Portland Oregon 2017

Real Estate Report

Nick Krautter Keller Williams Portland Central Principal Broker in Oregon SellPDX Team 503-703-5102 35 NE Weidler [email protected] Portland, Oregon 97232 2017 Portland Report P a g e | 1

For the 2017 edition of the Portland Real Estate Report we surveyed thousands of people in the Portland area; clients, realtors, lenders, and people from all walks of life. Real estate has a long history of following predictable cycles. With eleven years of experience in the and 260 million dollars of real estate sold here in Portland, I have a solid track record of helping clients make educated decisions on when and where to buy, sell, and invest.

In last year’s edition, we expanded to go deeply into the real questions that we received from buyers, sellers, brokers, investors, and others involved in Portland’s real estate scene. This year, however, just two questions came up again and again:

Question 1: Are we in a bubble? If not, when will the market peak? What are some black swan events that could hurt the market?

Question 2: What impact will the current City Hall and State government's focus on renters and rent control have upon real estate in Portland? What impacts can homeowners, , investors, buyers, sellers, and realtors expect?

I will start this report by sharing market trends and current opportunities. You will have access to home inventory and sales volume numbers; as the year unfolds, you can get updated reports each month at sellpdx.com. I will give you my answers to the most pressing questions about Portland real estate. I will cover the unique benefits of owning real estate including positive leverage. You will learn about the team of professionals that make up a successful real estate team and the roles they serve. I will discuss distressed , which are becoming rarer, but still present an opportunity for investment. I also will include trends for the metro market and the entire country for you to review. Finally, I will share a case study, including an actual APOD (Annual Operating Data) of an investment property I purchased and remodeled in Portland, and go into the different metrics investors use to make a buying or selling decision. This report will give you a solid working knowledge of the Portland market and a starting point for your journey in . To build out your skill base further, you can access even more valuable tools, guides, and videos at sellpdx.com/resources.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected] 2017 Portland Real Estate Report P a g e | 2

My hope is that you will learn from this report and get started investing in real estate, whether that is your first home or a portfolio of cash flow properties. If you find this report valuable, share on your social media pages so others can find it and get started on their journey as well. If you are planning on buying, selling, or investing, give me a call at (503) 703-5102 or email at [email protected] anytime -- my team and I can personally help you in the Portland metro area or help you find the right agent in your city.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 3

Market Trends ...... Page 4

Current Opportunities ...... Page 8

Your Most Pressing Questions ...... Page 10 How will rent control impact real estate in Portland?...... 10

Are we in a bubble market? ...... 18

Updated for 2017:

What is keeping the inventory so low? ...... 23

What are Portland’s next hot neighborhoods? ...... 25

What are Portland’s current hot neighborhoods? ...... 29

Is Portland becoming unaffordable? ...... 30

What are the current returns on investment property? ...... 32

Unique Benefits of Real Estate ...... Page 34

Positive Leverage ...... Page 35

Your Real Estate Team ...... Page 36

Distressed Properties ...... Page 38

Investment Case Study and APOD ...... Page 39

Appendices ...... Page 45 Mark Barry Report ...... 45

Portland Metro Apartment Construction Report ...... 48

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 4

Residential: The top stories of 2016, the fifth year of recovery, were the new records in both all-time high prices and all-time low inventory. Interest rates moved up to the mid 4% range to start the year, but ended back closer to 4%. Locally, we had the worst winter since 1940, and with multiple snow and ice storms the market had a slower December and January for sales. The presidential election also caused many people to put personal and business moves on hold until the direction of the government and economy became clear. The side effect of the boom in real estate was the city declaring a housing crisis due to both homelessness but more due to rapidly rising rents and from properties whose values have gone up significantly. The state of Oregon soon followed suit in early 2017 with Bill 2004 which would remove the state prohibition on cities enacting rent control if passed into law.

Can YOU Feel The Portland Housing Crisis?

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 5

Watch the video here: sellpdx.com/2015/10/can-you-feel-the-portland-housing-crisis

In the Portland metro area home prices shot up dramatically. According to RMLS the Metro area average home price is up 11.5% and the median is up 12.7%, which shows continued appreciation in a market where the average home is now $395,000. In the city homes are up 10%-20%. The Case/Shiller report showed the metro region up 9.5% which puts in the top tier for large cities in America. Oregon also maintained the number one spot for in-migration which is part of what is keeping home inventory at historical lows with 2016 ending at 1.3 months inventory. Are we in a bubble? In short I believe we are not in a bubble but more on that later in the report.

