and visitors might trip on the joints. While you are conducting these inspections, check the condition of your roofs and gutters. When was the last time you had the roofs and gutters cleaned? Now that spring rains have begun, make sure the downspouts drain easily. When was the last time your roof was inspected? Is the time approaching when it needs to be replaced? If it’s 3-tab, are the edges beginning to curl? When you clean the gutters, do they have a lot of sand in the bottoms? These are indicators it might be time to replace the roof before big problems show

up inside the building. Washington State’s short legislative session will be finished by the time you read this. We (the Washington rental housing coalition) had successes and failures. None of the bills we supported made it through although a couple got farther than in previous years. We successfully opposed all but one bill which had to do with sealing juvenile records. This law will make it more challenging to protect our tenant communities if applicants had juvenile problems with the law. Our April dinner meeting will depart from tradition. We are changing the date from Tuesday April 29 to Friday May 2nd. It will consist of two different topics. Blain Cowley will present a how-to repair workshop and WAA will review what happened in Olympia this year. Last month we mentioned our upcoming Landlord Training 101 that is scheduled for Saturday May 31st at Club Green Meadows. We are lining up topics of importance and knowledgeable speakers. We are targeting both new members and those that have been around a while. Mark the date on your calendar! Yes, the time for spring cleanup has arrived. Many of us have ignored the outsides of our units during the winter. Now it’s time to check them out and clean them up. We want our current tenants to feel proud to live there, and we want to be attractive to new tenants. After all, this impacts our finances and our rental community.

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Dear Maintenance Men: By Jerry L'Ecuyer & Frank Alvarez

By Jerry L’Ecuyer & Frank Alvarez

Most types of faucets are repairable with standard tools and a rebuild kit. Note the brand and style of the faucet and find a corresponding repair kit at the local plumbing supply house or home improvement center. Repair kits often come with the specialized tool you may need to repair the faucet. The faucet screen can be cleaned and is housed in a removable assemble at the end of the spout. These can be spun off and the screens cleaned and replaced. Keep in mind the cost of repairs may rival the cost of replacement. If the cost of repair is more than fifty percent of the cost of replacement, we recom-

Dear Maintenance Men: When the bathroom faucet was new, turning off the hot or cold water knobs would cut the flow of water immediately. Two years later, upon turning them off, the faucet weeps a bit of water. Is this a sign the knob isn’t working? Can a clogged spout screen be fixed? With all these problems, do I need to buy an entire new fixture? Paul Dear Paul:

mend the faucet be replaced with new modern fixture. Dear Maintenance Men: We have a vacancy and are currently upgrading the units as they became vacant. We are looking for an inexpensive way to upgrade our rental units. In other words, spiffy them from the normal. Hans Dear Hans: A great way to update older and modern units is to upgrade the cabinet knobs, interior door knobs and hinges. Typically apartment or builder grade knobs and hinges are

rather utilitarian in nature. They get the job done and that is about it, nothing fancy. That missing certain “je ne sais quoi” in a remodeled unit can be found in the choice of knobs and hinges you install. A wise choice is a lever style knob. They come in many different finishes and colors and they not only look attractive and modern, they are user friendly for any disabled or older residents. The use of solid brass knobs adds a bit of weight to a door making it appear rich and sophisticated. Stainless steel knobs and pulls can make an older unit look more modern. Check at your local home im-

Appreciate ...continued from front page Fulfill the promises that you make. If you promise a tenant a new dishwasher or new carpeting, be sure to fulfill that promise. Don’t make them ask you about it. Just schedule a time and do it. Respond promptly to any and all maintenance requests. If a tenant is responsible and takes good care of the property, they shouldn’t have to wait three months to have their stove repaired.

Here are just a few ways to show your tenants that they are appreciated: Be sure to take their concerns seriously. If your tenant calls to complain about loud music at midnight, or unauthorized vehicles in their parking spot, take prompt action and make sure that you advise them of both the action and the outcome; don’t make them complain more than once about the same issue.

Bend the rules – just a little. Should you wave a late fee – due to a mix-up with the post office for a reliable tenant that is never late with their rent? While opinions vary, remember that a good tenant is like a good customer, and it may be appropriate to bend the rules now and then. That’s not discrimination; that’s good business sense. Give them a gift. A gift card to a local store at lease renewal time, or

a card on their birthday will make a tenant feel appreciated, and build loyalty in the process. There are many ways to make a good tenant feel appreciated, with tenant stability and timely rent payments the ultimate payoff. What more could a property manager want?

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Become a Daily Learner…Today! by Ernest F. Oriente, The Coach {Article #213…since 1995}

O

ur economy and your success in the property management industry is based on knowledge. Gone are the days when you could graduate from high school or college and never again pick up a textbook or attend another class. Ready or not, your lifetime of learning has already begun, no matter how reluctant or scared you might be. In addition, sophisticated technology, business acquisitions, new products and significant regional or national competitors will continue to require your full attention. Ready to become a daily learner? Let’s get started! Staying current with your profession: Begin your learning journey by subscribing and reading the industry publications, E-newsletters, blogs and LinkedIn groups that serve the property management industry, such as your local apartment association magazine, UNITS Magazine, The Journal of Property Management and Multi-Housing News…just to name a few. These are great ways for keeping you in touch with local, state, regional and national trends. Next,

consider investing the time and money to upgrade your professional certifications as this says to your peers and colleagues that you are serious about your property management career. In addition, research the one day seminars delivered by Career Track {800-780-8476} or SkillPath {800-8737545}, as their programs can advance your specific business skills in a short amount of time and with minimal investment. Lastly, search the Internet for industry websites such as MultifamilyBiz [ http://www. multifamilybiz.com ] that serve the property management industry and register for their E-mail newsletters, read their industry news or participate in one of their live and dynamic

webcasts, to experience an engaging form of distance learning. Tip From The Coach: Start each year by reserving the property management seminars and trade show w o r k shops you will be attending. Then, schedule your company meetings and training that is planned and budgeted. Now, look at your calendar and reserve the time and dates you are going to schedule for the professional and personal learning that will best serve you. More specifically, consider budgeting $50-$150 per month for your continued education. This small investment today will pay large dividends in the near and distant future…The Coach says so!

