Category: Multifamily

Savvy Strategies for Security Deposits

Within the residential leasing business, the security deposit has long been a vital tool that has allowed landlords to ensure their properties and rent rolls are protected. Figuring out what to charge and whether to return deposits after alterations have been made to the apartment, however, can be quite tricky. As a longtime specialist in landlord representation, these topics are ones to which I have given much thought.

Typically, tenants are required to pay a deposit that is equal to one month’s rent. For recent college graduates or those who have been at their job for less than six months, I will typically request a deposit equal to two month’s rent. I will make an exception if someone can prove that they’ve been previously employed in a similar industry for a significant period of time. If I’m dealing with someone who has no credit, often because they’re from a foreign country, I will likely require that a deposit somewhere from three to six month’s rent be paid upfront. Guarantors, whether individuals or companies, may certainly help to reduce the amount of security deposit that’s required, on a case-by-case basis.

Credit Counts

Many younger people in particular don’t have the credit score required to put down only one month’s rent for a security deposit. Due to faulty advice they’ve received, many recent college graduates have only one or two credit cards, which doesn’t bode well for their credit when it comes time to rent. I always advise young people to open as many lines of credit as possible and either pay them off in full every month or to not use them at all. The more cards one has open and paid off and the more available lines of credit that one has but doesn’t use, the better their credit looks to a landlord who is considering what amount of security deposit to retain. Other ways by which a potential tenant may establish credit include securing a mortgage or car loan.

When it comes to the traditional rule that a potential tenant’s salary must be 40 times the rent, I am definitely not religious about this requirement, and I would advise other landlords to not focus as much on salary. After all, the creditworthiness of a potential tenant is a much better indicator of how they pay their bills. In general, I find myself requiring a larger deposit for those with poor credit as opposed to those with lower incomes.

Damages Subtracted

In terms of returning security deposits to renters, the laws often favor tenants in this regard. In the state of New York, landlords have 30 days to return deposits. If they’re keeping part of the deposit, they must send a letter by certified mail within 30 days that includes an itemized list of damage done and the cost for each item of damage. If certain damages aren’t on the list, landlords must refund the non-itemized balance. If a tenant wishes to dispute charges, they may sue in court and the statutory maximum which they can be awarded can be as high as three times the initial deposit. A landlord can likewise be sued for triple damages if they fail to return the tenant’s security deposit within 30 days.

Situations in which landlords have the right to withhold part of the security deposit include a tenant leaving very dark paint on the walls or if a tenant uses faux paint or wallpaper. Holes in the wall and floor that require more than basic repairs such as plastering and sanding are also damages for which the tenant must pay. At times, I have noticed major damage of appliances beyond regular wear and tear. If a refrigerator door is falling off or a stove has stopped working due to being jammed, I will certainly add those damages to an itemized list. These scenarios can be even more frightening when dealing with furnished rentals where televisions, chairs and coffee tables are often destroyed. Water damage that either was the tenant’s fault or wasn’t the tenant’s fault but that they failed to report is also something for which I hold tenants accountable.

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Apartment Construction Begins to Slow Down

Apartment building developers may finally take a breather in their rush to build new units.

“Starts will begin to slow down soon, translating into more moderate development activity by late 2020,” says Jeanette I. Rice, Americas head of multifamily research for CBRE Research.

There are still hundreds of thousands of new apartments already under construction, scheduled to open over the next year or so. But rising interest rates, rising construction costs and already tough lending standards are making it more difficult for developers to keep building at the rate they have been. Developers took out fewer permits to build new properties in September compared to previous months.

“The shift is a mild pullback, rather than an abrupt move to lesser activity,” says Greg Willett, chief economist for RealPage, a provider of property management software and services.

Strong demand for apartments has kept developers and investors interested in starting new projects despite the growing number of vacancies in many markets. Rents are still rising, even if not as quickly as they had in recent past.

“Development, just like investment, is a lower return environment than in previous cycles. But the very strong appeal of the sector makes this acceptable to market participants,” says Rice.

Fewer permits and construction starts

Developers have been taking out fewer permits to build apartment buildings. Their seasonally-adjusted annual rate of permitting has been slowing down since March 2018—shrinking to 351,000 in September 2018. That’s well below the average rate of 417,000 permits per year for 2018 so far, according to data from the U.S. Census.

“One can expect the decline in permits to translate into a decline in starts in the coming months,” says Rice.

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Identifying Lucrative Value-Add Multifamily Opportunities as the Cycle Lengthens

The appetite for value-add multifamily investments remains strong—and in light of this increasing competition, many investors are struggling to identify and secure assets that present high-reward opportunities.

