WIN179. How Rising Interest Rates Are Reshaping Multifamily Investing with Ben Murphy

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AJ: All right. Today we've got Ben Murphy with us. Ben is a seasoned multifamily broker. We are excited to hear some of his opinions today. Ben, do you want to just introduce yourself a little bit to our audience?

Ben: Sure. Well, AJ and Chris, I appreciate you having me back on. It's been at least two, maybe two and a half years. Lot has transpired in that span of time. So I'm excited to kind of go over this with you guys.

I've been a broker about twelve years, multifamily space in the Portland area, we work all over the state as well as Southwest Washington Initially with Tilbury Ferguson Investment Real Estate, Liz and I parted ways in early twenty twenty four. I now work with a company called Commercial Integrity Northwest and I'm the director of multifamily for that company. And yeah, excited to chat with you guys today.

Chris: You also own what 25 or 40 units or

Ben: I'm up to 40 Chris, don't short change me.

Chris: No, sorry. I said 25 or 40.

Ben: That's okay. You were right. And nothing compared to the uptown portfolio, but we all got to start somewhere, right? I still believe in investing in blue states very long term is the best way to go and I have no plans to sell anytime soon. So as a broker buying real estate, I think the smart ones do it over the long run.

There's so many tax advantages. So, I mean, this isn't news to you guys, but that does help me having a little bit of an owner perspective too, to kind of share I'm prospecting.

Chris: Yeah, I'm excited to chat a little bit about Blue States and as well, you have some red state marketing or a market perspective as well.

Ben: Yeah, I moved to Dallas about a year ago, a year and a half ago now. Wow. And I'm splitting time between Dallas and Portland. So definitely a unique, it feels like I'm living in two worlds. Currently, I'm 99% still Portland based as far as my transaction volume, but long run, I did just get licensed in Texas.

We want to kind of have more national exposure through our firm to buyers and investors. So we thought having kind of a Sunbelt presence was a good move for our firm long term. So that was kind of the idea behind that.

Chris: I feel like the Sunbelt and the Pacific Northwest kind of have a opposite market cycle almost. Very interesting. When Portland was booming in 2017, 'eighteen, Atlanta and, mean Hey, that was I wasn't hearing much about Texas. Austin was blowing up, but yeah, I feel like the market cycles are, there's some nice balance to being Sunbelt and then Northwest.

AJ: I mean, I think all the markets kind of trend in directions, but it does seem that like the Pacific Northwest might be a little offset, like either we're early or we're late in some instances, like you were saying, the Sunbelt kind of just getting discovered to 2015 to 2018 and really ran up while we were kind of in our boom.

Ben: It's interesting when you look at the West Coast guys, because it's more consistent. Yes, we're in a downturn right now and I think we will be throughout 2026 and I think we'll bottom out this year as far as commercial real estate values, but generally speaking, you look at like Texas or Florida or even Phoenix or some of these more urban sprawl ish type markets that have so much supply that delivers in a short period of time, you see cap rates expand and contract at a pace that is 3x, 4x what we're used to seeing in Portland or Seattle or San Francisco. Not to say our markets don't have ups and downs, obviously they do, but it's more severe in these other regions. So part of my reason for loving investing in blue states is the consistency there.

AJ: You know, I think that's really correct. You know, when Chris and I first started investing, we got in at 2007, like top of the market, but luckily we were only buying like one or two at a time then. But we definitely noticed and like we knew of people buying stuff at auction down in Phoenix and it's like really like boom or bust. I mean, were buying properties that were for $20.25 ks at the auction and normally would be going for at that time, 200 to 300 ks. So just that supply comes in the sunbelt with less regulations and everything like that really does play into the market and really plays into buying existing product and the value of it.

Ben: Yeah.

Chris: I mean, AJ, you bring up an interesting point of the oversupply from 2004, February '6, and that all played out through a huge debt crisis. We're kind of experiencing a similar, maybe not as big of an oversupply, but without the debt crisis. And so that, I mean, we're lucky we don't have a debt crisis because yes, credit is certainly a lot tighter. It's harder to get loans. I mean, honestly, my experience with Freddie Mac, basically any bank is that they promise you something and then they cut your proceeds 10 or 15% and say, take it or leave it.

Whereas during boom times, they're like, how much money do you want?

Ben: Yeah. The lending climate, everybody was like pretend and extend, right? And then we can say survive till '25 and here we are in 2026 and we haven't seen the distress, the systemic distress that I think a lot of the commercial real estate market was expecting, Portland has some office towers and stuff, but like, that have gone back to banks, but there's nothing like, we're multifamily guys, right? All of us here. Generally speaking, there's a handful, you could probably count them on one hand of like class A apartment deals that have gone back to the bank in the last couple of years in the Portland market, but looking at the grand scheme and size of our market, that's a very minuscule proportion relative to the overall product.

So it's interesting because I know in other markets, it's a much higher level, at least from what I'm hearing.

Chris: That is a great anecdote. I feel like we've hit some anecdotal feelings about the markets. Ben, you mentioned that you came with some hard data, at least when it comes to prospecting and in a couple other areas. Excited to hear it.