Using technology: Technology has created many new time saving, cost-efficient ways to enhance our professional and personal lives. But of course, you need to learn how to best maximize your technology tools to receive the highest return on your learning investment. Let’s start with the basics. Learn and master the software used by your property management company. Learn the shortcuts for creating professional looking correspondence, presentations or proposals. Understand the power techniques for using a spreadsheet or preparing your property budgets. Research social media websites and related software as powerful marketing engines. Tip From The Coach: Start with what you already know about technology tools and take it one step further. Not 10 or 100 steps further…just one step at a time. If you push yourself too far or too fast, you might be in a situation where you will not have the resources to succeed. Instead, take one step at a time, master your new skill, then Continued on page 12

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Touch Points: Intentional Customer Interactions By Pam McKenna Multifamily NW President Do you ever wonder what your customer really wants? Do you have a plan for finding out, or does it happen by accident or not at all? The more you engage with customers the clearer things become and the easier it is to determine what you should be doing. So, how often do you engage with the customer and are you intentional with your interactions? Setting up a touch point system will help you create a series of intentional interactions with your residents which will help you to better understand their expectations. This

can be accomplished utilizing the outlook calendar and will involve the entire team. Start it off with a move in orientation led by the leasing team using the opportunity to educate your residents on what your community has to offer. Include where to find the nearest trash and recycling areas, how to use all the appliances in the apartment and any other specific information that would start them out on a good note. The next touch point will be within 24 hours of move in. Use this as an opportunity for the maintenance team to get involved. Include a move in gift (ie; picture hangers, plunger, laundry detergent) delivered to the resident. Ask the resident if everything in the apartment is working

properly. Be prepared to respond immediately and make repairs right there on the spot. One week later have the manager call the resident to welcome them to the community, ask how things are going in their new home and if there is anything they need to make their experience better. Confirm they are clear on the rent payment process and have all the information they need to get set up for auto payments. Provide them with information on all the local businesses (ie: dry cleaning, pet services, restaurants, car wash). One month after move in send your resident a personalized hand written card or emailed video card from the entire team to let them know how much you appreciate them liv-

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ing at your community. At the 45 day mark invite them to a resident event that includes opportunities to network with other residents and start to build a sense of community. Hold these events once every three months to maintain comfort levels and to ensure consistency. Additionally, there are third party companies you can engage to send out customer surveys as an additional touch point. These can be sent right after the move in and after every maintenance request is completed. The survey allows you to listen to customer feedback but listen carefully and respond fast. If you respond to their comments they will continue to give you more feedback because they know you are listening and that you care. The conventional resident experience typically includes focused attention during the sales process but once they are handed their keys they are on their own unless something goes wrong. Then forty five days before the lease ends we slap a note on their door with a rent increase. ... continued on page 10

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T

he value of setting up appointments from telephone inquiries has been clearly established. Yet, it seems that the number of callers being converted into visitors is not always producing a high percentage of rentals. A recent question submitted by a manager of a large apartment community may shed some light on this subject: Q: I know it’s important to set appointments from my phone contacts, but does it really matter who ends up giving a tour when the client arrives? I manage and lease out of a busy office and we all work together, but sometimes I wonder if we would have a higher closing ratio if each of us helped our own clients. What do you think? I think there is a lot to be said for the environment of “teamwork” that you have created. Those managers who work side by side with their

leasing staffs, will keep them motivated and excited about renting apartments. However, in working too closely as a team when it comes to leasing, some of the “personalized” service can be lost. If a prospective renter is helped by someone else when they arrive for an appointment, it can give them the impression that their initial contact wasn’t genuinely interested in helping them. Also, any “rapport” that was personally created by you, or another member of your staff over the phone, is lost if they have to “start from scratch” with someone else. - Not to mention the inconvenience to the client if they have to repeat their needs and preferences all over again to someone else. Many times it’s the personality, sales skills and knowledge of the employee on the phone that “sells” the client on making an appointment in the first place. Once a relationship is established in the initial phone con-

tact, the prospective renter is expecting to meet with the same person when they arrive at the community. It can be a real let down to learn that the employee they connected with from the phone contact is unavailable. Worse yet, no one else in the office even knew they were coming in. For leasing consultants whose primary role is renting apartments, careful planning and scheduling can make it possible to keep most of the appointments they set. For managers and other office staff who end up answering the phone, but who are not available to keep appointments, it might be best to resist answering the phone on the days you are unavailable. This will give your leasing staff the ultimate opportunity to sell and close the deal. Remember: Working as a team means some players will spend time “on the bench” while other members of the team are out on the field. If you assemble

your team before the day begins, then you can decide which employees are best equipped and available to lease apartments that day. With your strongest players on the front line and everyone “passing the ball” (clients) to them, you will score more rentals every time! If you have a question or concern that you would like to see addressed next month, please ASK THE SECRET SHOPPER by making contact via e-mail. Your questions, comments and suggestions are ALWAYS welcome! ASK THE SECRET SHOPPER Provided by: SHOPTALK SERVICE EVALUATIONS Phone: 425-424-8870 E-mail: joyce@shoptalkservice.com Web site: www.shoptalkservice.com Copyright Shoptalk Service Evaluations

Touch Points ...continued from page 9 If you want to want to be in touch with what your residents really want, start by setting up intentional interactions. Don’t wait until it’s too

late. With today’s busy schedules we need to plan ahead and be more purposeful to stay in touch. The results will provide an improved customer

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Exit Strategy

Pt. II: Repositioning Your Real Estate Assets to Simplify Your Life Cliff Hockley, President Bluestone & Hockley Real Estate Services

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s Baby Boomers age, they realize that things may need to change with how they handle their real estate investments. First of all, they may be tired of dealing with the details that are involved with the day to day operations of real estate investments; secondly, they start having to come to grips with their mortality and may not want their spouse or family to have to deal with those investments. Finally they may be concerned about the tax implications involved with selling their assets; inasmuch as the direct sale of a property could cost forty percent or more of the capital return. Making decisions regarding the future of existing real estate investments is much like selling a business. Typically, most real estate investors spend a lifetime [40 – 50] years building a retirement vehicle, poured blood, sweat and tears into their investments to build a legacy. They are now faced with decisions on how to maintain a sufficient cash flow dur-

