Today we are talking about the state of the property management industry. We went to the National Association For Residential Property Management (NARPM) and Denver interestingly enough has one of the largest chapters of NARPM, as members, and are actively involved in Denver. But we here at Legacy Property Management went to the national conference in Arizona and they did an amazing report on the state of the property management industry. We did a summary of it and we thought that we would share it with you in this article today.
This summary will come in handy when it comes to what to look out for when you are buying property. This is primarily nationwide and not necessarily just for Denver.
We want to give credit where credit is due, so this information was presented by NARPM national. There was a committee and Buildium, which is one of the larger property management software systems out there. Many property management companies use Buildium, they compiled and queried many different groups, from tenants, property managers, owners, all of this. That is what they did to compile the data.
NARPM is equivalent to the National Association of Realtors. They do have lobbyists lobbying for property management, landlord tenant laws and those kinds of things. But they are not considered as a board as you might be familiar with as a realtor.
Challenges And Opportunities For The Property Management Industry
The most pressing issue facing the real estate industry is the crisis level, the shortage of housing that Americans can afford. Today over half the renting households spend more than 30% of their income on rent. This is very true also in Denver, specifically if you are thinking of areas downtown, Cherry Creek and other more expensive suburbs.
The housing shortage is the result of the home building industry, labour shortages and the rising costs for development and developers. The next one is the compressing CAP rate, this is a nationwide issue but certainly the CAP rate in Denver has lowered. So if you are looking for a 10% CAP rate in Denver you are not going to find it. You could find a 6-8% CAP rate. But these CAP rates are lowering. Rent has gone up, property values, taxes and interest rates are fluctuating. So it all plays into the profitability for investors, but with all that being said real estate is still a good option for investors to do. Real estate remains an attractive investment option, posting a 9% growth nationwide into 2018. So there is still investing happening.
The next one is institutional investors and industry consolidation. This really in a nutshell is between 2011 and 2017. We had institutional investors like Invitation Homes and American Homes For Rent and what they did was they scooped up over 200,000 single family homes across the United States and then aided by federal incentives, they made the competition really fierce for investors to compete against them. That is what happened as a challenge in the industry. It provided affordable housing, but it intensified the competition for the investor.
Most investors are holding onto their rental portfolios that they picked up a few years ago. Some are holding and riding the wave, certainly in Colorado. We have investors that if they are not cash flowing to what they want it to be then they are selling. The investors were pretty lean on what they were cash flowing if they were cash flowing at all. More importantly the ones that were subjected to the rising HOA fees, they bailed out. A lot of investors’ HOA fees went up and they said “OK I am out” That is why the condo town homes are a little bit more challenging. Our high rent rates have plateaued now so they are not as high as before.
The High End Apartments and The Amenities War
We almost feel like they wrote this because they came to Denver and found out just how many apartments there are, but we are sure it was nationwide. We have really been impacted by the amount of new buildings and their amenities– what they can offer. What residents get when they go and live in these apartments vs the perks or lack thereof compared to a condo building that is older.
Does downtown newbuild Class A high amenity stuff impact rentals in the suburbs?
All the class A or the vast majority of class A high amenities is all downtown highlands area and some other pockets around there and there is a little bit in the DTC area. They have built some pretty decent buildings in the DTC, and highlands ranch has some pretty good apartment complexes.
They offer really good amenities and the thing that apartments do is that they will offer free rent which if you are an owner that owns a one-off condo, that’s a full mortgage payment for you. The big draw is the companys, we have a really large company that is relocating from California to Denver and they are building their office at Union Station.
Demographic Shifts And Popularity of Renting
This is interesting since buying a home remains out of reach for many Americans and this is really due to the high home prices, the shortage of starter homes, especially in Colorado which has $500k homes. Tight credit standards, stagnant wages, student loan debt. It makes it more difficult. Everyone thinks that millennials are renting but you will also be surprised by what other large groups of people that are renting now.
The Rapidly Changing Regulations
A handful of local governments like Oregon, New York, California, Minneapolis and Denver are passing various measures really to protect tenants more. It becomes a little more strategic on managing a tenant in your property. We have not yet passed rent stabilization or what everyone likes to which is rent control. We anticipate that it’s something that could be coming. There has been talk on suppressing eviction records and no fees to tenants.
The challenges of legislation are still very present in our industry. Then the dwindling supply of property management staff. The industry as a whole is facing a shortage of available people and vendors to work in the property management world. Colorado is one where you can be a realtor and you can operate as a property manager as well, because it is a real estate licence. Other states offer licences specific to property management. There are differences across the United States and some don’t even require a licence.