Ben: We use a CRM, it's just a Salesforce product, but I kind of reflected before this call on 2025 and just I'm a numbers guy and I'm a believer, like if you can't look back and kind of quantify things, it's hard to really goal set for the next year and understand kind of where you want to be as a broker. Personal goals aside, this is purely kind of professional goals. So I use this to kind of set my 2026 kind of aspiration, so I look back and I had made 2,985 cold calls, of those calls that led to 93 BOVs, fancy acronym for evaluation, so just a free property valuation we do for owners, of those 93 BOVs that led to 18 listings, of those 18 listings we closed 10 deals, so a little over 50% close rate and then of those 10 closings, four were actively listed, four were off market meaning, we brought an unsolicited offer from a buyer it was right place, right time and we closed the deal and two of those were buy sign commissions. So I guess dissecting those 10 closings and unpacking that a little further, the total sales volume on those 10 deals was 45,840,000, total of two sixty units, aggregate price per unit was $161,841 getting really granular here guys and cost per foot was $215 a foot and the cap rate, this is an in place cap rate on current rents not pro form a was 5.65%.

Chris: 5.65 that is much higher than what we thought we'd be selling at five years ago.

Ben: Totally and I should preface this with, I compared this to my last 12, I've got an Excel spreadsheet and I would say we're kind of a decade there, like 2014 running up through 2020, 2021, so maybe eight years, I looked at the average cap rates for each year on all the deals I've closed and they were generally between four point five and five and you saw 50 to 75 or so basis point increase 2021 till now, maybe 50 to 100 basis points. So yeah, the last three or so years. Sorry,

Chris: say that again, Ben.

Ben: Sorry, Chris, the last one was transaction volume was down. I look back over that time span and it was like, I typically close 75 to a $100,000,000 a year. And I'm about 45,000,000 this year. So kind of half of my normal volume.

AJ: My understanding from kind of like all the economic reports, seeing multifamily Northwest and some of the other national guys, transactional volume across the nation was down like 75% in 2023, 2024, like 2025 it's climbed. But certainly I don't think we're back to the transactional volume we saw pre COVID.

Ben: Yeah.

Chris: Would 'twenty three and 'twenty four, were those years also lower transaction volume?

Ben: I can tell you right now.

Chris: Because anecdotally, feels like it was impossible to sell anything. We still have one property that we're trying to sell that we listed in 2023. The deal we eventually closed with you, we also listed that in 2023, our Nineplex in Tualatin, which probably didn't bring up your average, but we did sell it for over 200 ks a door. So we had a lot of square footage on those.

Ben: Yeah, so 2024, volume was 67,000,000. So it was a little bit higher than 2025. The cap rates were a little lower 5.4%, 151 a door average price per door, but going back to the peak for example, like 2020 average cap rate on my closed sales is 5%, 2019 was 5.3%, 2018 was 4.9%. So we've seen a pretty rapid expansion in cap rates and I don't think a lot of people anticipated such an adjustment.

AJ: Yeah, I mean, nobody predicted interest rates would rise so much and they're not directly correlated, but it certainly limits the buying power of and the ability of buyers with interest rates higher, you've got to lower your loan to value, which means you got to come up with more cash. So they're related but not directly correlated.

Ben: And owners, I mean, Chris, you touched on this earlier with credit kind of being locked up, like if you can't refinance to A) fund capital improvements, whether it's plumbing or electrical or roofs or windows or siding or B) buy another deal, which most people can't, right? Who wants to give up a three or three and a quarter rate early, right? That's why we're seeing such stagnant transaction volume, right? And people really avoiding older vintage assets.

Chris: Well, there was also the insurance just reshuffle. I mean, we experienced it with American Family exiting the Portland market, and we had to find new insurance carriers. And essentially, it just led to us having to pay 50% more in insurance. And you're talking about cap rates, but as well, I guess what isn't reflected in the cap rate is the huge expansion in expenses. Not only have your profit, your net operating income dollars worth less, but you're getting less of those net operating income dollars because utilities, I think I looked at it and utilities are up 75% in the past five years, and insurance is up 50%.

I mean, the cost of labor is significant. The only thing that's not really up are management fees, because they're just a percentage of the income. And it's just so interesting that it's so I mean, yeah, properties aren't going back to the bank, but they're worth significantly less on paper.

Ben: Yeah, I mean, NOIs eroded, right? If you have rent growth that's muted at 3% to 5% a year and for Portland, that's low relative to the last decade and in many cases, rents are flat, if you're at market rents are probably more flat, if you're a bit under market, you're still seeing maybe 3% to 5% annual growth, but then expenses are going up, I don't know, 8% to 10% annually, so double Yeah. And you combine it with higher borrowing costs. Yeah. That's why values are down 30 to 40%.

AJ: So Ben, of like given all this information and what you talked about, you know, 2026 bottoming out, I guess kind of what, you know, what substantiates that opinion?

Ben: Yeah, I guess, well, first of all, I'm a broker, so I'm a glass half full coming. I think that the supply glut is something that is serious and rents have to rebound purely from a supply standpoint. Portland historically had 8,000 to 12,000 units coming online a year in the MSA and I think right now we have 700 in the plan and proposed phases, so a fraction 8% or 10% of what we normally see. So from that standpoint, to get NOI growth back, we're going to need to see rent growth obviously and I think that will happen purely from a deliveries like a new unit delivery standpoint and very limited plan and proposed product in the pipeline. I also think that rates are going to come down maybe 50 or so basis points this year, if we normalize around five instead of 5.5, that does move the needle quite a bit and I think we're seeing a resurgence in people, I'm hearing this from investors and buyers being skittish of those red state Sunbelt markets that are currently really struggling to absorb a ton of supply.

Chris: Portland is struggling to absorb supply for sure.

Ben: But it's all relative, right? Our amount of units is minuscule compared to some of these other markets.

