Property Management Blog

Professional Property Management Performance

August continued the steady summer trend of rental rate increases and low-moderate vacancy. New leases and renewals saw a 5.23% average increase in rental rates.At the beginning of the summer, we did see some notices to move-out due to purchasing a home. Recently, we’ve had none. Could just be a coincidence, but perhaps the sudden interest rate increases have discouraged home ownership for the late part of the summer. Hopefully the economic forces that be are a little more constructive in the future than these two fellas:

What would you like to hear about?

I’ve recently received a few suggestions for informational topics that I thought were great ideas. As my reason for spending time on this blog is two-fold: 1) Giving additional transparency to homeowners / clients and 2) Providing resources and information to make us all better investors, I’d very much like to hear where you feel your knowledge gaps might be or which aspects of real estate investment you find your comfort level is less than ideal. As the weather cools, I devote more time to education and refinement in my skills, so please shoot me a message or give me a call with your ideas.

A Summer For Landlords

With increased rents, reduced turnover, and escalating home prices, this is a good summer to have rental properties. In July, the strong majority of our turnover was in Canyon County. Even still, we saw a 5% increase in rents for new leases and renewals. Reduced turnovers combined with a proper preventative maintenance program can significantly affect the return on housing investments. Fortunately, we’re at a 67.25% renewal rate for 2013 so far.

Q2 NARPM Vacancy Survey Results and Vacancy Outlook

The SW Idaho Chapter of NARPM vacancy survey showed a major increase in rents. With a 7.49% average increase in rental rates, all segments realized increases with the strongest increases in Ada County.

Will we continue to see these rent increases for long? Given relatively low rent increases in recent history even while vacancy rates remained low, there is a case to be made for at least a portion of the rent increases to be part of a market correction. Furthermore, estimated new construction within the next year marginally outpaces expected household formation from population growth, which means vacancy rates are likely to stay low in the near future.

Rental Rate Increases, Oh My!

<>p May was a good month for property investors! With vacancy rates still low and an average 6.3% increase in rental rates, there was plenty to be happy about. We’re definitely seeing significant movement in rental rates that are making up for the recession years in which increases were pretty minimal. There is still a general shortage of housing driving the rental rates as population increases and household formations eat up the increases in new construction inventory.

Property Management Value

Do you know someone that would be surprised to hear about such great rental rates? One of the values of having a professional property manager on your side is knowing rental trends as they are happening and getting you the best rate the market will allow. How much equity would be lost by missing out on keeping up with the market? Would keeping up on maintenance costs be easier with more rents coming in? If you know someone that is missing out or is just plain stressed out, give me a call and I will make sure they are taken care of.

Vacancy and Renewal Rates

I’m starting to feel a bit like a broken record here this year, but once again, performance was awesome with a 1.01% vacancy rate and 77.78% renewal rate for May. Most people are opting to stay where they are with a rent increase rather than incur the expense of moving. We are seeing some instances where rent increases are not tolerable by the tenants’ budgets however, which generally results in a turnover and the costs associated with it as most homeowners prefer to have top dollar rents. In some cases however, it is more sensible to avoid those turnover costs, and a risk versus reward assessment is presented to the homeowner if there is any debate on which course of action best suits the homeowner’s needs.

Q1 NARPM Vacancy Survey Results

The rental market is strong! The few segments that were previously performing less favorably than the national market(Canyon County multi-family particularly) have nearly caught up with the rest of the market and we’re currently seeing some of the most impressive vacancy rates ever accompanied by rent increases.

April Rental Vacancy Rates and Renewals

April was closed out with a 1.3% vacancy rate and precisely 2/3 of all leases renewed. On average, we realized a 4.6% increase in rental rates for April – a trend I suspect may be even greater as we approach the prime time of the year. All properties were pre-leased before tenants even moved out!

An Unusual Market – Home Prices and Rental Rates

Real estate tends to have cycles. There tends to be an inverse relationship between increases in home sale prices and rental rates where often times as home sale prices are increasing at a very healthy pace, rental rates tend to increase much slower and vice-versa. Currently however, we’re seeing rental rates and home prices move in parallel with both increasing well above the inflation rate. Time will tell, but I would surmise that this unusual market behavior is a combination primarily due to the following: low housing inventory, improving employment, out-of-state money coming in, and a shift toward renting over ownership. Whether your rental investment strategy focuses on cashflow or appreciation, it would seem that the Boise market is shaping up to give us both! Although a trend now in its infancy, this could prove in time to be extremely beneficial to Boise property investors.