Rental Housing Journal On-Site • April 2014

ing their lifetime and transitioning their assets either to their spouse, children, grandchildren or charitable organizations. There are many different directions baby boomers can choose to reposition their real estate investments to prepare for retirement and / or to reduce the time and energy needed to manage them. These include: 1. Selling their real estate investments 2. Family succession planning 3. Selling to partners 4. Contributing to a charitable organization 5. Repositioning your portfolio 6. Using a 1031 exchange to invest in an UPREIT (Umbrella Partnership Real Estate Investment Trust) 7. Tenant in Common Investments 8. Hiring a property manager Sale of the real estate investments Typically when investors choose to sell their real estate holdings, they are faced with the following costs,

taxes and possible prepayment penalties: 1. Federal Taxes Federal capital gains: 20% Federal Medicare tax: 3.8% 2. State capital gains (depends on state) 9.9% (Oregon) 13.3% ( California) RED FLAG: Depending on the number of 1031exchanges involved with their holdings, the state’s revenue departments (tax collectors) will come after the investor to recapture taxes one may have put off paying in the past closings. Should you die before the state gets its share, the beneficiaries basis in the properties received from the decedents estate is valued at the properties Fair Market Value at date of death or 6 months later. (The estate has an option regarding the valuation date.) 3. Real Estate Transfer Taxes** (state and county) See below for examples: **Washington State collects 1.28% and Clark County collects .5%, equaling a total of 1.78% of the sale of transfer of ownership of real property. **Washington County, Oregon: The current rate

is $1.00 per $1,000.00 of consideration. The transfer tax in Washington County is customarily divided equally between the seller and the purchaser. ** Go to this chart to decode the transfer taxes in California. www.chicagotitletransfertax.c om/ 4. Local city and county business taxes Note: (in the City of Portland, Multnomah County, Oregon, the sale of a property could trigger a 2.2% city tax plus a 1.45% county tax, if one does not reinvest the funds via a 1031 exchange. 5. Federal depreciation recapture, which is 25% of the depreciation written down over the life of the ownership of the property. RED FLAG This could be a huge number depending on the number of 1031 exchanges one has closed to get to the final exit sale since with each 1031 the property basis is typically adjusted , though you can avoid those taxes at death. Upon death, property basis is “stepped up” to Fair Market Value at date of death or 6 months later. ... continued on page 19

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RENTAL HOUSING JOURNAL ON-SITE

Daily Learner.continued from page 8 take another step. For many, hiring a private business trainer or coach, can rapidly accelerate your learning curve around technology. For others, just reading two or three pages of their software user manual each day, is enough to gain incremental knowledge with technology tools. Helping your team to learn: In addition to your daily learning, it will be equally important that your property management team continues to grow and learn at a comfortable pace. Property management companies around the world are finding a direct connection between learning and company performance. In fact, many companies are now measuring both performance goals and learning goals on an individual basis. These learning goals are focused on areas such as: resident satisfaction, increased asset performance, maximizing technology and team-building skills. Tip From The Coach: When helping your team with their learning skills, ask them to help you answer this question, “Learning __________ will help me __________ so that I can __________.” Asking this question is key, because the people that work for your property management company will be eager to learn if they have a hand in structuring

their own industry and professional training. Remember, whenever you include your team in the planning of their future, you raise their motivation to succeed and reduce turnover at the same time. In closing, today’s success comes from yesterday’s learning, while tomorrow’s success comes from what we learn today. Want to hear more about this important topic or ask some additional questions? Send an E-mail to ernest@powerhour.com and The Coach will E-mail you a free invitation to be on a PowerHour conference call.

Author’s note: Ernest F. Oriente, a business coach/trainer since 1995 [31,800 hours], serving property management industry professional since 1988--the author of SmartMatch Alliances™, the founder of PowerHour® [ www.powerhour.com ], the founder of PowerHour SEO [ www.powerhourseo. com ], the live weekly PowerHour Leadership Academy [ www.powerhourleadershipacademy.com/pm ] and Power Insurance & Risk Management Group [ www.pirmg.com ], has a passion for coaching his clients on executive leadership, hiring and motivating property management SuperStars, traditional and Internet SEO/SEM Continued on page 13

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Get Smaller

...continued from page 3 You can learn more about the details that the CFPB’s website which is a great source of information on new laws that govern the use of credit and consumer rights. Property managers, here’s an idea for you. Why not send a link to this article to your owner-clients and your prospective client list as a “heads-up” for the year ahead. As I often like to remind us, being a font of information and the latest insights can separate you from your peers, leading to more referrals and a bigger book of business. On second thought, if you send this article to your owner-clients and your prospective client list, maybe it would be more prudent to copy and paste sections and leave off the last 3 paragraphs.

Daily Learner.continued from page 12 marketing, competitive sales strategies, and high leverage alliances for property management teams and their leaders. He provides private and group coaching for property management companies around North America, executive recruiting, investment banking, national utility bill auditing, national real estate and apartment building insurance, SEO/SEM web strategies, national WiFi solutions [ www.powerhour.com/ propertymanagement/nationalwifi.html ], powerful tools for hiring property management SuperStars and building dynamic teams, employee policy manuals [ www.powerhour.com/propertymanagement/employeepolicymanuals.html ] and social media strategic solutions [ http://www.powerhour. com/propertymanagement/socialmedialeadership.html ]. Ernest worked for

Motorola, Primedia and is certified in the Xerox sales methodologies. Recent interviews and articles have appeared more than 8000+ times in business and trade publications and in a wide variety of leading magazines and newspapers, including Smart Money, Inc., Business 2.0, The New York Times, Fast Company, The LA Times, Fortune, Business Week, Self Employed America and The Financial Times. Since 1995, Ernest has written 225+ articles for the property management industry and created 400+

property management forms, business and marketing checklists, sales letters and presentation tools. To subscribe to his free property management newsletter go to: www.powerhour.com. PowerHour® is based in Olympic-town… Park City, Utah, at 435-615-8486, by E-mail ernest@powerhour.com or visit their website: www.powerhour.com

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RENTAL HOUSING JOURNAL ON-SITE • Executive Director – Jim Wiard • President – Gail Duke – Vice President – Kris Buker • Secretary – Becky Sanders • Treasurer – Brett Stevens • Vice President of Suppliers Council – Barry Savage • Immediate Past President – Jay Olson

Market Trends Update

18300 Cascade Ave. S., Suite 130 Tukwila, WA 98188 (425) 656-9077 (425) 656 9087 (fax) admin@wmfha.org

WMFHA members were treated to a current market trends presentation by Mike Scott at a recent quarterly Membership Luncheon

