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11 Metrics for Your Real Estate Portfolio

Everyone loves Excel! Pivot tables, pie charts, bubble graphs, colour-coded bar-scales!

Ok, that’s just me. I do love data. One of my most read blog posts is really nothing more than a big spreadsheet of real estate values since 1962. (NB – no, I can’t update that post. The way they collect data has changed too much to have real ongoing numbers).

Here’s 12 metrics I’ve found in my own experience, from my clients and from reading interesting things like annual reports.

  1.  Debt to Value (Book and Market)
    This one isn’t complicated on the face of it. What’s the current outstanding debt of your property divided by the current market value. That gives you a bead on how much risk you’re carrying, your potential ability to refinance and potential profits if you sell. You should also compare that to your book value if you’re depreciating your properties.
  2. Operating Expense Ratio (OER)
    People love this one when they’re buying properties and I’ve never really understood why, but they do. This is how much you spend on operational costs, before debt servicing, divided by the net income of the building. I think it’s important for comparing stabilized vs. non-stabilized properties and how fast you can get a poor asset under control. Companies like Mainstreet consider a stabilized building to be one that’s been under management for 24 months.
  3. Occupancy vs Vacancy
    I use two metrics here – first there’s vacancy rate. If there’s one vacancy in a 20 unit building you have a 5% vacancy rate in that month. You need to consider vacancy rate as a snapshot metric or a forward-looking estimation. Then there’s the historical vacancy rate, which I prefer to think of as Occupancy Rate – the number of units multiplied by the amount of time they were rented, divided by the number of units divided by the total amount of time. If you’re actively renovating to add value or just doing repairs to maintain cash-flow you may also want to be conscious of how much time you loose to renos – a rental-time-lost or down-time metric.
  4. Rent-Days Lost to Renovations
    Speaking of lost-rent metrics, here’s two ideas for you. If you’re a renovator and you have a lot of units or properties (for the single-family folks out there) – renovations take time and time is money. How long does it take you to do a reno? If you’re doing a similar reno over and over again, such as new flooring and countertops in every suite, how fast can your crew turn around a suite to be rent ready? I’d make the distinction that while it’s under construction it’s not available for rent, and then when you’re done renos and someone can move in it’s now counted as vacant. Every unit comes with 365 rent-days – it’s up to you to make sure as many as possible are fully occupied and paid.
  5. Rent-Days Lost to Turnover
    The turnover metric is hugely important in multifamily in a slow market. Assuming you can get a suite rent-ready as soon as your old tenant is out, how long does it take you to get it done? I’d say that same-weekend turnover is the goal and that same-day turnover is possible. You need to be in the unit before the tenant moves out to do little touchups and have a proactive onsite person to help coordinate moving, carpet cleaning and touchups. If rent is $1,000/month every day costs you $32.88. Get it moving!
  6. Loss to Lease
    This is a metric I believe I first saw on a Boardwalk annual report. Simply put it’s the difference between the rent you collected during the year from tenants on a fixed term lease (e.g. $1,000/month) compared to the full market lease. Imagine a year where full market was 950, 975, 975, 975, 995, 1010, 1050, 1050, 1050, 1050, 1050, 1050. Your leased unit income was $12,000, whereas the market is  $12,180. Your loss to lease is 1.47%. If you were worried you’d missed out on a rising market, I’d take that number as a reason to chill out.
  7. Incentives as a proportion of rent
    Self-explanatory. If you’re giving a discount for the first two months of a lease, or a free TV, or something else like free parking or laundry tokens – put a value on it and keep track of it!
  8. Length of Stay
    My favorite metric – how long have your tenants lived in your property. Better yet, how can you change this? Don Campbell suggested last night that when Do you see patterns by area, asset type or suite mix? How much better is a full single family house compared to a basement suite? With garage or without? Good data lets you decide what you want to buy moving forwards or what assets are underperforming and should be sold.
  9. Maintenance proportion of expenses
    Like the operating expense ratio item above, you should be keeping track of how much of your expenses are going to capital costs or repairs and maintenance. Usually it’s a metric I see that’s way too low and the building is slowly running into the ground. We’ll come back to properly planned spending.
  10. Utility costs per square foot
    I’m not convinced that this will really work across buildings, but it’s worth measuring utility costs and breaking it out to be a per square foot cost. It’ll help compare apples to apples, and if you’re looking at higher costs in some buildings you should also consider measuring adults or teenagers per unit and maybe square foot per person.
  11. Deferred Capital Costs
    I own a number of condos and I’m the treasurer of the board of one. I have a healthy respect for the idea of a reserve fund study, also known as a depreciation report. Simply put, look at the big expenses and estimate what they cost and their lifespan and work backwards to know what you need to save. You can put the numbers you get into context by comparing it to annual revenue or market value.For example, a shingled roof on a house may cost you $5,000 and last 20 years. That means that the day after the roof is installed you should to save $250/year for your next new roof.A little extreme? Maybe, but I’ve also seen a huge number of owners, both residential and commercial get absolutely screwed when these costs catch up to them. Just ask anyone who has been on the receiving end of a special assessment.