The State of R-22 Refrigerant Today

The refrigerant of choice, R-22, has been in use for decades; however, as worldwide regulation has reduced the need for it, its production has been cut substantially in recent years and prices are roughly six times what they were just a few years ago. No new systems are allowed to be built with R-22 employed, so the entire R-22 market is purely for servicing existing equipment at this point. With a typical system holding anywhere from 7 to 12 pounds of refrigerant and the cost of R-22 being roughly $75 per pound, the cost of replenishing a system has become particularly cost-prohibitive. With refrigerant costing as much as $800 for a unit, many homeowners are electing to put that money toward simply replacing their system with one that does not rely on R-22 or undergoing a retrofit when possible. Although replacing a system is typically several thousand dollars and never a particularly fun choice to make, it really is something many property owners need to prepare for in the future perhaps a bit sooner than would have otherwise been anticipated. There is very good cause for the regulations behind phasing out R-22; good enough that nearly the entire world was actually in agreement with the measures.

R-22 Refrigerant History and Future

Due to its ozone-depleting and greenhouse gas effects, the world first agreed to begin phasing out some refrigerants in 1987 through the Montreal Protocol. Modifications were later made in the 1990s to reduce the consumption and production of HCFCs(hydro chlorofluorocarbons) and CFCs, most commonly associated with refrigerants. The United States has outlined a series of benchmarks and goals for phasing out these harmful products through the Montreal Protocol and Clean Air Act.

In 2004, the U.S. was required to reduce HCFC consumption by 35% and did so by banning production and import of HCFC-141b and established allowances for HCFC-22(R-22) and HCFC-142b. In 2010, the U.S. was required to reduce HCFCs by 75%, which was accomplished by limiting the use of R-22 to servicing existing equipment. This meant that no new air conditioning systems could use R-22. Looking to the future, HCFCs to are be reduced by 90% from the U.S. baseline in 2015. And in 2020, consumption shall be reduced by 99.5% of the U.S. baseline. At this point, no new production or import of R-22 will ever occur and requirements to capture and recycle R-22 will ensure there is supply to service old units. This is currently known as Section 608 certification and ensures contractors are EPA-certified to handle the refrigerants appropriately as allowing them to be vented or otherwise released into the air is illegal. As the plans for phasing out the harmful refrigerants were established in 1993, the phasing out process should continue to go rather smoothly and there shouldn’t be any concern about running out of R-22 to service older units; however, we can likely count on the costs of such refrigerants to remain high.

Alternative Refrigerants

The new standard refrigerant for home conditioning equipment has become R-410A. It does not contain chlorine, so it does not affect the ozone layer, but it does still contribute to the greenhouse gas problem. For those concerned about the refrigerants used in your cars, refrigerant HFO-1234yf was first approved for use in 2011 and has made its way into many 2013 model cars. It is considered to be 99.7% better than the previous car refrigerant in terms of global warming factors.

Conclusion

As the world progresses forward in its pursuit of sustainable business, property owners with air conditioning systems built before 2010 need to be aware of the potential need to retrofit or replace their air conditioning systems based on the refrigerant market at the time of disrepair as the economics of the market are more likely to make earlier replacement the economically viable solution.

Mortgage Forgiveness Debt Relief Act

The Debt Relief Act provision that exempts homeowners from paying tax on forgiven debt through short-sales was set to expire at the end of 2012. With the “fiscal cliff” deal, the Act was extended through the end of 2013. With this, short-sales will continue to be easier for underwater homeowners to stomach as tax liability isn’t a concern. Usually, without the Act, the debtor would receive a 1099 for the amount of debt forgiven and the IRS would consider it taxable income. Depending on the difference in loan amount and sale price, this would have introduced a significant tax liability without the Mortgage Forgiveness Debt Relief Act in place.

Energy Tax Credit

The $500 energy tax credit was also extended through 2013 and made retroactive to January 1, 2012, so you can use the credit for purchases made in 2012. Those who have used the credit in recent years are still limited to collecting a total benefit of $500 throughout the life of the program. For instance, if you have received $300 worth of credits in previous years, you are limited to using $200 worth of credits. Credits are available for insulation, ENERGY STAR doors and windows, and high-efficiency water heaters, furnaces, and air conditioners.