The bottom line is we at Legacy are asset consultants, we are doing so much more than managing the asset. We are consulting with the owner to strategize around all of the legislation, all of the rents, how to be competitive, what you want your house to look like, how to take care of it, how to place a great tenant to take care of the house that you just invested in. That’s really what we do at Legacy and it’s slightly different and it takes time to train somebody to do that.
Is the nationwide PM staff certain job types or all types?
A younger generation that is in college don’t really know that a property management career could be a choice. They are not electing to head that way. After all how many students graduate and say “I am going to be a realtor”
This image below indicates the top areas where property managers are located.
It’s interesting to note that Colorado fell in the top 10 twice. Denver number 5 and Colorado Springs number 10. This is the most amount of concentrated rentals and where they are utilizing professional management.
So many people invest out of state in these midwest markets. On Google there are a ton of these companies, and not a single one of these markets is a top rental or PM market. With that being said we know a ton of people that are invested in Florida and a lot in Georgia.
When we look at the above image we think of Arizona having a lot of vacation rentals and the same with Florida. It is kind of interesting to note that we fall into the top 10. Now is this a good or bad thing or just an interesting data point?
Well from our standpoint it is highly competitive in this State. There are a lot of rentals and there is a lot of business to be had. But there are also a lot of people doing property management. There are a lot of realtors that operate as property managers as well so brokerages allow both.
Is this also a good thing for landlords? Well there are a lot of choices. We are getting more of the big box people here in Denver, there are a couple of larger boxed property management companies.
Who Is Renting and Why?
- 45% would prefer to own but are not in a position to buy right now. This mostly is amongst millennials and generation Z’s.
- 13% say their current rental meets their needs right now. That is why they are going to stay as a renter.
- 8% like the flexibility of renting. This is again gen Z’s and millenials, they want the flexibility to get to school or work. They like urban living.
- 19% say renting is more affordable than buying in the area where they want to live.
- 11% don’t want the responsibility of owning and maintaining a home. This is the baby boomers, and we are having more and more baby boomers, retired people applying for homes because they don’t want to maintain the house anymore.
- 4% like the amenities or community that their rental gives them access to. So they are just going to stay as renters.
Baby boomers who are now empty nesters, they are still working. But they are now selling their homes and now they are renting. It’s simple and nice and all they have to do is maintain a much smaller living space. And they can go somewhere and lock up and leave.
The Top 5 Neighbourhood Qualities Renters Look For
This is what people look for when renting a home. This is important for investors that want to buy a property.
7 in 10 people want it safe.
6 in 10 want it convenient to work, school or transportation
5 in 10 want it quiet
4 in 10 want it family friendly
5 in 10 want it close to stores and restaurants
You kind of see a bit of urban influence in a lot of this. The confusing thing about this data is that it’s very different if you are doing a survey to a 20 year old single person vs a family in their 30’s that are renting. Different people at different ages will want different things.
You also have to consider this taking into account a higher income professional or more towards a blue collar area that a lot of times has government assistance. So many of the millenials want to be urban living and this is why they are renting because they are renting 30% of their income. It is worth it for millenials to rent in the highlands for example.
Some good areas to rent in if you are going to be family friendly, people still love and it’s still a great rental and that is the Highlands Ranch area. Either you are going to plan to do rehab in the Highlands or you are going to spend a good chunk of change because it has already been done for you. Salt Lake is becoming more and more popular. The Baker neighbourhood is starting to turn. There are a lot of areas that one could get into.
We at Legacy had somebody that bought right on the train line and it is a changing area off of broadway. The problem is it is definitely not quiet when you have a train roaring right by you. Builders put those things right there on the train tracks, it is different from Union station because those trains come in quiet and a coal train does not.
Top 5 Amenities Renters Want In A Unit
6 in 10 want a washer and dryer
5 in 10 want a dishwasher
5 in 10 want a balcony
6 in 10 want central air
5 in 10 want to be able to have a pet
We hear very strong opinions from different investors and different property managers that some swear by putting a washer and a dryer and some not so much. It’s important to take into account where the washer and dryer is located. If it is an easy move in for the tenant then that is good. If it is going to require a tenant to put holes in the wall then it is best for the landlord to provide it, eliminating the damage risk to the unit.
You absolutely do not have to provide the most high end washer and dryer. It can be a standard washer and dryer. Attorneys will say that if you install it and it breaks you need to repair it. Your tenant has rented the unit with it and it needs to work.
Most of the places in Denver have dishwashers. An interesting one is that 5 in 10 want a balcony. Which makes sense if you are in a multi-family, but it is still interesting that it is included in a requirement that people look for when renting a home.
If you are a landlord and say your house is not pet friendly then that is probably the best way to shrink your pool of people when you do that and also the best way to reduce your rent because you can charge pet rent. The average for pet rent is $25 per month per pet per month.