While some investors have turned to extreme measures, including taking on projects that require extensive remediation and complete overhauls—or even repurposing entirely different product types for multifamily use—some of the greatest opportunities for growth and stability lie in strategically identifying and refreshing functional, yet under-managed vintage communities.

With a strong sourcing and repositioning plan in place, investors can still take advantage of opportunities to acquire ‘diamond-in-the-rough’ multifamily properties that present high potential for growth at this point in the cycle. We’ve included a few strategic approaches below:

Select submarkets with sustained growth and livability

Top-of-mind for many multifamily investors is the current point in the real estate cycle and impending market correction. The good news is that we’ve been in a slow growth economic cycle for several years, which has recently been bolstered by changes in policy and new employment opportunities.

Consequently, we anticipate continued upside for the next few years, and further, that many multifamily markets across the country will remain resilient even in the case of a downturn.

The key is selecting submarkets that are experiencing increasing population growth year-over-year, job growth that includes the influx of a diverse mix of employers and those that are located in regions that present a high quality of life—vibrant areas where today’s multifamily residents want to live.

For example, we recently added the eleventh apartment community to our Portland, Ore.-area portfolio in just over three years. The greater Portland market demonstrated strong fundamentals that brought it through the economic downturn of a decade ago relatively unscathed compared to many other markets, and we have been particularly bullish on Washington County submarkets, as in recent years the area has emerged as the tech hub of the Pacific Northwest, as well as expanded its presence as a sports apparel capital.

We expect well-positioned multifamily assets in continuously growing locations like Washington County to thrive, but as opportunities become scarce and competition high, it is also critical to keep an eye on newer emerging markets.

In the West, we are seeing that certain submarkets of Salt Lake City and Denver are demonstrating similar fundamentals that the Portland area has for the last several years.

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Effective Strategies for Driving Multifamily ROI Growth through Property Management

The great “amenity decision” is on the minds of most of today’s multifamily owners. Which amenities will attract residents? Which will provide the best return on investment?

While these questions are important, it’s also important to first determine a property’s current and target renter demographic. This means understanding which amenities renters are expecting, which services to provide and prioritize and how to best secure ROI through them.

Western National Property Management specializes in attracting and retaining renters to boost the bottom line for multifamily owners—with 179 communities and 24,801 units, catering to new and long-time renters is a must-have quality and a fine-tuned capability. Below are strategies our firm uses to achieve strong results.

Anticipate and manage expectations

Multifamily property managers are aware all renters have expectations for their prospective living situation. Whether this includes laundry services or security systems depends heavily on the generation or community to which a renter belongs.

For example, millennial first-time renters will anticipate common areas, in-house laundry systems, easy food delivery and online rent payments. Baby boomers are more likely to expect high-tech security and smart appliances in their individual units. Generationally, millennials represent nearly half of all new renters, and apartment communities are increasingly implementing online options to meet the demands of this demographic.

Successful and efficient managers see the opportunity in installing renter-specific amenities.

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The U.S. Cities Most Flooded with High-End Apartments

New data from RentCafe shows that more than 25 percent of apartment buildings in some U.S. cities are now high-end units.

Visit any urban center in a major U.S. city and you’ll see a similar view: cranes dotting the landscape and billboards advertising units in the latest luxury apartment projects. Has the focus on high-end units gotten out of hand?

New research from RentCafe found that luxury rental properties had accounted for 79 percent of all apartment construction in the U.S. And in the 2018 that number has grown to a whopping 87 percent. In many cities, a full 100 percent of projects completed in the first half of the year were upscale units.

Yardi Matrix tracks the data, with a database of more than 80,000 large-scale apartment developments with at least 50 units across more than 130 markets in the United States. The firm considers units class B+ or above as high-end or luxury projects.

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Apartment Rentals Now Make Up a Larger Share of New Housing Units in U.S. Than They Have in Decades

Apartment rentals have been luring residents away from other kinds of housing since the housing crash—and that is not likely to change in the foreseeable future.

“Apartments should continue to play a role in the total housing market that goes beyond the historical norm,” says Greg Willett, chief economist for Real Page Inc., a property management software and services provider based in Richardson, Texas.

In the years after the Great Recession, millions of people lost homes to foreclosure and had to move, often into apartments. The extra demand for units was not expected to last more than a few years. However, today—more than a decade after the collapse of Lehman Brothers—the percentage of American households that own their own home is still near its low point. New households are still much more likely to chose to live in rental housing than in the years before the crash.