M

ike Scott’s company, Dupre+Scott Apartment Advisors, conducts extensive market research for the apartment industry. Average rents continue to grow at a favorable pace, but there is a sizable difference between average rents for apartments built since 2000 and apartments built before 2000, by about a 60% margin. Apartment sales prices continue to climb as a result. New construction is still approaching record rates, with nearly 14,000 units forecasted to come to market in 2015. Average rents continue to rise in the Puget Sound region, but in large part due to the impact of new construction. New construction has been primarily higher end, market rate product in urban areas. These properties are leasing up at rents higher than the average market rent, thereby increasing the average of all property rents. “Beware the skew of the new” said Mike, referring to the

effect new property rents have on the overall average. On the expense side, Mike cautions against two disturbing trends. First, capital expenses to maintain properties in a competitive condition have risen over the years and now average $900 per unit per year. However, investors continue to estimate the old standard of $300 per unit per year, which will result in rate of returns which fall short of projections when reality sets in. Mike also explained that although rents continue to rise, expenses, primarily property taxes and utilities, continue to rise at a greater pace than rents. This is an unsustainable phenomenon that, if maintained, will turn properties upside down. Keep in mind, the benefit of increased rents is partially diluted by the rate of inflation over time. Collected rents in the past 15 years have increased by 3.7% per year. However, taxes and utilities have increased nearly 6% per

year during this time and total operating expenses have risen by 4%. NOI’s will continue to shrink if this trend continues. Monthly apartment sales volume has seen peaks and valleys in the past 10 years, with peaks in 2006 and 2007 and valleys in 2009 and 2010. The same trends held true for apartment price per unit. In 2013 and 2014, apartment sales trends and pricing have increased but to a more moderate level, as mortgage rates and cap rates have held in the 4 ½% and 5 ½% range. Interestingly, the percentage of sales at or above listing price has increased substantially the past year compared to previous cycles. Market vacancy in the Puget Sound region is 3.6%. There are 9,400 units in lease up in the region today. Rents are 7.5% higher than they were a year ago. New construction volume continues to be the hot topic in the Seattle market. Quarterly apartment completions will average 3,200

units in 2014 and 2015, compared to a historical average of just 1,100 units per quarter. This influx of new construction will certainly have an impact upon rent growth, occupancies and concessions in the short term, starting next year. However, in-migration figures for Washington state and King County are well above average. 60,000 new residents moved to King County in the past year, up 16% from the prior year. Favorable demographics benefit our region as the large millennial generation moves into rental housing and the “geezer effect” of people turning age 65 continues to rise at unprecedented rates. Both age dynamics support new apartment household formation. Demand continues to outpace supply. Job growth continues to be steady, allowing for strong absorption numbers. Our region added 49,000 new jobs since the first quarcontinued on page 16

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Rental Housing Journal On-Site • April 2014


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It’s Tough to Afford to Be a Renter These Days By Marc Courtenay

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ousing affordability isn’t looking too promising as 2014 begins. If you listen to the National Association of Realtors the opportunity to be a homeowner hasn’t been this affordable in a long time. If you review Figure 2 below you’ll get the impression that American housing is now extremely affordable and the typical household can easily make the monthly mortgage payment on a home. Thanks to historically low interest-rates, fixed rate mortgages have become more affordable for some American families and many analysts expect that this cheap credit will fuel another housing boom. Figure 2: US Housing Is Affordable Perhaps another home-buyingboom has begun, but from the index above it still looks like the price of housing is above the levels we saw between 2005 through 2008. Yes, there’s been a dip since 212, but anecdotally I’m not hearing of a big increase in existing housing sales since mortgage rates are climbing.

Rental Housing Journal On-Site • April 2014

In fact on Dec.19, 2013 Reuters reported that “U.S. home resales fell sharply in November to their lowest level in nearly a year, hurt by a rise in interest rates since the spring and ongoing price increases that have shut some home buyers out of the market. The National Association of Realtors (NAR) said on Thursday [the 19th] that sales of previously owned homes dropped 4.3 percent last month, the third monthly fall in a row, to an annual rate of 4.90 million units.” That was the lowest annual rate since December 2012, and well below the median forecast in a Reuters poll of a 5.03 million unit pace. “It is a clear loss in momentum for home sales,” NAR economist Lawrence Yun told reporters. How About The Cost Of Being A Renter? As Mr. Doubtfire said to Mrs. Doubtfire in the movie by the same name, “Brace yourself Effie!” An online trade journal for folks in the mortgage industry, The National Mortgage Professional had a grim assessment titled, “American Renters Facing Tough Affordability Issues”. “Affordability problems for renters have skyrocketed over the past

decade both in number and the share of renters facing them, according to a new report on rental housing from the Harvard Joint Center for Housing Studies.” “The inability of so many to find housing they can afford dramatically impacts the health and well-being of U.S. renters, as lowerincome households cut back on food, healthcare, and savings, just to keep

up.” The Harvard report, “America’s Rental Housing: Evolving Markets and Needs,” found that half of U.S. renters pay more than 30 percent or more of their income on rent, up an enormous 12 percent from a decade earlier. A large amount of the increase was found among renters with Continued on page 18

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When Screening Applicants Remember the Fair Credit Reporting Act

By Marc Courtenay

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roperty Managers know how important it is to prevent problems with residents through careful screening procedures. The old saying, “an ounce of prevention is worth a pound of cure” is as important in today’s society as ever. That’s why experienced property managers don’t cut corners when screening applicants. Yet there are some legal issues that landlords and all business people face when screening, and it begins at the Federal Government

level with the “Fair Credit Reporting Act” (FCRA). The latest version of the FCRA is worth reading since it also involves procedures for doing a credit and background check on employees. The Consumer Financial Protection Act of 2010 (CFPA) is yet another set of rules and regulations that property management companies should become familiar with. There are a number of ways to get the overview for the CFPA and this link is an adequate example. The purpose of this article is to make you aware of these federal

laws, not to explain them in detail. Any kind of background check is a very good idea only if the rules and regulations are followed. Because many of the credit reporting and consumer protection laws are complex you’re likely to need help. There are a number of online resources that can be useful to make sure your background check doesn’t violate the laws—and those laws include state and local ones. Yet like all online resources, as the song goes, “you’d better shop around.” Another option is to use a property management software solution that includes

screening. The take-away from this article is that most people who own or manage rental properties need a reputable screening services company that’s easy to work with, thorough and fast. The ones worthy of your consideration should welcome your questions and have a phone number you can call to ask a live person to give you straight answers.

matter experts on topics such as leasing, leadership and market best practice trends. Supplier members will be on hand to display their products and services, and the event will be highlighted by our popular Think Tank Brainstorming Session, where peer groups will break down daily challenges and everyone will come away with solutions to their most pressing issues. Sign up on our website for this must attend event to be held May 20th at the Meydenbauer Center. On a separate note, in support of a celebration of National Fair Housing Month, WMFHA is promoting the im-

portance of fair housing through an interactive Facebook campaign intended to bring greater attention to the need for fair housing awareness and commitment. The multifamily housing industry has an obligation to show leadership in supporting and enhancing fair housing practices for all. I urge our members to set an example for the industry by embracing the promotion of fair housing practices and training among our member employees and company leaders.