What about you? Any good measurements you’ve come across? Am I out to lunch? I didn’t even get into tactical management metrics like calls/ad, applications/vacancy or applications/lease signed.

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My 2014 Review

I have to say that 2014 was a year of massive changes. We’re going into 5 years in the business of helping people buy and sell and we’re finally properly conscious of what we know and don’t know. I’ve never been more excited for the future. Here’s the highlights:

– Our move to do more business on the commercial (multi-family) side continues. About 65% of our income was from the commercial side, while I think we still do a great job on residential properties. I love working with friends and family – right now I’m pretty sure we’ll always stay involved in that side of the business. It’s so grounded and I like knowing how things are in the market first hand.

– We made the RE/MAX Commercial Top 100 in March!
The great letter dad and I got. Top commercial #REMAX in western Canada.

– We did make one big change to the residential side of the business in the person of Jennifer Elander-Bianchini. Jen is a brilliant Realtor, always cheerful, massively hard working and loves spending time with people. She’s helping our buyer clients find new homes and learning lots as we go.

– We gained Jen, but after 30+ years in the business Brent decided to retire from the active side of real estate. He’s still involved managing his own properties, helping out when our clients need advice – he’s still available for consulting and speaking engagements! If you’re buying your first apartment building he just might join you for a walkthrough and see if he can impart some wisdom.

– The band that Mike Landry and I have played in for nearly 10 years recorded our second album and played some cool gigs before letting things go to see what new projects God has in store for us.

Look! I found a #rainstick just for @trevorlawless!

Ready to play for a Columbian choirs rehearsal.

– I managed more sailing this year than last, including some time in my Laser.
Out #sailing with boy #1. Great day. #startthemyoung #kidsofinstagram

– I’ve also brought some terrific experience into the office in the person of Leigh Davies. She’s the former controller and general manager of Davies Management and my office has never been cleaner or more organized.

– RE/MAX Commercial World Symposium in Denver, plus visiting RE/MAX World Headquarters!
Finally checking out #REMAX headquarters. #yegre

I’m writing a book! It’s about strategic apartment building ownership and it’ll hopefully be out in early 2015. Drop me an email or comment if you’d like to be on the list for updates.

– The boys are just brilliant and they’re expecting a new sibling around Easter. Megan and I are stoked.
Awesome helpers on my trip to Rona tonight.

– I also finally got my MCNE (Master Certified Negotiation Expert) done which included a trip to Vancouver and Victoria!
Hanging in Sydney harbour before our ferry. #thewifehatesselfies

This was a very challenging year but when I look back at what we accomplished I think we weathered the storm in style. Here’s to a great 2015.

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Moshe is brilliant and there’s some great ideas here. Apartment building living doesn’t need to be for the poor, be boring, or be mediocre.

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The Double Edged Sword of New Rental Construction

There are many reasons I love new dedicated rental buildings. There’s also a lot of reasons I love working out of a RE/MAX brokerage. I have many great commercial clients and a lot of wonderful friends who are simple residential clients. There’s also a world that crosses the divide; investors who want to move up from a couple dozen houses to an apartment building.