Chris: Interesting. I I guess we were chatting about this yesterday at our quarterly meeting. We saw an article that said that there's 2,000 affordable units that are sitting vacant. It's almost I think it's like seven or 8% of the affordable homes available in the area out of the 25,000. And most of that product is new.

And just looking at those listings and the concessions that are being offered, two or three months free, and rents capped at $1,300 for a new one bedroom and, like, $14.50 for a a new two bedroom with huge concessions. And it's I mean,

AJ: given the fact that, you know, Home Forward came out with a letter saying, no rent increases. I mean, they're probably not adding more people into the program. So those things are probably going to sit vacant or maybe some of those section eight vouchers move around, but ultimately, unless they move from a market rate property into the affordable, like that absorption is probably gonna stick around for quite a bit of time just because there's not gonna be new applicants would be my guess.

Ben: I also think there is a lack of tenants that qualify.

Chris: Yeah, that's probably true too.

Ben: Part of that, she wouldn't look at the income threshold to rent at some of those projects. I mean, that's a guess, but I know enough about tenant screening and kind of where rents are, but the letter, AJ, you mentioned is interesting. I've had multiple owners bring this up in the last few months.

AJ: I read another thing today actually says that we're not allowed to raise rents on these section eight people according to that letter, which it just boggles my mind. I I can't imagine that as a, you know, landlord that's required to allow section eight in to then, you know, allow them in and then we can't screen off of it. So we can't deny them just because of that fact. But then they can come back and tell us that we can't raise rent on them. I mean, I think that that's something that's probably gonna have to get handled out in the courts by someone.

And unfortunately, court process is gonna take way too long then. So it just won't come into effect.

Ben: It's unfortunate. I'm sure your market rate tenant would also love to not have their rent increased. Yeah.

Chris: Right. That

Ben: doesn't seem too fair. Yeah.

AJ: Well, Ben, while we got you here, we had our quarterly meeting yesterday and we started syndicating around twenty twenty. So we've got some new, we got some more properties that we're gonna have to probably dispose of in the coming years. And, we sold the sixty eighth with you earlier this year. And that was our first kind of 10/31 through a syndication. That was a new process for us.

We were super excited to take some investors with us onto the next project. But from a asset standpoint, like what sort of advice or kind of recommendations can you give us with regarding to financials, actually physical attributes of the asset to like really poise it for a good sale?

Chris: Yeah, I mean, CapEx or trying to achieve a highest new rent, possibly with a bunch of concessions, just go with like, what really moves the needle when it comes to like, is that highest achieved, like that big of a deal or yeah, let us know.

Ben: I would say illustrating upside, but leaving something out for the next guy, some meat on the bones. So if you could, and some of this is out of your control because you have more turnover than you're expecting or what have you, but if you can renovate, like I've had the best luck when owners renovate like a quarter of the units, 25% to 30% of the units that illustrate a rent that is 30% to 40% higher than the average in place rent and there's kind of proven upside and a track record that the broker selling the deal can point to, but honestly, we're in a rental market right now that will pay more for a unit that's well managed, safe, clean, it doesn't have to have all the bells and whistles And I guess what I mean by that is you need to be really careful right now to over improve in your units. I think, the age of like throwing granite and all new cabinet boxes and appliances and tile backsplash and like the full shebang, the ROI is not there right now for that. So I would say be judicious about your turns, you will get a good 25% to 30% bump spending 5 to $8 a unit and not going that full blown 20 to 25 and almost gutting and redoing all the finishes.

Proving that high rent out on maybe a quarter of the units, having clean books and records and avoiding delinquency and age receivables as much as you can is really important as well. Lenders are extremely, extremely just picky about delinquency. I'm

AJ: kind of curious about the quality of the renovation that you talked about. I mean, our outlook is we've always been long term investors. I mean, do you think that that is a myopic view given like the circumstance that we've been in for the last, like, or two years? But as supply you mentioned is probably slowing down and absorptions gonna be up like the differentiating and maybe not this year, but maybe next year, maybe the following year, like those granite countertops and that other thing might be a large differentiator in rent as it once was?

Ben: I mean, yeah, I think right now it's just managing expenses. Like I think the best thing, a property management firm and you guys are vertically integrated with Uptown, which is great. So you kind of like you're driving the bus and you've kind of got like different tranches in your company. So you're able to like manage the renovations, manage the property, but I think placing good tenants in your buildings that pay rent on time, yes, you may not be getting tippity top market rent, but focusing less on making the units really, really nice because the problem is when you spend all that money on a rehab and a renovation, what I found is a lot of owners sacrifice the quality of tenant, they kind of like they have to settle for somebody that might on the face level say they're going to pay that rent and they stop paying or there's an eventual eviction and it just destroys operations. So I would say

AJ: Is that because of the price of the unit? Because we've, say we've put $20.30 ks into it and we're expecting a larger rent bump and there's less applicants.

Ben: That's part of it. And then

AJ: you have to sacrifice the quality of the tenant because there's less people applying.

Ben: Correct. I mean, price point is part of it, the rent level, but the other part of it is like, there's going be pressure on you guys as the operator to rent that unit quicker when you know you have 20,000 to $25,000 of cost to recoup and naturally I found owners and management companies sacrifice whatever it is and screening the tenant just to get somebody in there so that can come back to bite you on an operation side and I've seen it really often where people over improve units, they end up kind of doing a heads on beds type leasing approach and it just, it's tough to operate through that and it snowballs from there. It also helps to show like, look, we rented a unit for $1,600 a two bedroom unit, highest achieves $1,800 let the next guy deal with that, right? Like everybody wants some form of upside and a lot of times the buyer will pay you for that upside and you don't even have to go to the work to prove it out. And in prove it out, mean, have all of your rents at that level, you can illustrate it's achievable, but it's not like you have to show, look, every unit's remodeled, I can get 1,800 across the board.