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Apartment Rent Growth Accelerates in the Third Quarter of 2018

Apartments rents are on the rise again.

“The apartment market’s performance during the third quarter slightly surpassed expectations,” according to Greg Willett, chief economist for RealPage Inc., a provider of property management software and services.

Demand for apartment units softened slightly in recent years, as developers built thousands of new apartments. Now, demand is growing quickly once again, as the number of new households rises quickly and helps fill new units. This improved outlook comes after years of already strong rent growth and low vacancy rates.

“We are living in a very dull bliss,” says John Sebree, first vice president and national director with the national multi housing group at brokerage firm Marcus & Millichap. “The fundamentals are very strong. They continue to be very strong.”

Rent growth getting stronger

Apartment rents in the U.S. grew by an average of 2.9 percent over the 12 months that ended in the third quarter, according to RealPage. That’s up from 2.5 percent in the second quarter. The faster increase at least briefly reversed a pattern of slowing rent increases recorded since late 2015, according to Willett.

Rents have grown more slowly as developers have been opening new luxury apartments at a rate of 300,000 to 325,000 a year since late 2016. Developers are on track to keep opening new units at that frantic pace at least through the end of 2019, according to RealPage.

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Five Steps to Smart Multifamily Investments

Home ownership rates have fallen in recent years due to rising home values and stricter underwriting standards. As a result of this and the increase in the number of people 34 and under—the prime rental age—more U.S. households are renting than at any point in 50 years, according to a study done by the Pew Research Center.

The signs all point to an excellent opportunity for investment in multifamily rental properties. But while the overall outlook may be favorable, it’s important to dig a bit deeper to find the most profitable properties for long-term investment. Here are five things to consider before you make a decision:

  • A growing market. Who are the renters? Working-class individuals have traditionally been a mainstay of apartment living, but we now have to consider the millennial generation, consisting of 85 million U.S. citizens born between 1977 and 1996. Whether due to student debt or the delay in starting a family, this large segment of the population is a big factor in the increasing demand for apartments nationwide.
  • Investing in a new complex. In response to the growing number of people who prefer to rent rather than buy a home, new, shiny apartment communities are being built in cities across the nation. However, a survey done by RealPage found that retention rates for these upscale buildings tend to be low, with less than half of the tenants opting to stay when their lease expires. Such turnover results in high expenditures for marketing and unit make-ready in order to attract new tenants. In short, net operating income is low if vacancies are high.

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Less Is More for Apartment Brokers

Having been in the residential real estate business for almost 15 years now, I have been surprised to see the change in many brokers’ approaches to leasing and sales. Numerous brokers today often sell themselves and the properties in an overly aggressive fashion rather than just being congenial and friendly in the hopes of developing client relationships that way. Many newer agents don’t realize that it’s typically more effective to let the residence sell itself than to be pushy about closing the deal.

It’s important to recognize that if people don’t have the need for what you’re offering, then there is no way to make them have that need. Thus, brokers should never employ begging as a strategy. When hiring potential agents, I always ask them whether they have the ability to make people rent or buy a listing. If they believe themselves capable of such a feat, then I know they are probably much more aggressive than I prefer my agents to be.

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Landlords Get Innovative to Fill Vacancies

With both the National Apartment Association and the National Multifamily Housing Council predicting that demand for apartments will soar over the next decade-plus, property owners throughout the U.S. are seeking innovative ways to set themselves apart in an increasingly competitive landscape for new development.

For owners with vacancies that need to be filled, there are many options to minimize the time that their rental property sits empty. In the coming months and years, landlords that want to optimize occupancy and maximize income must pay attention to three rapidly emerging trends:

Co-Living Partnerships

“Co-living” apartments allow landlords and building owners to give renters the option to double- and triple-up with roommates in shared suites. Companies such as Ollie, WeLive and Common are now partnering with developers on co-living projects in markets across the country. This provides on-the-move millennial renters with access to convenience, comfort and community.

While the prospect of renting out your building this way is enticing, there are some cities, such as New York, where it is illegal to allow unrelated adults to live together in single room occupancy, co-living suites. Securing funding for co-living as a landlord is also difficult. Banks need the certainty of a proven market when providing construction loans, and generally won’t consider co-living when filing loans for planned apartment communities. Regardless, modern renters enjoy the hassle-free online rental processes and fully-connected environments these co-living options offer. So, if a property owner can clear the legal and financial obstacles, the rewards are plentiful.

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