This summer however, the two worlds connected in a new way for me. I had three clients move out of new dedicated residential rental construction and buy homes. In one case they were a young professional couple who bought a $250k townhouse, one bought a $450k new build detached home and one bought a $350k existing home. The common reason they all gave for moving out? The poor quality of the building and the management. In one case there was an 8 foot long settlement crack in the living room.

The double edged sword is this: It’s great to build nice looking buildings and push for the top end of the rent range, but the tenants you attract are high maintenance, have high expectations and the same high incomes that fuel your top of the market rents also make them great home buyer candidates. They’re renting by choice and it doesn’t take much to change their minds and move them into an ownership mindset.

Come to think of it, I might start targeting some residential buyer focused advertising at those buildings to see if I can’t convert them into good buyer leads for my team…..

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Ok, the title is a shameless plug for a great band. The Apartment Vacancy and Rental Cost Survey put out by the Alberta government’s Municipal Affairs department is only slightly less awesome. What is it? Here’s a quote from their introduction.

Since 1973, (with the exception of 2004), the Province of Alberta has conducted an annual Apartment Vacancy and Rental Cost Survey (AVS) of multi-family dwellings in Alberta’s rural communities. The survey identifies building type and age, unit type, number of units, rental rates, and the number of vacancies of private market rental units in rural communities. The eligibility criteria used in selecting communities for the survey are those with:

  • A population between 1,000 and 9,999;
  • Thirty or more rental units; and
  • The community is not included in the Canada Mortgage and Housing Corporation’s (CMHC) bi-annual Rental Market Survey.

Each year the number of communities surveyed by the AVS may differ due to changes in population or the number of rental units in the community. In 2013, the Town of Millet was added to the survey as they qualified with a population over 1,000 people and over 30 eligible rental units.

That’s great news if you’re like me and have listings or buyers working in Swan Hills, Tofield, Vegreville, Edson, St. Paul and Wainwright. CMHC’s numbers are helpful, but they don’t cover the small towns. In a small town the name of the game is risk reduction and having real data is key to ensuring you’re making logical, informed and impartial decisions.

Interesting Charts!

There’s some pretty wild extremes in small towns, and that can mean big things for your income or pure disaster! And here’s just one data series from the report (picked Athabasca because it’s the first alphabetically) together with a sparklines chart.

Here’s links to a handful of interesting extracts directly from the Government’s website. I have the full report so if you’re looking for info, give me a call.

I’m finding this $15 book of numbers hugely useful and I’m sure if you have or are considering buying properties in rural Alberta it’ll help you too.

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AshLike most landlords, I have a love/hate relationship with smokers. They’re usually great tenants, pay on time and tend not to move as often as their fresh-air cousins. The hate (really, more of a dislike) comes when they move and it’s time to re-rent or sell. Flooring, paint, washing, ozone, and lots of fresh air. I’ve even had clients scrub walls with the commercial cleaner TSP (which I used to use when I worked in biology labs) to try and remove enough tar so that primer could adhere to the wall.

In the September 2013 issue of Canadian Apartment Magazine Chris Seepe does a quick summary of a couple issues facing the owner or manager with smokers in their buildings or who wants to go smoke-free. One part stood out to Edmonton’s market, currently seeing huge number of multi-family (condo) projects on the go, with the first new dedicated rental buildings in decades appearing on the outskirts of town. A survey undertaken by the Ontario Tobacco-Free Network showed that (in Ontario) 2 out of 3 people would choose to live in a smoke free building if the choice was available.

It’s tough to monitize a statistic like ‘2 out of 3 would choose’, so let’s consider the costs of turnover and the costs of lower rent. In the article Mr. Seepe suggests that it costs $650 every time you’ve got to clean up a one bedroom smoker unit – $450 on paint, $100 on carpet cleaning and at least $100 to clean all other surfaces, including windows, mirrors, balcony doors, closet doors, kitchen cabinets and appliances. If that tenant goes after a year, you’ve effectively dropped your rent by $54.17 per month.