So

AJ: having the one or two units with like the highest achievable is pretty important like before disposition?

Ben: Yes, I would say so.

AJ: Like, I guess maybe what sort of timeline, like if we're looking at disposing something like how, like how early should we be kind of like looking at these sort of things?

Ben: Yeah, I mean, typically, I mean, that's kind of a tough one to weigh in on as far as

AJ: Well, I mean, like from our perspective, we getting the highest achievable rent right now in the middle of winter, this is not going to be our best outcome. Whereas if we wait until May or June and we select one of our best units and try to get that highest achieved, Then we come into winter or even next year where we can say, Hey, you know, maybe we list it next January or something and hopefully have a sale complete by May or June the following year.

Ben: Yeah, seasonally I've had the most traction every spring and that's, that hasn't changed in twelve years of doing this. So I'd say if you are flexible from a timing standpoint, hitting the market in like March, April for kind of blasts in late spring, early summer is the best approach. So it's like thinking about it the prior summer. So thinking about it

AJ: from like July until September, like starting to think like, how are we going to position this asset so that like, we're entering in with a broker maybe December, January and like listing what, like February, March? Like what's kind of like, from what you've seen, like the ideal situation?

Ben: Yeah. I mean, it takes us about a month to get all the marketing material together typically. Then, we usually actually blast it out in an email like a month thereafter and start doing property tours. So, I mean, there's no like set formula, AJ, every owner's different. It's, yeah, I mean, I think to the extent like, are you, I mean, this is a question I would pitch back to you guys.

Are you even doing 9.9% right now on turnovers?

AJ: Mean, with tenants that we don't want, like, yes. You know, we're also trying to gear people towards leases. So we will put in a higher rent increase on a month to month and then offer a lower rent increase for a lease. But I mean, we're I wanna say we're seeing somewhere between like 27% depending on the asset.

Chris: Well, mean, if we have a unit that's $500 under market. Yeah.

AJ: I mean, those are outliers.

Chris: One of the deals, the deal in Milwaukee that you sent us or sold us a year

AJ: and a half ago. No. Nobody's moved out of that one.

Chris: With the rents, the two bedroom rents at $900, yes, we're doing 9.9 over there. We've got a few units where we have ten years of 9.9 rent increases scheduled out. But aside from those, anybody who's within 10 or 15% of market rent, we're sending a small increase. We're really trying to avoid not increasing or decreasing the rent, but sometimes it's very, very small.

AJ: You know, in in a, you know, kind of like all the property management realm that I've been in and even advice from our dad was like, it doesn't matter what happens. Like you always you wanna train your tenant to expect receiving something. Like, even if it's a nominal increase, a 1% or a half a percent, setting them up and training them that every year, our taxes go up, our insurance goes up, everything goes up. So even just that it's going to be something. Because that's where I think you get know, some of the properties that you sell or bring us is like, you know, these self managed people are like, oh, I'm not I don't wanna be diligent with the property management.

Like there it covers the mortgage. I'm making money. You know, I'll just like, let it ride. But really just being diligent about having them get used to something.

Chris: Yeah. Ben, I have a couple questions. So there's a lot of different versions of the language of how to achieve the highest sales price, price per door, price per square foot, cap rate. I mean, but in the end, when someone's selling a property, they want to get the most that they can out of it. And so how do you navigate the language when it comes to deciding how to choose which way to, I guess, advertise it or which way to yeah.

And then I guess I've got a few more questions, but I'm interested in that right now.

Ben: So we try to look at it through the buyer's lens, right? And generally speaking, if I can illustrate cap rate aside, because cap rate is subjective, right? Everybody thinks they can get certain rents. Maybe they can, maybe they can't, everybody underwrites expenses. Sometimes they use actuals for utilities and taxes and insurance typically, and then often they'll estimate the other stuff.

So it's like the cap rate can change a lot, whether you're a buyer, seller, a broker, a lender, whoever, but looking at it through the buyer's lens, I would say if I could illustrate north of a 7% unlevered yield on cost, generally I can get traction with buyers. Unlevered meaning we're not factoring in debt or leverage and that's basically just looking at the cash, I guess another way to look at it would be the cash on cash return for day one when you purchase an asset. So taking the NOI divided by the, sorry, the cash flow after the debt service divided by the initial investment, which would be your down payment plus all your loan fees and closing costs. So if you can be 7% or higher, generally I found that is a way to back into pricing that's realistic.

AJ: And that wouldn't include any CapEx costs, That's just literally for purchasing the property.

Ben: Correct, that would be below the line. So that's, you know, standard operating expenses. Yeah.

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Chris: And so if there is deferred maintenance, calculus gets a little more complicated.

Ben: It does, so I guess, yes, you would have to sort of budget for those non recurring CapEx items. That 7% number is assuming there's no deferred maintenance. When there is deferred maintenance, it typically means there's like way more upside. You kind of got to look at it, the formulas get a little different, right? If you're completely redoing the building envelope and enhancing the curb appeal and spending 30,000 a door on that, it's very likely you're going to get much higher rents too.

So sometimes those offset each other, right?

Chris: So when you have an older asset that can, I guess, that you could spend a lot of CapEx on? When it comes to getting a property ready for sale, and when you don't have a huge budget and you're selling something as a value add, what are the small things that move the needle, I guess, in the eyes of a buyer that should get done prior to listing?