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Market Trends Update ...continued from page 14 ter of last year. If job creation and inmigration continue to be strong, the impact all the new construction will have on the existing market will be tempered, and strong supply and demand factors will prevail in 2017 and beyond. To view weekly apartment updates from Mr. Scott, go to our website at www.wmfha.org. Also, check out www.weareapartments.org for data on the positive impact the apartment industry has upon the economy in the Washington and Seattle regions. For more relevant industry information, don’t miss our upcoming

Rental Housing Journal On-Site • April 2014

trade shows. Maintenance Summit (April 30) is an interactive, hands-on industry event for site maintenance personnel, with classes including appliance repair, electrical repair and water mitigation, as well as a valuable vendor trade show. The day ends with the National Apartment Association’s Maintenance Mania skills competition, with the winner vying for an all expense paid trip to Denver for the national competition. Your on-site management teams will want to attend EdCon, an exciting and informative education conference and exhibition, with national keynote speakers and local subject

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RENTAL HOUSING JOURNAL ON-SITE

It's Tough ...continued from page 15 severe financial burdens (e.g. paying more than half their income on rent). These levels were unimaginable just a decade ago, when the percentage of American renters paying half their income or higher on housing stood at 19 percent and was already an alarming concern. “Escalating rental affordability problems come at a time when the share of Americans that rent has increased from 31 percent in 2004 to 35 percent in 2012. In fact, the 2000s marked the strongest numerical growth in renter households in the last fifty years” the report continued. “As ownership rates fell, housing markets have adjusted dynamically to the increased demand for singlefamily rentals, with about three million existing homes switching from owner to rental occupancy from 2007-2011 alone.” That number has risen in the last two years, and most of those houses were rented at local fair-market rent levels. So Property Managers, are you keeping up with the rental affordability circumstances in your area? How fast are your vacancies being filled, and will vacancies start a trend in the other direction? Be prepared to speak with your owners (clients) and let them know what’s going on both regionally and

nationally. If fewer Americans can afford the current cost of renting a house or an apartment, perhaps we will all experience the need for temporary rent reductions? Another possibility to consider; Are your owners and you willing to rent to multiple couples, and are you going to need to advertise your unfilled vacancies for singles to share to help the affordability challenge? Hopefully a rebound in employment and a robust gain in the economic circumstances of the average American will unfold in the year ahead. In case it doesn’t, prudent Property Managers need a back-up, contingency plan. What is yours, and are you communicating with your clients about it? If you don’t have one, create one. Then plan on scheduling individual meetings with owners or do a client-appreciation seminar to let them know your ideas.

New Poll of Millennials Gives New Meaning to the American Dream Posted by Alexis Hammond in PropertyManager.com a Service of AppFolio

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new poll of Millennials puts travel and self-employment at the top of what they consider the American Dream. Putting these values far higher than genera-

tions before them. More surprising numbers show Millennials identify the dream of homeownership at a far lower rate than Gen X and Baby Boomers. This from the latest MassMutual third biennial study The 2013 State of the American Family.

Rental Housing Journal

ON-SITE Publisher Will Johnson • will@propubinc.com Designer Steve Olsen • steve@propubinc.com

Advertising Sales Will Johnson • will@propubinc.com Terry Hokenson • terry@propubinc.com

The statements and representations made in advertising and news articles contained in this publication are those of the advertiser and authors and as such do not necessarily reflect the views or opinions of Professional Publishing, Inc. The inclusion of advertising in this publications does not, in any way, comport an endorsement of or support for the products or services offered. Metro Apartment Manager is produced monthly and is published by Professional Publishing Inc. PO Box 6244 Beaverton, OR 97007. (503) 221-1260 - (800) 398-6751 © 2014 All rights reserved.

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Exit Strategy Pt. II ...continued from page 11 6. Prepayment Penalties: Many properties have underlying financing issues the most important being the prepayment penalty. With Commercial Mortgage Backed Securities (CMBS) loans, an investor may have yield maintenance clauses and with other loans there may be percentage payoff between 1 and 5 percent of the outstanding loan balance, which might last over ten years. These penalties are a significant issue and need to be calculated into the costs of sale as one makes the critical decisions to sell and exit the real estate investment marketplace. These significant expense hits (Tax and prepayment penalties) frequently make real estate investors uneasy, so they tend to look at other ways to exit or reposition their real estate holdings. Family Succession Many investors dream of leaving their hard built real estate “nest egg” to their families. Unfortunately there are many challenges with this plan. Most important is that one will need to find a family member who is mature enough, has an interest and wants to learn about the family’s existing real estate investments. This typically proves very difficult to do. Real estate investors tend to forget that they made many mistakes build-

Rental Housing Journal On-Site • April 2014

ing their portfolios. They expect the next generation to make the “right” decisions, just like they did. This is an unrealistic expectation. The next generation needs to be mentored and educated; patiently, over time. Decisions need to be discussed. An investor might request their successor(s) to take real estate and/ or finance classes to prepare them for their future decision making. They should be involved in the basics: Property inspections, financial reviews, attorney meetings, refinancing and purchasing decisions. Finally they should draft long and short term plans on paper to insure a record of their plans. Use this process as a road map for family leadership. Remember that over time one needs to relinquish control, if the transition is going to be successful. This does not mean relinquishing control of your income, just planning and decision making. Yes, mistakes will be made. Consider relinquishing control a small step at a time so that your successor(s) can learn in a controlled environment. At the same time, if there are numerous “stakeholders”, children, grandchildren, nieces and nephews, create a reporting relationship that is reasonable. Decide who is going to make the decisions. Create dispute resolution processes. Don’t let disagreements in the family ruin your

investments. Have a plan B in place in case your next generation manager gets ill and can no longer serve in his or her role. Most important is that you, as the owner of the investments, understand the next generation’s needs. In every generation there is most likely one of the following: • A thrifty spender • A very conservative investor • A very risk oriented investor • A very sophisticated investor • Someone that does not get along with the others • Someone who needs cash to pay for the kids college • Someone who needs cash to retire or make their house payment

• A child with a disability or a mental illness (a conservator needs to be appointed to protect their interest) • Someone that has no interest in real estate at all and is willing to opt out of all decision making • A son or daughter in law that have different ideas from the rest of the family. One needs to plan ahead with your estate and real estate attorney to build a Trust structure that addresses the needs of the next generation. Remember also that at some point in time (with the exception of those of you that have property in Alaska) that these real estate trusts that you build, will not last into perpetuity. Continued on page 20

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Exit Strategy Pt. II ...continued from page 19 Note: Whichever option you choose, have a designated person to manage your real estate in case you are hit by a car or suddenly become incapacitated.] Sale to partners This is the easiest one to accomplish, if you planned ahead. In other words you added a buy sell agreement into your other partnership agreements. Of course this is dependent on how your partnership was formed. If one has planned this in advance, you most likely crafted a partnership

agreement or more likely formed an LLC. In that agreement you addressed the terms of your partnership. If on the other hand you had been operating on love and trust alone, now is the time to draft those agreements and spell out everything, including how to value the real estate assets once you exit. You will want to sit down with your CPA and attorney to review the tax implications of this decision and plan out if it is possible to defer or avoid some of the income taxes on the sale of your shares of the property. Note: Minority partner discount (fractional interest): Sales or partner-