I think it’ll be $1500 on paint and carpet, plus cleaning.

Speaking from three generations of apartment building ownership, if you were going to re-rent without doing a lot of work, you’d be looking at a $25-$100/month discount. That’s also assuming you could re-rent it to a light smoker. However, we’re in a very anti-smoking society and the majority of light smokers I know are quick to say they’d like to quit – making them unlikely candidates to move into a heavy-smoker unit. You should just keep the old tenant and leave things along. Smoking isn’t even close to being one of my 10 terrifying tenant issues.

New buildings, those recently renovated and buildings where you’re looking to turn around the tenant profile will see an even more profound discount or premium. Just like strong cooking smells, second hand smoke in the halls will scare off many students or people new to town who are looking to rent while they get established. As a REALTOR, I’ve seen many buyers choose significantly more expensive properties because they can’t find anything in their price range that isn’t coated in smoke. They’ll move from wanting cheap detached to brand new condos just to get away from the smoke.

I think there’s a niche for C-class buildings that will stay that way and be accepting of smoking. They won’t be a star in the current market but when things slow down they’ll be steady.

Are there any owners or brokers out there with experiences going pro-smoking to anti-smoking? Anyone got numbers of their own?

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I’m well known around my office for knowing quite a bit about landlording and the laws that govern tenancies in Alberta, or at least knowing where to go to find answers. It’s not surprising that I get a lot more questions when it’s spring and leases are up for students or people want to sell. I’ve had the same basic question twice this week so I thought it’s blog post time. (Thanks to Bill, Doug, Oliver and Christian for the push to actually get typing.)

The essential question is two-fold. First, can I get rid of the tenant so I have a vacant property to market and sell? Second, if I’m selling with a tenant in place, how do I get in and how can I get vacant possession for the buyers? There’s a lot of Realtors out there who don’t understand the law in enough detail to help you decide if you can/should accept an offer that required vacant possession. Imagine you accept an offer that asks for 30 day possession and your tenant refuses. Your sale could collapse and you may end up with a lawsuit on your hands. These tips may help and I’m always happy to help you sell your rental property.

Access to Your Rental Property

An agent called my yesterday who has a property where the tenant is refusing to let the Realtors in for a quick look around. Here’s the first big rule which helps owners and Realtors: Tenants can’t refuse access. The only exception is on a day of Religious worship if the tenants have informed the owner in writing in advance. I’ll quote from Service Alberta’s website:

After giving the 24-hour notice, a landlord can enter between 8 a.m. and 8 p.m., but is not allowed to enter on a holiday or on the tenant’s day of religious worship. The landlord can enter on a Sunday if the tenant’s day of religious worship is not a Sunday and the tenant has provided the landlord with a written notice of that day.

My advice to the owner or agent. Post a notice, leave voice mails, text messages, or whatever, and then just go. I’m presuming you have keys, but just go. If nothing else the tenant who refuses access usually has committed a substantial breach such as having 5 roommates, having trashed the place or is otherwise contravening the lease.

Notice to Vacate (Fixed-term leases vs month to month)

If your tenant is on a fixed term lease you’ve got a double edged sword. First, you can’t break a fixed term lease, no matter what the purchase agreement or the lease says. You’ve got to wait until the lease expires however you’re not obligated to renew the lease or go to month to month. Your only other legal option here is eviction for substantial breach. There’s one more option I’ll talk about at the end.

If your tenant is on a month to month lease, you’ve got more options. I’m going to quote Service Alberta again (emphasis mine).