What Influences Residents To Renew Their Lease
Listening and acting on issues in the property, specifically maintenance. They can be your worst pain if you are not being responsive and as such, the states are coming up with their warranty of habituality stating this is when you absolutely without a doubt must respond.
Rents and rental increases, within reason. There are a lot of owners that say their tenants have been good and they don’t want to increase the rent. Most tenants expect an increase, you don’t need to rip them off but if your HOA goes up why would you not increase their rent by $50 for example. You have to stay within the market but if a tenant has been there a while it is just normal for a rent increase.
Safety, private, friendly landlord. Respecting your tenants privacy is super important, you cannot go in every month to make sure they are not breaking any rules.
Freedom to decorate. This can be within reason so they do not have to paint the entire house absurd colors. But they must first get approval.
Hassle of moving vs benefits of the space they rent. A lot of times it is a hassle for the tenant but also for the owner. You risk vacancy if you are going to up tenants’ rent too much. If they have been good tenants then you should be happy that your mortgage is being covered and that you are making cash flow.
Rental Property Owners
Denver, Colorado is #4 of the top areas where rental owners properties are located nationwide.
#1 was Los Angeles
#2 was Chicago
It is falling in line with, this is where property owners own the most. They may not be located here but they own here in Denver. There are 3 types of rental property owners.
People that purchase a rental property with the full intention of it being an investment property.
This is the person that fell into a property or an ownership, maybe they had owned a property in Colorado and they are getting moved or relocated and they don’t want to give it up. They had not initially intended to be a landlord. They don’t necessarily plan on growing their portfolio. Accidental landlords are the ones that are very fearful of their house getting trashed.
Same as the accidental landlord in that they fell into ownership due to circumstances, but now they think it’s kind of a fun and cool thing and they are going to continue to build their portfolio.
Over 50% of people are accidental landlords in our experience. People that bought 10 or 12 years ago, before the market crashed, but not all of them. Some recently and due to a job or military took them overseas or they are just gone for a while and they are coming back. We at Legacy have about 20% intentional investors and then just a sprinkling of the unintentional investor.
Top 5 Services Owners Want From Property Management Company
- Rent and fee collection
- Maintenance and repairs
- Leasing and marketing vacant properties
- Property Inspection
With regards to leasing we at Legacy try very hard to not let out properties go vacant. We will list the property if our tenants are still living in the property if they are not going to renew their lease. There are a lot of management companies that will let their property go vacant, do the clean up and then list it again on the market.
On the topic of property inspections it is pretty common with most property management companies to do them and we like to do property walks and then get a property inspection company to go through every mid point through the lease.
Rental Owners Request From Property Managers
This is a big thing, this is the number 1 complaint and that is communication. So it is vital that property managers communicate with rental owners. Some other requests include:
Placing great tenants
Stay on top of the market, rent rates, vacancies, etc
This is big because we don’t rent properties just to get paid. We are investors at heart first, so we want to rent and capture the most that we can from our owners. We set expectations, we have no problem starting high. But if the market is not responding we need to price adjust and it’s again a communication.
Have integrity and honesty
You can query different questions and take note of how they react to certain things to dig out if they have integrity and honesty or not.
Follow up with work orders and maintenance
This is probably more of when the work order comes in or maintenance requests, giving the owner a heads up that something has happened on the property. Our rule here at Legacy is that if there is an expense on the property, the owner will know prior to getting his statement at the end of the month. If we are going to impact what they get as a distribution then they need to know it because some of them are banking on a certain amount every month.
3 Takeaways From The Report On The Industry
Takeaway #1 – Property Managers Are Consultants
This plays really into the regulations for fair housing, housing affordability, subsidized housing and how to respond to people asking do you take section 8. All of these things, this is where all of this is coming from. But then it’s also the legislation, it’s helping owners. For us we have over half of our owners who don’t live in our state. So again we have those people that have accidentally become a landlord. We are their eyes and ears, so it’s communicating. We are improving the asset to keep the value high.
Takeaway #2 – Awareness of local market trends matter more than ever with other growing cities
With the CAP rates pressing in markets like New York and San Francisco and Denver. Property managers can be valuable by keeping abreast at the changes in this market and educating owners.
Takeaway #3 – Relationships are still at the heart of property management, even as efficiency is boosted with technology.
Most property managers have an incredible amount of tools that are virtual, electronic and on the web. Ultimately our owners and our tenants still want that human touch. It’s no different than developing relationships and understanding that they are all human after all.
We don’t want to compromise our communication or our personal relationships with tenants, vendors and owners.
What Legacy Property Management Offers
- Hassle free property management giving you your greatest asset which is your time
- Resources, classes and Legacy Academy
- Leasing services, maximising rents in a changing market and fair housing compliance
- Full service management, we handle everything from rent collection, tax documents, maintenance, move in/move out and mid year inspections and much more!