3 Factors to Consider in Exchanging Your Oregon Rental Property
At 1031 Capital Solutions, we have daily conversations with landlords contemplating selling their rental properties, many of which are single-family homes or small multi-unit residences. This article presents three key factors to consider before deciding that now is the time to sell/exchange: 1) regulatory, 2) economic and 3) personal timing.
1. Regulatory Timing.
Oregon has officially declared war on rental-property owners. This action reflects an alarmingly popular sentiment that rental housing belongs to the state, not its owners. Portland has gone a step further, imposing requirements almost guaranteed to trigger unintended violations. Indeed, the FAIR ordinance is anything but fair to non-corporate landlords, seemingly punished for investing in rental houses to generate income as an alternative to stocks and bonds.
A handful of opportunists likely could learn to exploit these new rules, preying on otherwise law-abiding landlords to obtain legalized shake-down payments. Some rental-property owners who never needed an attorney may soon have a landlord lawyer on speed-dial. From screening to security deposits to eviction, recent laws create many ways for owners to trip and fall.
And now Multnomah County has prevented landlords from evicting delinquent tenants. Tenants in arrears due to “loss of income related to COVID-19” have a six-month grace period—without late fees![1] How are retirees living on rental income supposed to pay their mortgages? Certainly not by liquidating their retirement accounts that just suffered an historic drop in value.
Do you feel that Oregon’s bias against landlords is a temporary fad, or a permanent change that may even worsen over time?
2. Economic Timing.
According to data compiled by Marcus & Millichap[2], the Portland area has experienced three very important trends since 2010:
- The average price per unit for apartments has nearly doubled
- The rate of employment growth rose from 2010 to 2015 but has since declined steadily, projected to be up 1% for 2020 (estimated before COVID-19)
- Roughly 30,000 apartments have been built since 2010, with another 5,600 units slated for construction in 2020
Most RHA members have enjoyed a solid decade of price growth, rent growth and steady occupancy. Yet for owners of rental SFRs, duplexes and condos—not to mention retail and restaurants—COVID-19 threatens to reduce landlords’ rental income, perhaps entirely. An entity that operates hundreds or thousands of apartment units has far less concentration risk than an owner of a few rental homes, whose tenants may all be impacted by COVID-19.
Do you think Portland’s ten-year trend of positive economic growth for landlords will continue, or will it flatten out, possibly even declining in the wake of COVID-19?
3. Personal Timing.
For many landlords contemplating a sale, the timing ultimately comes down to personal choice. To help you, we have developed a simple tool for gauging your emotional response to some common aspects of rental ownership. In each category, note how much you are bothered or stressed on a 1 to 5 scale, with 1 = not bothered at all and 5 = stressed out:
|
Pain Points |
Stress 1 to 5 |
Pain Points |
Stress 1 to 5 |
|
Unit turnover |
Exterior maintenance |
||
|
Advertising for available units |
Deferred capital expenditures |
||
|
Tenant screening rules |
Plumbing or electrical emergencies |
||
|
Tenant selection / discrimination rules |
Mortgage payments |
||
|
Documenting move-in conditions |
Bookkeeping and bill paying |
||
|
Documenting ongoing conditions |
Taxes and insurance premiums |
||
|
Dealing with tenant complaints |
Risk of late payments or non-payments |
||
|
Dealing with neighbor complaints |
Risk of property damage or vandalism |
||
|
Mold, termites and rodents |
Premises liability |
||
|
Interior maintenance |
Evicting tenants |
If your completed table has mostly 1s and 2s, then congratulations—you are a happy landlord! However, if you wrote mostly 4s and 5s, you may want to consider your options.
A Final Note About Selling and Exchanging
In our new regulatory environment, a rental-housing owner in Oregon can run afoul of the rules even when trying to sell. If your rental property is occupied, there are different rules that apply for selling to an investor versus selling to a buyer who intends to occupy the property. Be sure to work with an agent or broker who understands your local market, and consult with a professional who understands all applicable tenants-rights laws related to your transaction. Finally, if you intend to conduct a 1031 exchange, it is important to work with a good exchange accommodator and, most importantly, an experienced professional to help you find a suitable replacement property.
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Richard D. Gann, JD (“Rick”) is Managing Partner of 1031 Capital Solutions, serving the Pacific Northwest from the firm’s office in Lake Oswego. 1031 Capital Solutions’ mission is to provide tax-efficient strategies to real estate investors.
The contents of this article constitute neither an offer to sell nor a solicitation of an offer to buy any security which can only be made by prospectus. Investing in real estate and 1031 exchange replacement properties may not be suitable for all investors and may involve significant risks. These risks include, but are not limited to, lack of liquidity, limited transferability, conflicts of interest and real estate fluctuations based upon a number of factors, which may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover.
Investors should also understand all fees associated with a particular investment and how those fees could affect the overall performance of the investment. Neither 1031 Capital Solutions or its representatives, nor DFPG Investments, Inc. provide tax or legal advice, as such advice can only be provided by a qualified tax or legal professional, who all investors should consult prior to making any investment decision.
1031 Capital Solutions is a branch office of DFPG Investments, LLC. Securities and Investment Advisory Services offered through DFPG Investments, LLC.
[1] Multnomah County Executive Rule No. 388, March 11, 2020
[2] Marcus & Millichap, 2020 Multifamily North American Investment Forecast