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ship interests are generally valued at Fair Market Value (FMV). The FMV of a third party arms-length transaction may include a discount for owning a non-controlling minority interest. That is a matter between the buyer and seller. The IRS has accepted up to 30% value discounts in the valuation of fractional interests. Transfers to trusts for estate planning purposes may also be valued at a lesser amount – minority discount. The issue here is reduction of the gift/estate tax upon demise of the property owner. Contribute to Charitable Organization You can always donate all or part of your properties to a charity via a charitable remainder trust (CRT). The advantage to doing this is that the size of the tax deduction is based on the then current market value of the property, not its cost basis. If structured properly, the CRT can pay you an annuity (income for the balance of your life, or for a specified term, and then distributes what is left over to the charity.) As a tax exempt entity, the CRT can sell the real estate donated tax free and reinvest the proceeds in income producing assets (that are typically more liquid than real estate). You do have to pay income taxes on the distributions you receive, but each payment may include a combination of ordinary income, capital gain and tax free return of principal. The charity can also buy an annuity in your name from the proceeds of the sale

of the real estate investment. Critical tax potholes you need to sidestep: 1. Substantiate the value with an appraisal as part of the donation process. Don’t just estimate a value; the IRS might disallow the donation. For properties over $500,000 you must attach an appraisal to your tax return. 2. If the charity sells the property within three years of the donation ( most do in the first year), and the property sells for less than the appraised value, the IRS will most likely challenge your deduction. 3. Donating properties that are free and clear is a cleaner process than donating one with a mortgage still in place. According to Attorney Peter Lennington of the Lennington Law firm PLLC, St Paul Minnesota, you might end up recognizing taxable income for some of the outstanding mortgage’s value. 4. Don’t prearrange the sale of the property before it is donated to the charity. If you do the IRS will disallow the donation and you will have to pay capital gains taxes. A simple summary on charitable real estate donations is available at: http://lennington.com/global_pictures/ Shouldyoudonaterealestatetocharity. pdf or go to the Oregon Community Foundation’s Website at www.oregoncf.org/donors/give. Giving real estate to a charity is not easy. Many charities are not geared to accepting real estate; they want Continued on page 21

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RENTAL HOUSING JOURNAL ON-SITE

Exit Strategy Pt. II ...continued from page 20 cash or stocks etc. If they take real estate they have to figure out how to manage it and sell it, not always an easy task. Most charities prefer donations without a mortgage because of the complicated tax implications. It is not unusual to have a home donated to charity with a life estate attached also known as a “Gift of a Remainder Interest with a Life Estate”. This donation process takes time and has to be planned in advance. For more info see this link: www.weikellaw.com/ news-story/ should-i-donate-myhouse-charitypart- 4-donating-yourhouse-andreserving- life-estate. Repositioning your real estate portfolio One way to simplify your real estate portfolio is to reposition your assets. Assuming you have a multifamily portfolio, you might want to transition out of those assets and trade into quality triple net (NNN) investments, with longer term leases. There are trade-offs in making this decision, primarily as the market changes you can typically adjust your rents with multifamily tenancies. Commercial long-term leases don’t have the same flexibility and the rents with national AAA tenant leased properties, which typically only increase 10% over a five year period with adjustments coming at the lease anniversary mark. On the other hand they are triple net leases and the

tenants are picking up almost all of the costs in taking care of their buildings. Though it bears remembering that critical to a successful investment in a NNN property are a great location and a financially strong tenant. This may mean that you trade a higher yield for a lower yield but the benefit is a long term tenant and an easy monthly check with no midnight calls for maintenance. Note: Single tenant investments exist with medical, retail, industrial and office tenancies. It pays to do some research before you decide on a tenant and an industry group. Use of 1031 exchange to an invest in an UPREIT (Umbrella Partnership Real Estate Investment Trust) Basically to take advantage of an UPREIT, you sell your property on the open market using a 1031 exchange and then using your 1031 proceeds you invest in a REIT. Then, by virtue of a 721 exchange, the assets are traded into shares of the REIT. It is possible to just trade your investment into a REIT, but that rarely happens because UPREITs want to be able to choose their own property focus. It looks like this: The first step is selling the relinquished property and structuring a 1031 Exchange. However, instead of searching for suitable replacement property, the investor identifies and

acquires a fractional interest (tenantin-common interest) in real estate that the REIT has already designated. This completes the 1031 Exchange portion of the transaction. The second step is to contribute the fractional interest into the operating partnership after a holding period of 12 to 24 months as part of a 721 Exchange (tax deferred contribution into a partnership). The investor receives an interest in the operating partnership (OP) in exchange for his or her contribution of the real estate and is now effectively part of the REIT. www.exeter1031.com/article_upREIT_1031_721.aspx Benefits of an UPREIT The benefits of an UPREIT are numerous, most importantly they deliver a tax deferral strategy to the holder of the real estate. In trade for your property, you receive a return on your investment and someone else is managing it for you. The real estate investor just has to cash the quarterly check and does not have to pay capital gains on the sale of the real estate asset. To summarize an UPREIT:

tate holdings (i.e., OP Unit Holders have an interest in a portfolio of properties instead of just one). • Gives one potential to convert liquid‚ long-term assets (i.e.‚ real estate) into more saleable securities (i.e., OP Units - REIT Share Cash). • Eliminates or reduces property management responsibilities or concerns. • Provides quarterly income distributions. • Provides potential to recognize unrealized gains as earnings. • Can provide professional management and expertise in capital markets. • Avoids risk of negative cash flow. • Establishes estate simplification. • Allows the owner to dispose of property in a way that maximizes its value. • Can improve cash position through potential leveraging of OP Units.

• Provides a viable tax deferral/ avoidance exit strategy to property owners facing significant capital gain tax liabilities on the sale of appreciated property with a low tax basis.