Ben: I would say, yeah, I mean, low hanging fruit for a seller who's kind of on the fence or looking at like how to maximize value in the near term, signage, landscaping, exterior lighting, paint, trim, right? I mean, like in the grand scheme of things, can be expensive, striping a parking lot or even doing like a slurry coat can really help tree trimming. A lot of this is more exterior related, I think. Yeah, those are a few that come to mind.

Chris: I mean, seems like all of that stuff would also increase rents. If it's more visually appealing, if the exterior is more visually appealing, like if the paint is crisp, there's good signage and good lighting at night, that would seem like, it might pay for itself.

Ben: I agree and what I've found is owners who kinda judiciously watch costs but improve the curb appeal, the kind of common areas when they're delivering those rent increases on lease renewal, the tenants are way more receptive because they're seeing, we're all getting a mutual benefit here. I'm not getting a rent increase because you renovated my neighbor's unit. I'm getting a rent increase because of the general appeal, safety, the cleanliness of the property I live at is improved. So I found operations wise, as far as maximizing income, those are kind of great ways to position an asset for sale. Those kind of low hanging exterior items I mentioned.

Chris: Yeah, I mean, even if you're not selling, making sure that those items are being paid attention to. I mean, I'll throw in gutters, having clean gutters, especially if the inspection if it's raining. Clean roofs.

Ben: Has been privacy. Fencing has been really good. There's some depending on the location, like a security gate too, but yeah, like little private, like smaller things, if you're filling in a pool too, barbecue areas or a dog run, that has been really well received too, so.

Chris: Interesting. We had a lot of success creating private fenced areas at one of our properties. And that Yeah.

AJ: The the newest one that we bought, we're planning on putting in the fenced areas. It's just, you know, the what we found on that deal, which was awesome, was that, you know, our common area landscaping reduced as a cost and the value to the tenant went up. So pushing on, you know, the cost of the landscaping by enclosing it to the tenant made a big difference and it was a good project.

Ben: Are you planning to fully enclose it or is it partial sort of like side by side kind of quasi private backyards?

AJ: For this, the new one, that we did on Cloverleaf, we, we, there's actually no, no backyard access, so we have to remove a window and put in a sliding glass door and we'll fully fully enclose a backyard for each, unit that's on the Ground Floor. And, you know, we're there's there's a significant amount of area that is land that so, I mean, they'll they'll actually be, like, fairly good sized backyards. And, you know, people that have pets love that ability rather than, you know, having to, you know, get out of their PJs and put on shoes and, you know, get out from under the the TV to go walk their their their pet.

Chris: And you get to charge pet rent too. So it's Or instead of charging pet rent, it just more easily garners a higher rent. And I guess one of the things that we found in Portland is that people love their pets. And if you don't accept pets, then that really limits the tenant pool.

Ben: Yeah. And again, I think I've seen property inspections, you know, walk throughs at no pet properties, the quality of tenant is horrible. So you're kind of giving up, Can you collect a larger security deposit or no? That deposit. That risk pet rent, security deposit, that stuff helps miscellaneous income.

So yeah.

AJ: So I think we, you you really kind of dived into the physical attributes of the asset, but what like, give us, can you give us some examples of like what you've seen on some financials and like what suggestions you've made to people to kind of like get the properties books ready for sale?

Ben: Yeah, I would say everybody has a little bit of a different definition of CapEx and I think it depends on your bookkeeper and your CPA and your kind of risk tolerance, but I'll just kind of go like general, like middle of the road here on what I'm used to seeing and what I recommend to owners. If you're redoing a unit with all new, like LVT or LVP flooring, like I've seen a lot of people put that below the line, obviously windows, roofing, siding, plumbing, electrical, all should be shown below NOI. Cleaning up aged receivables is huge on the income side and I've actually had some owners, I've advised them to pay off debt prior to going into marketing, so there's not some 10,000 or $15,000 balance due, not everybody agrees, but it has come back to

Chris: When you say pay off debt, you mean either evict a tenant that has a large past due balance or forgive it?

Ben: Forgive it. Yeah,

Chris: What about past tenants? I mean, when it comes to, I guess, aged receivables, most of the time, we're not sending It's only current tenants that we send age receivables for to lenders at least. Correct.

Ben: I guess I should rephrase this comment on delinquency because I've actually done it two ways. We've also handled it when we're in escrow, having the owner pay the buyer the balance due prior to going for loan app to clear that up. So it's not showing on a thirty, sixty, ninety day plus day AR with a bunch of active rent that basically that tenants timeline has started over. It's been forgiven. So we've done it that way as well.

But Chris, your question was?

Chris: I mean, when it comes to current tenants that have aged receivables, like whether it's utilities or rent, the options are to either forgive that tenant's rent or aged receivable or to evict them or I guess just keep sending them collections notices. We haven't strategized that at all. And so I guess I'm interested to hear, I guess, a little more on the conversation. I guess from the lending perspective, if there's large past due balances, it shows that I I guess that just shows that there's gross potential rent available. I guess, when you show the actual historical number, the amount of money collected, you know, I mean, most deals I'm underwriting right now, you know, I'm I'm taking a very hard look at the actual rent received in the past twelve months as opposed to taking a hard look at the rent roll.

Ben: I mean, what are eviction timelines right now in the city of Portland?

Chris: It's few months. The crazy thing

AJ: is Multnomah County has gotten better than Washington County, which

Chris: is Yeah, Multnomah's flip flopped. It's sixty months. Five days.