The only reasons landlords can terminate periodic tenancies are:

  • the landlord or a relative of the landlord intends to occupy the premises,
  • the landlord has entered into an agreement to sell the premises and all the conditions of the sale have been satisfied or waived, or the agreement is to sell one detached or semi-detached dwelling unit and/or condominium unit, and the purchaser requests in writing that the landlord give the tenant a notice to terminate the tenancy,
  • the landlord intends to demolish the building in which the premises are located or make major renovations requiring the premises to be unoccupied,
  • the premises will be used for a non-residential purpose,
  • the landlord is an educational institution and the tenant is or will no longer be a student,
  • the premises rented are subsidized public housing and the tenant is no longer eligible for such housing, has not reported income respecting eligibility or the public funding for the program is cancelled,
  • the tenant is employed by the landlord and the employment is terminated,
  • the premises are being converted to condominium use, or
  • if a tenant has committed a substantial breach of the tenancy agreement.

Now please note that you still have to give 90 days notice when the purchaser has requested vacant possession. That’s 90 days from the end of the month they’re supposed to vacate, so it can be closer to 120 days in practice.

Family/Substantial Renovations

The smart reader who actually went down the list of reasons to terminate above will be asking if we can use family or renos as a reason. Yes, but you actually have to take the action required. The notice periods aren’t fun either. For condo conversion or substantial renos, you need a full year notice. For family or owner occupation you can get away with “just” 90 days. **Note that if you’re buying it for a rental you can’t use these reasons to terminate the old tenants’ lease and put your own tenant in. I’m not saying it doesn’t happen but if a well informed tenant wants to they can force you to rent to them.

The long story short is that fixed term leases seem more rigid but they’re actually easier if you have a difficult tenant because you can just not renew the lease and the tenant has no recourse.

Pictures

It’s tough to do pictures and respect the tenant’s privacy. First, the entire process we undergo requires we be professional and above board. Tenants need to understand we’re respecting the law and trying to make the process as painless as possible for all parties. This is not the time to take out your frustration on your tenants.

Three tips for pictures:

  1. Get their permission in writing. Realtors have a form we can use (see AREA’s webforms), but just a simple written agreement will do in most cases.
  2. Do your best to protect their privacy and let them know that you’re doing it. Give them lots of advance notice of the date you or your photographer is shooting. Encourage them to do a quick clean for things like personal photos, utility bills, underwear or expensive possessions that can be easily moved.
  3. Be realistic with your photos. If you do a super-clean and make the property look too good, you’ll attract unqualified buyers who will just walk away when they see the mess that is reality for your tenant.

Showings

I have three great tips for managing showings and one thing that drives me nuts.

First, refer to my first point above – tenants cannot refuse showings except for holidays, showings after 8pm or on days of religious worship. It might suck, and they might decide to sit at home and be nasty, but they can’t stop you from coming in.

Second, I often get owners to buy a stack of $5 gift cards to Tim Hortons or Starbucks. Every time I show, I leave a gift card and a thank you note. You’d be shocked at how quickly tenants get onside when you give them treats. I guess they’re much like toddlers.

Third, give advance notice for showing windows. Imagine that instead of giving 24 hour notice and setting up a showing every time you get a request, you give  the tenants a letter on Monday morning with notice for Tuesday, Thursday and Saturday afternoon between 2-6pm. That fulfils your legal requirement for notice, and then you follow up with a phone call or text for actually scheduled showings. I prefer to work out a good time with tenants ahead of time and keep everyone happy. Paper letters like this help keep tenants happy and cooperative because then they really see that you’re working hard to fulfil the legal obligations you’re all working under.

However, Realtors, please don’t have buyers agents contact the tenant directly. I might be polite but there’s a lot of morons out there who will harass your tenant with 1 hour notice attempted showings.

Sneaky Tricks

Ok, so you might have the perfect buyer who is paying $10,000 over market but needs possession in 45 days. Here’s a couple ideas to help.

First, help them find a new place. Call, email and post messages for other investors who might have a space. Maybe you even want to buy another property knowing you’ve got a great tenant.

Second, offer them cash. I’m usually a fan of paying their first month’s rent and security deposit. If you’re getting a premium or solving a problem a couple grand is less of a problem than a frustrated sale.

 

Owners, you need to read and understand the Residential Tenancies Act and the Ministerial Regulation. There’s other strategies we’ve learned over the years, but that’ll have to wait for another blog post. Give me a shout if you have any questions or if there’s any way I can help.

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