More information through this link: http://www.broadstone.com/ realestate- services/upreit/ UPREITs can help you restructure your real estate assets and make it easier to give away or inherit after your death. If

• Allows diversification of real es-

Continued on page 22

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Exit Strategy Pt. II ...continued from page 21 structured correctly, ownership in UPREITS might not result in a taxable event until the shares are sold; however when doing business with another company you must carefully vet the strength of the company, its history and its future goals, as well as the experience of the officers running the REIT. Additionally, remember they are trying to make a buck as well. It is very important to understand all of the costs that are involved with investing with an UPREIT and the ups

and downs of the stock market as well. Note: Fore more details regarding the definition of an UPREIT, see (http://www.exeter1031.com/ article_upREIT_1031_721.aspx) from the Exeter 1031 website TIC investments: Tenant in common investments were a common real estate investment vehicle before the market downturn in 2008. Then the short term mortgages that many of them

were financed with needed to be refinanced and financial institutions were loath to refinance, because vacancy rates had increased and income had declined. Many investors lost significant assets due to the so called “TIC Meltdown”. All was not as advertised and the SEC decided that these were securities and needed to be sold by stock brokers with securities licenses vs real estate agents. On the other hand, out of this challenge a few companies in Utah, Rockwell and Realty Net Advisors, decided that they could mitigate investment risk by taking investors 1031 returns and place then into NNN investments where no loan was needed. In other words 100 % of the purchase price for a single tenant investment came from 1031 proceeds that investors placed in the pool. They also focused on very small investments in the $1,000,000 range, possibly to avoid securities regulations. This means less risk for the investors, because the worst thing that could happen to the investors is the loss of the tenant, resulting in an empty building they have to retenant. They cannot lose the building to a financial institution since there is no loan in place. In addition, the TIC sponsors mitigate this risk, by only choosing high quality national tenants. They keep it simple. They col-

lect the rent, charge a management fee, inspect the property and then send a check to the investor, {Note* There is no loan in this scenario so no mortgage to pay off, this helps with upside on the yield for the property.). Average returns are in the conservative but steady 5-7% range. This also means though that you don’t have help from Uncle Sam in this kind of transaction i.e. an interest expense write off. Additionally, in this kind of a transaction don’t get the benefit of leverage which could increase your returns. The downside is that you are in a type of a partnership and when you want to exit from this structure, you have to live by the TIC agreement. Basically in this structure, much like the UPREIT structure, you have ceded control of the investment to a third party. If the third party mismanages your property/ies, you may lose all of the return from your investment. For more on the downside risk see this link: Note: don’t forget that when you complete a 1031 exchange you also have to replace the debt, if any, you have in place in the replacement property. For more details follow these links: www. securitieslawyersblog.com/2013 /10/30/tenants-common/ www. realtynetadvisors.com/ www.rockwelltic.com/ Hire a property/asset Continued on page 23

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Exit Strategy Pt. II ...continued from page 22 manager Many investors hate spending money to have their properties managed, but a good property manager is worth his/ her weight in gold. Life is simplified. You can travel, work and enjoy your family and not have to pay daily attention to your property, though you still need to be involved with your property. In preparing for retirement, you can have a property manager manage your assets for you and for the next generation as well. Annual or semiannual property inspections, reviewing financial reports and involvement in capital expense decisions are still on your required list of things to do. These are things that your spouse/ life companion can also do, should you be unable to due to an illness or other incapacity. If you have significant assets, you might hire an experienced real estate professional in the form of an asset manager who makes all of your decisions for you, from acquisition to disposition, from long range planning, to holding property managers accountable. They typically are paid a fee for services. In some cases banks have trust departments that also can manage properties for you either with their own staff or through the use of property managers; they would perform this in an asset management role, much as they manage stocks and bonds for their clients. Conclusion So how do you best protect yourself when you are ready to retire from active real estate investing? Which one of the exit

strategies do you use? 1. Selling your real estate investments 2. Family succession planning 3. Selling to partners 4. Contributing to a charitable organization 5. Repositioning your portfolio 6. Using a 1031 exchange to invest in an UPREIT (Umbrella Partnership Real Estate Investment Trust) 7. Tenant in Common Investments 8. Hiring a property manager In the end your own personal situation and personal preferences will dictate or influence your decisions. I always fall back on the thoughts of George S. Clason and his book published in 1926, The Richest Man in Babylon.* Some of his key points were as follows: “Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling. Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep. Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.”

Bottom line is that you need to carefully investigate all of your investment strategies. You should hire advisors you trust. Hire experienced CPA’s, Attorneys, and real estate advisors. Spend some of that hard earned money to protect the rest of the corpus. Seek out specialists in estate planning and real estate. I recommend that you do not have your employment attorney tell you what to do. The real estate attorney, who is an expert at evictions, is the wrong person. You need to talk to someone that understands all of the exit strategies. Interview and meet many people. If your gut tells you that you are over your head, trust your gut. You will find the answer that is right for you; it just may take some time! Plan ahead! Don’t let the tail wag the dog, understand all of the tax implications (estate tax and real estate capital gains taxes) first before you make a final decision. *The Richest Man in Babylon - The Success Secrets of the Ancients, by George S. Clason. Publisher - Signet / First published in 1926 Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company. Founded in 1972, Bluestone & Hockley’s staff totals nearly 110 employees, including 20 licensed brokers. The compa-

ny’s property management division serves commercial buildings, apartments, condominium associations and houses in the Portland/Vancouver metro area, while the brokerage division facilitates both leasing and sales of investment properties throughout Oregon and Washington. Cliff earned a degree in Political Science from Claremont McKenna College and holds an MBA from Willamette University. He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM). Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM). Cliff is a member of the Institute of Real Estate Management and was named Certified Property Manager of the year in 2001 and 2003. Cliff is a frequent contributor to industry newsletters. Bluestone & Hockley offers customized brokerage, property and asset management, as well as maintenance services to property owners and investors throughout the Portland/Vancouver metro area. The company’s full-service approach benefits busy property owners and investors, who know they can count on Bluestone & Hockley for high quality real estate services start to finish.

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Three MoreWays to Fill those Vacancies By: by Marc Courtenay PropertyManager.com a Service of AppFolio

H

ere are three ideas from my upcoming article series titled “50 Ways to Fill Your Vacancies”. Like you, I’m fired up about the idea of having as many marketing tools as possible to manage properties effectively. As a property owner and/or manager, you may already have many successful ways to quickly fill your vacancies with well-qualified new residents. My hope is that I can add a long list of intuitive and counter-intuitive suggestions that have worked and will keep on working. So here are three more suggestions that can insure that the rental income stream keeps flowing to your clients and yourself. 1. Go to the restaurants you frequent the most. Ask the owner or manager to allow you to display a tastefully crafted “take one” box at the check-out counter or hostess table. Make sure it clearly displays the message that a gift certificate for that restaurant will be given to the individual who takes one of the special

display cards and gives it to a prospect who becomes a resident. A variation of this is to tell the restaurant owner, manager or hostess that if someone rents one of your units, you’ll buy a gift certificate from the restaurant and give it to a new patron who has never been to their restaurant. It will generate a fresh batch of regular customer for the restaurant and a repetitive source of referrals to you. You’ll be amazed how many restaurants will love the idea as they’re always looking for new ways to increase their clientel. 2. It may seem old-fashioned in this age of digital, mobile media, but creating a full-page, colorful, glossy hand-out that lists all of the benefits, accoutrements, and features of your available rental still works. Make sure you show some photos of how nice the vacant unit looks, and when you take the photo “stage it” with a few perky pieces of furniture or wall furnishings. List any extra features like a new dishwasher or free Wi-Fi and provide information about the local area, bus routes, schools, laundry and conveniently popular shopping venue. Continued on page 27

