Income Property Market

Once again, the income property market is riding the crest of the wave and as an owner; you are positioned to reap the benefits. Now is the time to ensure you are maximizing your rental income or, if you are considering selling, preparing your property to capitalize on the current trends to receive optimal offer value.

On a recent Saturday night, we had friends in town from the Midwest, and the discussion migrated to the topic of the cost of renting in the Bay Area. I searched Bay Area’s Craigslist for a 2 bedroom apartment in some of the some popular neighborhoods in San Francisco to show them the realities of our rental market.

To their shock, the least expensive 2 bedroom apartment was $3,975 per month. To put that expense into perspective, the monthly rent in San Francisco was much more than my friend’s monthly mortgage and property tax on their 3,400 square foot home in the Midwest.

Welcome to the Bay Area! As rental property owners, we ask ourselves if the current rental rates are sustainable.

Let’s first look at the national trends for evidence:

According to an article in the February 2014 issue of ARA’s Units magazine ( Report) their national ranking listed markets with the highest overall rent growth for 2013 with San Jose topping the list, Oakland in 3rd and San Francisco in 5th.

Oakland averaged 6.6% rent growth for 2013. Pretty impressive considering the City of Oakland’s Rental Adjustment Program’s allowable rent increase for existing tenants was 3% last year. To achieve that growth in rent, and if we assume that one in five units in Oakland was vacated and that vacated unit was raised to market rent, that means we had increase of 21% in rent in those vacated units.

From my experience, that was about the amount of increase that I was able to get on our personally owned investment property with a single acancy in 2013. I held our Open House for 1 hour only, posted it on Craigslist which attracted approximately 35 prospective tenants of which 7 were serious, well qualified applicants. All had good jobs, strong credit scores and they were all willing to pay $2,000 per month for a 1 bedroom in a quaint four unit building in Oakland.

To understand why we are getting more and more rent, from a macroeconomic perspective, I agree with Globe’s recent lead story, “Apartment Poor NY suburbs see ‘Brain Drain’”.  In the report from Community Housing Innovations, it explains how Millennials, young adults (25-34), are leaving the affluent suburbs near New York City as they “indicate they prefer lively urban environments to suburbs, and rental housing rather than owning, and are more comfortable with racial diversity”. This description probably sounds very familiar to the majority of the East Bay communities where we members own and manage our rental properties.

For owners interested in selling their property, now, in the East Bay specifically, we still see rents on the rise, and multi-unit properties selling quickly with multiple offers. Many properties are still receiving “all cash” offers.

Compared to Spring 2013 market conditions,  buyers appear to be more purposeful in their offer strategy, offers are still over asking price in most sales, although to a lesser degree, and buyers are more selective.  In all neighborhoods, multi-unit properties in good condition and well maintained, are still very much in high demand.

If you’re considering selling your multi-unit property, the one singular mistake in this type of market is to overprice your property. Buyers assume they will have to bid over the asking price, so your property needs to be priced accordingly.

Make sure your agent is working hard for you. The most important aspect of listing your property is to insist that your agent puts your property on a listing service (MLS or Loopnet) for the broadest possible audience to see.  A small percentage of agents will try to convince sellers that they have many qualified buyers, but we can’t know what your property’s top value is unless we have open houses, broker tours and get your property broad visibility in front of all potential buyers in order to truly gauge interest and demand. It’s a lot more work for the seller’s agent, but that’s our job and number 1 priority: ensure you receive the highest possible price from a qualified buyer(s).

As a multi-unit property owner, it’s still very important to remember that maintaining your property (inside and out) is one of the two most important aspects in increasing its value. As rents go up, tenants have higher expectations.

The second very important factor is increasing your rents within the allowable limits for all tenants. If you have not taken advantage of pass-through rent increases from previous years, NOW is the time to send out that paperwork to your tenants.

News flash: all your existing tenants who have been in your building for more than 12 months are almost certainly paying below market rent.

Your property may be worth 10-16 times its annual rent, depending on its location , deferred maintenance, and unit size.

So passing through this year’s allowable rent increase of 2.1% with your existing tenants, your property value could potentially increase as much as $30,000-40,000, based on your current rents and total numbers of units.

The East Bay rental market appears to be still rising albeit more slowly, and stabilizing at the highest levels from last Spring’s hot, hot market. Our East Bay rents are still well below rents in San Francisco and most of the Peninsula. As long as the job market remains stable, demand for rentals will continue in the East Bay. Property owners will continue to reap the benefits of their investments.

Keys to Maximizing your Rental Income Now:

  1. Add a laundry room or install a washer and dryer. With a 4 unit property, you should generate an additional $80-$100 per month. The laundry income will pay for the cost of the machines in 24-36 months. Laundry income is calculated as part of the annual income for your property and thus increases the value just as rent increases will do.
  2. If you already have a laundry room, ensure that you are charging competitive prices for the washer and dryer. Stop by a local laundry mat to compare prices.
  3. If your apartments were built prior to the 1960’s and your units have carpet, there is probably beautiful vintage hardwood underneath. This was true of two of our properties when we purchased them. If this is true for any of your units, at the next vacancy, tear out the carpet and have the wood floor refinished. It will cost typically $900 to $1,200 depending on square footage and condition of the wood. You will probably be able to charge $100 per month more in rent, and greatly decrease your maintenance costs for that unit. Hardwood floors really stand up to tenant wear and tear and are more desirable. This is another example of a simple upgrade that pays for itself quickly and increases your monthly cash flow and the value of your building.
  4. Lastly and MOST importantly: When you get a 30 day notice from a tenant, this is a great opportunity in the current rental market. If you spend a couple of hours actually visiting current open houses for vacancies in your neighborhood, then you are truly educated on what you can charge for your upcoming vacancy and new tenants. Please don’t just guess, or add $100 to what your old tenant was paying. Your upcoming vacancy could increase your rental income by as much as $400 to $500 per month. It is a great return on your time if you can add $2,000, or $3,000 or more to your annual cash flow with just a couple hours of work. Also, use Craigslist and look at vacancies (with photos of the unit) as a starting point, then do some homework. It really pays off!

Sellers – Steps to Ensure you get Top Dollar:

  1. Landscaping and exterior painting. I always advise my clients that if a property is not well-maintained on the outside, expect many additional examples of “deferred maintenance” upon further inspection on the inside. Landlords who don’t take care of the common areas and exterior typically don’t spend money on other general maintenance.
  2. Laundry room income. It’s a tenant amenity, and its counts towards your annual gross income.
  3. Clean out the basement, storage, and parking areas. New buyers paying top dollar don’t want to take over a building with excess junk from old or current tenants.
  4. Get all your paperwork in order.  These should include at a minimum, last year’s expenses broken down into basic categories: utilities, repairs and upgrade, maintenance, property taxes, insurance, business tax and licenses, if appropriate. Lastly, the buyer is going to want copies of your tenant leases with deposit amounts, plus estoppels. It’s important to give buyers the current lease terms, as many buyers today are looking to live in one unit and collect rent for the other units.
  5. Last, and most important: pass through all rent increases that are allowable. If you are in a non-rent controlled market, spend some time visiting open house opportunities in the neighborhood and check Craigslist for rentals in your area. This is a business and a very profitable one if you treat it like a business.