Boise Vacancy Rates Remain Low Even in the Winter

January is typically a lackluster month for real estate in Idaho. Very few leases are up for renewal and although online rental search traffic is about 50% more than December, it is still only a small fraction of typical summer traffic. This January went down as the 3rd coldest January on record here in Boise, so perhaps everyone was too frigid to move. The January vacancy rate topped out at 1.28% as a few newly added properties were being rented out.

Boise Renewal Rates

As I’ve mentioned many times, I strategically avoid winter renewals as much as possible with good reason. This year, only 2% of our inventory was up for renewal in January compared to 0% last year. Although it’s motivated by getting better returns for investors, it sure was nice almost entirely avoiding showing houses while there’s a foot of snow on the ground. Here’s hoping it will soon be time to start showing off those lawns again! Boise Renewal Rate Chart

What would have happened

As of May 1st this year, any new construction or replacement of existing gas furnaces in the Northern states would have been required to be 90%+ efficiency units. The non-condensing, 80% efficiency furnaces that exist in many homes would no longer have been permitted for new construction and would have required upgrading if replacement was necessary.

The benefits of 90%+ efficiency furnaces

Over the course of the equipment’s life, they are much more cost-effective, particularly in the colder climates that require significant use of the furnace. Since a therm of gas is using 90% of the maximum heat from the natural gas rather than only 80%, gas bills are less, consumption of finite resources is reduced, and less carbon dioxide is released into air. Here in Boise, we currently have been plagued with inversions wherein the population is forced to breathe in the various pollutants trapped in the valley. Although Boise air quality is usually better-than-average, reduced emissions from homes would certainly improve our air quality, most noticeably in the winter. Although it’s difficult to measure, less pollutant exposure has been associated with being less susceptible to respiratory infection, so people would be less likely to get sick as well – a significant factor in lost worker productivity and generally happiness.

Additionally, as tenants are becoming ever more aware of utility bills when shopping for homes, greater efficiency equipment is continually becoming a more significant marketing tool and reason for fetching higher rents!

The drawbacks and why the legislation is to be repealed

In new construction, as proper installation can be easily accomplished, high-efficiency furnaces make great sense and even in many retrofit situations, they are cost-effective solutions as well; however, there are many situations where the installation costs become very cost-prohibitive. High-efficiency, condensing furnaces have greater needs in terms of addressing ventilation and condensation. Often times, chimneys have to be redone if they were previously shared with a hot water heater, or new furnace and ventilation placement for retrofits would have to be done such that they are taking up formerly usable living space, which extremely diminishes the value of a home.

As one might imagine, the air conditioner industry was largely involved in opposing the legislation largely due to what they believe would cause a considerable excess of low-efficiency furnace inventory in the region: a legitimate concern. The Department of Energy has stated they will still continue looking for a way to move forward with improved efficiency standards. The possible solutions are really quite simple, and it’s somewhat surprising there was a need to entirely restart the process. Possible solutions include only requiring the higher standards for new construction and exempting all retrofits, or simply creating a waiver process by which retrofits that would be cost-prohibitive would be exempted from the policy. The DoE has done such waiver programs in the past, mostly with commercial applications, and it does require quite an administrative expense, so it would likely be more efficient to simply exempt retrofits entirely and let those units be replaced as they do become cost-effective through market forces. A total exemption or waiver process would also allow equipment manufacturers to continue selling their inventory of 80% efficiency furnaces and reduce production and distribution of such units in a more gradual fashion.

Survey Chair for 2013

This year, I am serving as the Survey Chair for the SW Idaho Chapter of NARPM, and very much look forward to improving the reliability and usefulness of the survey in addition to participating in all of the local chapter’s contributions to the community.

Q4 2012 Vacancy Rates

Vacancy rates continued their show of strength through the end of 2012. Ada County came in with a 2% single-family and 3% multi-family vacancy rate, which is considerably better than the national average and such rates are generally considered to indicate a shortage in housing inventory. Canyon County had a healthy single-family vacancy rate of 3%, but had a 9% multi-family rate, which is more in line with national averages and was the weakest segment of the Treasure Valley within the survey.

Although vacancy rates were strong, rental rates continued to be relatively stable by most measurements with minor fluctuations that are within the typical fluctuations of the Boise winter market in which rents become more competitive. This is again one of the reasons Legerity Property Management avoids winter renewals as much as possible.

Much to my delight, there was also a 22% increase in properties sampled from last quarter, a trend that will hopefully continue throughout the year and provide even more accurate measurements of local market performance.