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Rent Checks Stolen from Property Manager’s Lockbox by Marc Courtenay

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on’t let what happened to a property management company in Las Vegas, Nevada happen to you. The company had set up a convenient lock box so residents could drop off their checks after hours. The worst case scenario unfolded on a hot summer’s evening in July when thieves who had noticed the drop box of the property management company found a way to pry it open and steal the contents. Dozens of innocent renters had their checks stolen before they were cashed. The property managers said that the thieves took between $20,000 and $30,000 in checks. They also stole residents’ identities. The property management company involved worries about the information the thieves were able to get their hand on. “Their bank information is out there now, their name, address. Can identity theft be taken? We don’t know,” said one of the realtors. According to the story, thieves had stolen from the drop box at least four times in the past two and a half years.

In response the property managers had purchased more lighting, cameras and even a more solid drop box but even those measures couldn’t stop the criminals. “Everyone is upset. Owners didn’t get their money on time. Tenants said they paid their rent,” the employee quoted in the news story said. One of those checks belonged to a 26-year-old resident who was quick to act. When he found out about the burglary when he received a call from his rental agency he immediately called to cancel the check. Is the property management company liable for the identities stolen, the time lost and the emotional distress such an incident causes? That may be an unnecessary risk the company has exposed itself to. Now, according to the story, payments for the company’s 400 renters are going to be made online, but the Las Vegas Metro Police say the damage has most likely already been done. “Basically, what they do is they attempt to remove the existing ink off the check. At that point, what they have is a valid account number. They then forge the checks and attempt to

cash them at other locations,” Metro Police officer Jose Hernandez said. If that isn’t bad enough, the realty company that manages the properties says renters still owe rent, even if their check were stolen and cashed. That could end in more legal hassles and bad feelings. Police recommend that the victims change their account numbers immediately and file a police report concerning the personal information that was on their checks. This could have all been avoided if the property management company had used a streamlined, easy-to-use online payment system like the one

offered by AppFolio Property Manager. Its online rent platform system gives residents multiple ways to pay their rent online. This saves everyone time, and time is money! The residents can pay securely and conveniently 24/7 which will eliminate late payments and security breaches. With such affordable technology services available there’s no reason crimes like this should happen. Because the payments are automatically entered into AppFolio Property Manager, the property manContinued on page 27

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How the Internet of Things Will Change Property Security and Monitoring By: Adam Justice, Grid Connect

R

ental property owners and managers are always looking for ways to provide value to renters without incurring large expenses that lead to an increase in lease rates. Security is one area that managers can beef up without breaking the bank thanks to a new technology trend called the Internet of Things (IOT). The ability to connect new types of devices, such as sensors, to the Internet is core to the concept of IOT. It has created a new portable and lowcost security solution. Traditional security without the monthly fees Using a wireless sensor, property managers can easily secure and monitor areas that should be off limits, such as maintenance areas, equipment closets and the rental office. These wireless sensors can be installed easily and configured to notify managers if an area is accessed. These notifications can be by email, phone call, text or even Twitter, depending on the manager’s prefer-

ences. Wireless sensors are attractive to property managers because there’s no need to pay expensive monthly monitoring fees or to be subject to false alarm charges from the police. Once the sensor is purchased and installed, it connects to the property’s WiFi to transmit notifications. Soon,

property’s liability. Monitoring preferences can be very specific. For example, the rental office sensor could be programmed only to provide notifications during non-office hours. Sensors in these types of areas can be programmed to only provide notifications during “closed” hours.

Internet of Things (IOT) refers to uniquely identifiable objects and their virtual representations in an Internet-like structure.

Sensor portability keeps costs down Since sensors are portable, property managers can install security sensors in vacant units and move them when the unit is leased. This can ensure that there are not breakins to vacant units, possibly causing thousands of dollars in damage and other headaches. Property managers who are looking for a low-cost way to increase renter value can install the sensors in individual rental units and allow renters to program the sensor with their own specific preferences. For example, renters could set up a security or motion sensor and program it to monitor only when they are at work. This gives renters peace of mind that their unit is secure without incurring monthly fees and provides a significant selling advantage

devices will be able to connect via the local cellular network, creating even more flexibility for property managers. These sensors are especially useful for businesses without an electrical outlet be-cause they run on batteries. This is helpful for pools and other open areas with specified hours. Managers can be notified if someone is in a restricted area during off-hours, thereby limiting the

for the property.

Beyond security Wireless sensors can be used for more than security. Since water damage can be very expensive to repair if not detected early, it is a big concern in multi-tenant units, as well as vacation condos. A small leak on the top floor of an apartment building can quickly spread to units on other floors. Wireless sensors can monitor for the presence of water, then quickly notify the building manager or maintenance supervisor, minimizing the damage. Wireless sensors also can be used to monitor temperature swings in units, which helps managers have better control over heating and cooling bills.

About the author: Adam Justice is vice president of Grid Connect, a manufacturer of the ConnectSense product line of wireless sensors. He can be reached at ad-am@connectsense.com or on Twitter @adamjustice.

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Three More Ways ...continued from page 24 You’ll be providing a valuable service that few property managers take the time to offer. Let your prospects take your hand-out and tell them to call you if they have any questions. Ask for their contact info so you can follow up. 3. Ask your current residents, clients and “happy campers” for a glowing testimonial of what it’s like to be a resident in one of your wellmaintained and thoughtfully man-

aged buildings. Let your prospects know ahead of time how much current and past residents appreciated your services. Ask for as many testimonials as possible, and use them to attract more owner-clients as well as prospective renters to fill your vacancies. There you have three more ideas on how to fill your vacancies as fast as possible. Keep in mind that if you haven’t tried these ideas lately, you

can’t objectively know why they work or how they work. These ideas derive from my property manager colleagues and my own experiences. Together we have many decades of management and marketing expertise and that’s why I literally have at least 50 of these tried and tested tools. They’re based on the principles that if you’re willing to do what few property managers are willing to do,

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lio’s. Don’t let this nightmare happen to you or your residents. Begin today to change the way you collect your rent payments. The money, stress and time you’ll save will pay you back many times over.

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RHJ is the official publication for the rental housing and multifamily industry in the greater Seattle area.