AJ: As an investor, we're like, yes, we want to buy stuff in Washington County specifically because the length of the timeline was less. And then now, you know, things have gotten stretched out. And this is just an example of like how, you know, some operational changes can really, you know, be a detriment to the, the investment.

Ben: We're positioning a deal for sale and you've got somebody that owes $10,000 in back due rent, you file an eviction on them, they'll be out in, let's say three months. What are the chances that you do, so you do evict them eventually, right? What are your chances you're getting those funds back when you send them to collections?

Chris: Like two or 3%?

Ben: Minimal, minimal,

Chris: than percent.

Ben: So my point, I guess, in thinking about positioning assets and I've talked to owners about this and some people are agreeable, some are like no way, but is why don't we forgive that rent when we're thinking about positioning it for sale and say, look, you have a clean slate, but a contingency or condition of me giving this to you is that you're going to be paying your rent going forward.

Chris: I mean,

Ben: there any legislative or landlord tenant law issues with an agreement like that? See, I'm not the proper manager, I'm just thinking as the broker outside the box, but that's something I've told owners as well, Maybe something for you guys to think about in Honestly, this

Chris: at a first appearance for an eviction, you can create a stipulated agreement with the tenant. And essentially, you can be like, hey, I will forgive your rent as long as you pay going forward on time.

Ben: So you have a double benefit. The AR goes away.

Chris: AR goes away. They start paying. But then if they violate that agreement, you can evict them immediately. You don't have to wait for another trial. That's a pretty powerful Bargaining tool.

Yeah, I mean, if you can do that stipulated agreement at the courthouse. I recently attended a first appearance in Washington County and our tenant who hasn't paid rent since December said that he wanted five months or $10,000 in cash to vacate. I wish I would have said, all right, we'll forgive your rent as long as you pay going forward. And I guess I wonder how long that stipulated agreement could last for.

Ben: It's something to think about and I think in positioning an asset for sale, if you do have some delinquency that is going to hurt us and probably whittle away our loan dollars, that's a to creative think about.

Chris: Yeah, because those first appearances, you can get them in a couple of months, or sorry, in a couple of weeks. So usually it's fifteen ish days from when you file for eviction. And so if you can get creative on those, yeah, that's a powerful, I guess, idea or tool that I thought a little bit about. But, I mean, the way that from your perspective, it's that's huge. Cool.

Well

AJ: What what other stuff on the p and l? I mean, we we we recently kind of have been discussing the, like, ancillary management fees and putting that as income on the p and l.

Ben: What do you mean by ancillary management fees? Late

AJ: fees and what other like lease break fees? NSF fees,

Chris: non compliance fees.

Ben: That should always be miscellaneous income.

Chris: Yeah. Yeah. It's money. Typically

AJ: our management contracts stipulates that that goes directly to the management company, but showing it on the P and L. And then additionally, as a cost shows the, you know, a higher rent or a higher, higher income, even though it still goes away on the cost.

Ben: Yeah. Mean, I would definitely love to see you guys clean that up and show, yeah, late fees, security deposit forfeitures, pet rent, whatever other miscellaneous income items all above. Yeah. On the income side of things. What else?

AJ: I mean, I know that we show rubs, you know, utility income and then utility payments. So it's kind of something similar to that.

Ben: And service of these third party billing companies are well worth the nominal per unit fee you pay. I don't know if you guys do it directly. I use a flat fee or if you use a third party.

AJ: No, we do it ourselves. Got accountants

Ben: for that do it. Okay.

Chris: But it has come back to bite us on the sending of notices and just the groaning of the entire complex of switching from either flat fee or some mishmash of systems to billing based on square footage.

AJ: Yeah, mean, nobody likes to change, so whenever you implement a change, there's always some friction. It doesn't matter what it is.

Ben: I just know with like conservatives, that's the one that most property management firms use. I want to say they charge like a dollar 50 a unit a month to handle everything and all the liability and risk has shifted onto them. If there's a screw up with disclosures or like paperwork or notices, I don't know. I mean, I haven't read this contract, but I've heard from other owners that their capture rate that they get for water sewer garbage is much higher than what they were previously getting using like a flat rate or a square footage or an occupancy formula. That's just what I've heard.

Chris: That's interesting. I mean, yeah, that's super interesting. And so do you think that having con service is, I guess, valuable than something that is implemented by a property management company because it's, I guess, more plug and play?

Ben: Yes, like it's easier to transfer.

Chris: Yeah.

Ben: So from a sales point and maximizing value, I would say yes.

Chris: Okay. What about like laundry, you know, and just that situation?

Ben: On-site laundry versus washer dryer hookups?

AJ: No. Well, say say say you're Coinmeter and, like, you know, they take, you know, 40%. Right? Like, do you show the 100% income and then the 40% payment to Coinmeter? Do I mean, is it worth it to bolster the income and then show the cost of, like, what it costs to pay their contract?

Chris: Or should you buy them out of the contract and then show 100% income?

Ben: Honestly, laundry income is so minimal in most cases. I don't necessarily see it really moving the needle, but you guys have a lot of smaller plexus and kind of properties that are in that four to 10 unit range. And if they do have on-site, I guess since it's a smaller complex, it does make up a larger, I don't know if you would agree with that, but.

AJ: With the last deal that we just did that the laundry income bolstered the proceeds by, I want to say it was like $100,000,000

Chris: Actually, Chase said, we know you're getting laundry income, we're just not going to use it.

Ben: It's actually really common for lenders just to completely ignore miscellaneous income as well. Not everybody, but yeah, I'm not surprised.

