Why you shouldn’t buy Rentals in Portland. And why it might be time to sell any you own.
Most Real Estate investors buy one or two rental properties to hold onto, expecting them to pay for themselves with rental income over time and eventually be a source of net income for the future and into retirement. So most of these investors don’t sell but hold for a long time.
The purchases are often a moment of opportunity, some extra cash on hand, or a house down the block that caused them to buy a rental. Maybe it was an inherited property that they just weren’t ready to part with, so it was converted to a rental. But after a few years of calls from tenants at odd hours, or working to find “good” tenants (or dealing with bad ones), the romance of being a landlord may have faded. Or maybe you just want to double down by spreading the accumulated equity across two or more “doors”. This leverage is a great way to achieve your long-term goals of increased cash flow without having to sell your time to make a living.
If you own rental property in the City of Portland, there may be another good reason to sell and reinvest elsewhere. Portland has created many rules the past few years in the wake of the shortage of affordable housing, and the influx of lots of investment in Portland Real Estate. It’s not just the small investors, but large institutional investment firms buying up buildings, terminating tenancy, renovating the buildings and reselling or re-renting for a very nice profit. Many have talked about this as some kind of evil plot against those making lower incomes or below the poverty level. But it’s just a factor of economics. More people moving here. A robust job market, an ever increasing demand for housing close to downtown, and a “cool” factor of living in the inner neighborhoods have driven up prices. That 2 BR bungalow in inner SE that used to be worth $175k, is going for $550k now. So it stands to reason that your rental property is worth a lot more than you may realize.
First a summary of some of the rules that have been enacted in case you haven’t kept up.
If you terminate a tenancy for any reason in the City of Portland, including raising the rent more than 9.9% and the tenant decides to move out; you are subject to paying the tenant a Mandatory Relocation Assistance Payment. All of these reasons trigger this payment (note item 3):
- Issuing an Increase Notice.
- Issuing a Termination Notice.
- Declining to renew or replace an expiring Rental Agreement.
- Declining to renew or replace an expiring Rental Agreement on substantially the same terms except for the amount of Rent or Associated Housing Costs.
There are very few exceptions to the relocation assistance payment, see this page for more information and how to apply for one of the exceptions: https://www.portlandoregon.gov/phb/76352
Because of the new rules in Portland, you may have to pay your tenants to vacate the property if you want to sell with the property empty. This can cost you from $1500-$4500 per unit. But before you jump off a cliff over the new “moving expense” rule, consider selling the property with tenants in place. A duplex or a larger multi-family apartment complex is usually sold with tenants in place. The leases with these tenants and the rent they represent going forward are a part of the value of your property. Which leads me to the next point -are you charging market-rate rent?
One of the ways we establish the value of a rental property is looking at it as a business. Because, well it is. The property itself had an initial acquisition cost, and you get that back at the time of sale. But along the way you have annual expenses for property taxes, repairs, advertising, property management, and debt service (I hope you have this because you make a lot more money getting loans than paying cash – but I’ll cover that in a future post). If you are not using a professional property manager, and/or have not had a tenant turnover in the last two years, then you may be well below market rent. This is one of the big rule changes in Portland, rental increase caps unless you compensate tenants to move out if they want. You can only raise your rent (in the City of Portland) by 9.9% per year and avoid the impact of these rules. So make sure you are raising it that much every year if the market supports that. And for the last 6-7 years, it has.
Should I sell or 1031 Exchange?
So you like the idea of selling, but then what? You were planning on long-term income from that rental to pay for retirement or to fund a college education. Ok, so what if you could double that long-term income and double the total value of your portfolio too? If you bought your rental before 2010, you probably have the equity needed to leverage your net equity into two properties, or at least into a 2-3 unit multiplex. This will make vacancy and turnover easier, make your cash flow more predictable, and leverage a larger asset value for appreciation. We have a partner that can do a one-on-one presentation with you to show the value of adding a rental every 2-5 years to your portfolio and how this turns into wealth and increased income over time.
You can also consider a 1031 Exchange which enables you to sell a property in Portland and then purchase a property in the Suburbs or in another state. This practice is a very common way to avoid paying capital gain taxes.
I can also do an analysis for you on the value of the property, and what it would look like to leverage the equity into another property and take on debt to better leverage your investment.
Read our blog post: How to Sell your Rentals and not Pay Capital Gains Tax