René Nelson, CCIM CRE, and Jim Straub, Legislative Director Oregon Rental Housing Association, examine leasing strategies and investigate the impact of Oregon Rent Control Senate Bill 608 on leases and relocation fees for multifamily owners. Learn from the experts so you can put a solid plan in place.
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René Nelson: Let’s talk about leases, because I think there’s a misnomer that a lease has to be for 12 full months. Since you’re a property manager and have years of expertise, you’ve got a good strategy, so let’s talk about that.
Jim Straub: My strategy has always been to pick the peak of the market and in the Linn County, Southern Willamette Valley area, the peak of the market tends to be May and June. Essentially, it doesn’t matter what time of year I have a vacancy, I’m going to terminate the lease between May and June, and I usually stagger my termination so I don’t overload myself or my staff. I’ll typically have between five and seven vacancies per week and I’ll just start having my lease terminations on May 1, May 7, and just throughout that week and it works very well for us. Anytime we have a lease agreement, we typically try to choose the most beneficial time for us, the owner, or the manager to have a vacancy.
René Nelson: Before we talk about the next part of your strategy, let me just clarify: If you give somebody a lease and their lease expires, do you have to pay them any relocation fees or anything that’s involved now with the Senate bill?
Jim Straub: As I understand it, as long as the lease expires in less than one year’s time, then the answer is no.
René Nelson: But one of the keys will be, potentially, will be to make sure that your lease expires on the 364th day.
Jim Straub: Correct. As written now, that is a significant advantage to landlords.
René Nelson: Let’s talk about the strategies that you use to do a walk-through and look at the condition of the property, because you and I both know there are some really good tenants out there. You want to keep them. So we need to look at what their condition is to make sure we want to renew leases of some of the newer tenants.
Jim Straub: Honestly, 95 percent of the tenants that we rent to are fantastic tenants, and we want to keep them; it’s the 5 percent that require the most amount of work for us and we want to guard against. Those are the ones that just through life changes, relationship changes, employment changes, and so forth just start to deviate from what they were when they first applied for you, and you want to catch those before they start damaging your property to an extent that goes beyond their security deposit.
Jim Straub: Typically, when I sign a lease, I target May/June as the expiration of the lease. Typically, within three months of the expiration of the lease, I’ll start scheduling my walk-through inspection. So, I’ll do a 24-hour notice, walk through the property, inspect the entire property, and that’s every single door is opened, cabinet door is opened, I thoroughly inspect the property, get an accurate assessment of the condition they’re keeping it in and then I evaluate as to whether or not I want to have that tenant in the second year.
Jim Straub: I’ll also go back and look at my history with the tenant. I’ll look at how my communication been, what the level of work orders has been, what type of things have we had to do at the property under what conditions, and then we’ll have a conversation with the owner and say either, “Yes, I recommend that we keep this tenant for the next year,” or “I think our time has come to an end and we should ask them to leave and we’ll try again.” If I offer to renew to the tenant, typically, I’ll send them a letter and I’ll say, “I’d like to offer you a lease renewal under these following terms and conditions.” If I make any changes to my lease agreement or my rental agreement, I’ll identify it then. If I make any changes to the rent amount, I’ll identify it then.
Jim Straub: A lot of things I do or a lot of times if I make no change to the rent agreement or the rental amount, and that’s a strategy in certain cases, somebody is taking exceptional care of the property, just looks fantastic. I want them as a tenant. You lose money on turnover. If I want that person as a tenant, I’ll identify that they’re taking fantastic care of the property and I want to reward them for being such a fantastic tenant, and I’m not going to raise the rent by 2, 3, or 5 percent, whatever I would have, as a reward for that. I thank them and ask them to keep taking wonderful care of the property. And if they want to renew the lease, I would like to hear from them within this time period.
Jim Straub: I give that notice, and even if I am going to raise the rent, I’ll identify it in the rental agreement, and I give them 10 or 15 days to sign an agreement to renew the lease for the following term, whatever that term might be. But also in that letter I tell them that if they disagree or they don’t sign and respond to it, then they should consider this as their termination notice effective at the end of their lease date.
Does the Senate Bill Mean that Landlords Will Have to Tolerate Undesirable Tenants?
René Nelson: In regard to the new senate bill, do you think now that landlords may have to pay relocation fees, and I guess more importantly having to deal with not being able to give no-cause notice, will they think that they’re just going to have to tolerate less than desirable tenants?
Jim Straub: I do not believe that to be the case. In the multifamily environment, over 95 percent of the units are lease only at this point, and with the lease, you can’t give a no-cause notice anyway. Right now we’re already bound by identifying a violation of the rental agreement and giving them the ability to cure that agreement. So this effectively changes nothing from the lease end of things. It gives some advantages to landlords on how to operate on the month-to-month tenancies that allows them to move a tenant out with without cause. But for the vast majority of multifamily units, it shouldn’t be any change at all.
Should Multifamily Owners Reconsider Their Portfolio?
René Nelson: What advice would you give to a multifamily owner who’s maybe below market rent and wondering whether they should get out of the market. If they’re substantially under market rent, that’s going to have a direct impact on their value or their sales price. What advice do you have for those multifamily owners who are just sitting on the edge right now trying to decide what to do with their portfolio?
Jim Straub: That’s a hard question to answer. For years, I’ve advocated for small regular rent increases for the tenants to guard against sudden large increases in a wider time period. No tenant likes to receive a large rent increase. But if a landlord is substantially under market, they’ll now have to make a quick decision as to whether or not to give large rent increases right now before this bill passes and potentially bear the consequence of having a lot of vacancies. Depending on how far you are on the market is going to determine whether or not your tenants are going to be able to financially afford to continue living there.
Jim Straub: If you’re thinking about selling your property, it’s good to have high rents, but you also don’t necessarily want 50 percent vacancy. Basically, you’re going to have to decide what the happy medium is as to getting your numbers up or reinventing. The bill is going to pass pretty quickly. There is a provision in the bill that says that if you have a notice that’s pending, it should be honored. We’re not sure if that’s going to stay in there. So, if you’re on the fence, you think you want to raise the rent, raise them now, you can always lower the amount you raise the rents, you can always resend the notice, you can always have a conversation with the tenant to say, gosh, I can’t afford this and you can make case-by-case determination as to whether or not you want to lower it to that particular individual needs.
René Nelson: That’s a great strategy. You’re a wealth of information, how do people reach you if they want to talk to you about your property management expertise or ask some questions.
Jim Straub: I own Acorn Property Management, which has offices here in Eugene in Springfield as well as in Portland. They can look me up online at acornpm.net and be I’ll happy to answer any questions.
For more information about the Oregon Rent Control Senate Bill 608 and how it affects Oregon rental property owners, call me today: René Nelson, CCIM, (541) 912-6583 / email@example.com / www.eugene-commercial.com