Chris: Yeah. All right. So laundry, just I mean, about other?

AJ: But I mean, if lenders don't look at it, but the buyers that are looking at the P and L when you present it to them, like they're the ones that are really making the decision, right?

Ben: That's a good point, AJ. Yes. And I would say buyers will almost more often than not give you credit for that.

AJ: Right. And that's, that's probably the reason to put like, you know, the pet rent and the miscellaneous, like late fees and other income on the the income line, you know, just larger cash flow kind of bolsters the value of an asset, even though, you know, the NOI stays the same, but showing that you've got more more cash flow, just it it's gotta add to a little bit of the leverage, doesn't it?

Ben: Yeah. It does.

Chris: Oh, I have one slight aside. So as far as, like, upgrading an older building, what upgrades make sense right now? How can you transition a, you know, c minus building to either a c plus or a b plus or b minus?

AJ: I mean, I didn't we kind of go over this where he's his opinion is, like not doing the b minus and going more for the c plus of like painting the cabinets and spending

Chris: Well, are that's interiors. But I mean

AJ: I mean, are you asking like if we're Like storage.

Chris: If there's space at a property, is it worth it to create storage?

Ben: If you have a property that's close in, in the inner city with mostly studios, yes, generally in the suburbs, it's a waste of time, Suburbs close in where you have more two story garden style, like one and two bedroom floor plans. I've very rarely seen storage. If it's like over 20% occupied, I'm surprised. As far as interior light rehab, it would be flooring, LVT, light fixtures, plumbing fixtures, respray the Formica counters, it's like $250, you can make it look really clean. It almost is hard surface looking without being a hard surface, but it looks clean.

Cabinet fronts and paint and trim, but again, avoid the heavy, heavy interior renovation expenses. And then exterior wise, we sort of touched on it already, the fencing, the landscaping, you know, lighting, roofing, well, you said clean gutters, which I agree with too.

AJ: Functional gutters, ones that are overflowing.

Chris: Yeah, probably dealing with storm water.

Ben: Definitely. I think that can come back to bite you as far as like washout and erosion and crawl space mitigation work.

Chris: Yeah. Yeah. But as far as making changes to floor plans or adding in unit washer and dryer, digging more. I mean, to me, the adding in unit washer and dryer is that moves the needle for tenants.

Ben: It definitely does. I mean, that will significantly enhance your leasing and give you a leg up to most of the competition in your immediate neighborhood, but again, it boils down to what's the return on cost there, first of all, can you vent it? Second of all, does that involve an electrical panel upgrade? Likely it does. And third, where does it fit?

Chris: Yeah. Do

Ben: it, but those are kind of three really big hurdles that can cause costs to go through the roof.

AJ: I got another kind of question, maybe a little bit similar. Chris and I are, I wouldn't say, arguing, but we have maybe a difference of opinion. The deal that we just bought, there's three two bedrooms and two one bedrooms on the ground unit. And so, you know, we're putting in these fences for all five of them no matter what. We're have to pull permits for those because we're, you know, changing a window to a door.

But the the laundry room is next to it's in between each of the one units. And so there's four buildings total. So we, you know, had this idea to remove two of the laundry rooms and add a bedroom to each of the one bedrooms, turn it into instead of, six, two bedrooms and four one bedrooms to ten two bedrooms. So, you know, increasing the square footage of four one bedrooms and and and increasing them to two bedrooms. I mean, probably overall cost, like the actual construction of it is minimal.

Like, it's putting up a wall and demoing some storage and putting in a door. The the cost really comes in on the architectural and the permitting. So I mean, my kind of like guesstimate is like 80 to 90 k to do all four units. I think you

Chris: need to quadruple that with the structural upgrades and the bringing in and we'll have to do, like, ADA requirements. And

AJ: Nope. Nope. Nope. I've I've talked to the architect about that. There's no ADA requirements.

It's underneath the threshold, you know, and we're already going in for permits for the fences and the doors. So this would just be kind of an add on. So I I might even be high on, some of the architectural costs because they're, you know, we we have some sunk cost in already doing these fences and putting the doors in. And so the additional cost to do these, like, four, you know, upgrades to two bedrooms.

Chris: Alright. Let's let's just call it 200 k.

AJ: No. Like, not even.

Chris: Like, that's a joke. You're saying it's 90? Yes. 80 to 89. 90.

So you're you're saying we can add these one bedrooms for less than $100 a foot? Yes.

Ben: That seems like, but I, AJ, you're the architect kind of engineer background. So I'm not questioning you. I would just say be very diligent and make sure that whoever comes out from the city or the county, I mean, somebody's going to inspect it, right? Yeah. Are they going to require like fire suppression sprinkler upgrades?

AJ: We've got an architect that is super familiar with the city of Portland, works with them all the time. Because there's 10 units in each building, because there's another five up the top, we're not modifying more than like 20 or 30% of the building. Like, we're literally taking use? What's that?

Ben: They're changing the use in the city's eyes or no?

AJ: No, it's a laundry room that's common area accessible by everyone and it's just changing it from common to private.

Ben: So, yeah, because the number of units isn't changing. No. Yep. That's what would maybe trigger. Okay.

Chris: But still the question is, we'd be removing half of the laundry rooms and

AJ: yeah, they'd have to walk 50 yards extra down to, but they, the way that it's set up configured currently is their their doors are on one side of the building, and then the door in the laundry room is on the backside. So they they already have to walk Yeah.

Chris: You know But third of the way there. The question is is, you know, is the one bedroom, is it Is that ruin the unit mix? Is it worth it to because I guess right now, all of our one bedrooms are rented. It's the two and the three bedrooms that are impossible to rent. And then that changes from time to time.

So I think it's an interesting question.

Ben: That is interesting. I would think the twos and the threes would be more full in this market with the rental climate being what it is and people wanting to room up.

AJ: And I mean, guess is that with the three bedrooms, the comparable cost to an actual house and the amenities that you get to a house, like it's just, instead of being in an apartment that doesn't necessarily have, like, the full amenities of, a gym and, like, you know, the other stuff that's associated with it, the the three bedrooms in our apartment complexes are very difficult right now. I I don't necessarily agree that the our two bedrooms are that much harder than the one bedrooms, but the jump from the two to three, I think, is is pretty significant.

Ben: Well, AJ, assuming you're willing to sign on the dotted line for Chris that it won't be more than 80 to $90,000 I think it would make sense.

AJ: At what price does it not make sense?

Ben: I'm nervous about that. I mean, I think it could be easily double that, but again, I'm again, I'm just not, a broker. I just, that sounds light, but you guys self perform on a lot of this stuff and I've seen you save costs in other

AJ: Well, I mean, but like this, it's directly next to the units. Right? You put in you have to put in one interior door and then you have to put in a devising wall in between the laundry room. And then you have to demo what's already in there. Like the actual construction is not a lot.

Like, the the more the more cost of the construction is gonna be changing the window to a sliding glass door. Like, that's gonna be a much more significant cost than, like, the actual, like, adding of the bedrooms. Yeah. I'm not saying that the entire project is gonna be 80 to 90 k. I'm saying that particular portion of the entire project is probably 60 to 85 k.

But you'd say it'd be worth it for that price?

Ben: Yes.

AJ: Yeah. To

Chris: remove laundry, which is kind of generating like maybe $200 a month, those laundry rooms. Then

AJ: The the all the all four units, it was like 500 a month. So each laundry room itself would be like 125, 150.

Chris: Oh, it was but for the three months that it was

AJ: about And also, Chris, just because you remove a laundry room doesn't mean that the laundry actually doesn't happen, right? Like they're just going to move locations. And so that income is not necessarily loss.

Ben: You may need to make sure you can add a machine or two in the other rooms if you need it.

AJ: Yeah.

Ben: If there's space.

Chris: It would be interesting to consider, having those units be in unit washer and dryer in the ones that we converted and potentially adding that to the adjacent units as well.

Ben: Because they're not some blanket room, so they have

AJ: That increases SDC fees because then you're adding plumbing fixtures and everything else like that adds a significant cost.

Chris: Like Well, thought SDC fees were free.

AJ: No. The SDC frees are waived for new units, not upgrading existing units and fixtures like

Chris: But it wouldn't be up adding fixtures. It would be repurposing them.

AJ: Correct. I that you could repurpose it for the the two upgrades because I believe that there's two washers and two dryers in there. So you just you keep those fixtures and just move them within those two one bedroom units that you're increasing to two bedroom units. So, I mean, that could be potentially part of the plan. But, you know, the adjacent two bedrooms, I I don't I I wouldn't foresee that being a good idea to add especially add washer and dryers to the other units, especially when the crawl space is being demised.

Like this particular property has a separate crawl space for each

Ben: unit. Woah.

AJ: Yeah.

Chris: Ben, as always, I mean, honestly, we could probably just keep going for, you know

AJ: We've actually got to get going.

Chris: We just keep going forever. It's like every time I get you on the phone, it's just like, oh shoot, my next appointment is now.

Ben: Mutual, my friend. I'll see you next week, so.

Chris: Yeah, poker night.

AJ: Yep. Oh, fun. I'm sorry. I'm gonna be missing it, but I wish you guys the best of time. Hear it's gonna be it's your birthday?

Chris: No. It's Archie. It's his son's birthday. Okay. Yeah.

We'll sing, we'll do a video message for Archer and send it to him. Well, with a giant stack of money in front of us.

Ben: There we go. Cool.

AJ: Well, Ben, it's been an absolute pleasure chatting with you. We've we've got your answers on our last four questions from your previous podcast. So this one's gone a little bit long too. So I think we're going to pass on those for this episode. But is there is there any parting kind of like wisdom that you want to give our listeners or if people have some more want to talk to you more about Portland market or the best way to get ahold of you?

Ben: Yeah, I would say just go to my company website, Commercial Integrity Northwest. You know, again, style of brokerage is I try not to be pushy, a lot of my clients and owners and the people I'm prospecting are big boys and girls and they can make their own decisions, but I want to be an advisor first and whether it leads to a sale or a commission down the line and hopefully it does eventually, I'm just an open book and I genuinely really just enjoy relationships and kind of molding those relationships and the uptown one is a great example where we've become good friends too out of it. And, you know, if you ever want to get ahold of me, all my contact info is on the website, cell phone, email, and, we can hop on a call, but yeah, we'll leave it at that.

AJ: Awesome. Well, thank you very much for coming on the show and sharing your knowledge and wisdom about the market. I know I learned a few things today.

Chris: Yeah. Thanks,

Ben: guys.

Chris: Thank you so much, man. Alright. Bye bye.

Intro speaker: Thank you for listening to this episode of the Real Estate Professionals Investing Podcast on WIN, your community of investing knowledge for growth. We hope that this episode has increased your knowledge and added value to your path to freedom.

AJ: If you would, please take a second to rate

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Chris: Thank you again, and enjoy your day.