Portland Market Summary 2015 2016 Change

New listings 40,815 41,121 Same%

Closed sales 33,307 32,798 Down 1.6%

Inventory (in months) 2 1.5 Down 25%

Average sale $ $ 355,000 $ 395,000 Up 11.5%

Median sale $ $ 308,000 347,000 Up 12.7%

Average days on market 54 42 Down 23%

Apartments: Vacancy moved from 3% up to 4% and rising rents have prolonged the apartment boom with 14,000 units under construction and close to 16,000 more units proposed according to the Barry Apartment Construction Report from Spring 2017 (https://sellpdx.com/wp-content/uploads/2017/05/2017Spring- BarryApartmentReport.pdf)

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 6

Demand is finally catching up with the pace of construction for urban and luxury with vacancies rising and rents falling for the top end of the rental market. The housing crisis sparked the passing of new rental rules in the City of Portland including 90 day notices for no-cause evictions and rent increases beyond the normal cost of living expenses (https://sellpdx.com/portland-rent-control/). There are also now move out fees being charged to landlords from $2,900-$4,500 per unit for no cause evictions or for tenants who move out if rents are raised more than 10%. The law is temporary but many expect it will be extended.

There are fears among landlords and owners that there will be continued restrictions of how properties and are managed in Portland and now in Oregon as the house has passed House Bill 2004 which would allow cities to impose rental caps (https://sellpdx.com/portland-rent-control/). As of this writing HB2004 is in committee with the state Senate with many people giving it a 50/50 chance of becoming an Oregon law.

Apartment cap rates have also dropped and rising rents are increasing apartment prices as well. Market cap rates are now around the 5.5% mark. Institutional investors such as REITs (Real Estate Investment Trusts), insurance companies, and retirement funds are now actively buying in Portland which is promoting the scaling up of buildings from 10-20 units to buildings with 100’s of units. That larger scale of development is now keeping up with demand and with a rise in interest rates we expect to see rents and sales prices normalize over 2017.

Commercial: Cap rates have actually gone down on Class A commercial properties, but they are being bought primarily by REITs and other institutional investors. Smaller local properties under the 5 million dollar mark are offering slightly higher returns to attract local buyers. That being said, owner-users and rapidly rising land values are pushing up prices on commercial properties in the $1-$5 million range. We’re seeing more retail vacancies as that sector continues to struggle to compete with online sales.

Land: After prices skyrocketed to $200 per square foot for commercial land in 2016 the implementation of inclusionary for apartment projects with 20 or more units has put a chill on land prices. Some experts are saying the new code

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 7 which requires units be set aside for affordable housing has cost land owners 30% of their property values. Residential in-fill lots are still trending up along with home prices and even the smallest residential lots in the city at 50’x50’ are selling for $250,000 with full size lots selling north of $300k.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 8

In the years between 2004 and 2007 there was a manic nature to the market, and many people were buying property on speculation that double digit increases in value would continue indefinitely. During the following five years the market corrected to levels where affordability reached record highs by 2012. The years 2012 to 2016 will be remembered as the recovery years with 2017 being the year we reached new all time highs for property values.

Already in the first quarter of 2017 prices are moving up sharply and inventory is holding under 2 months in the metro area. The biggest opportunity in the market I see is now in single family homes and multifamily on fringes of the “close-in” market. This was true in 2016 and I expect it to be the case in 2017. I’m also including Vancouver Washington which has long been a commuter suburb but now is looking more like it’s own city with growing entertainment and food offerings.

The true close-in market which I define as inside of 82nd Ave in SE and inside of 70th Ave in NE has seen prices rebound and even surpass the past peak of 2007, and the rate of return on multifamily is dangerously close to current interest rates. The vacancy rate for apartments in Portland is at a very low 4% right now and developers are bullish that in-migration will fill 20,000-30,000 new units coming online in 2016-2018. New construction has picked up substantially but it looks like it will over supply the luxury and urban market but not keep up with the need for affordable housing. Factor in that in-migration to Oregon was the highest in the USA and demand looks to continue to be strong. Property prices went up more than expected with the Case/Shiller Index at 9.5% and RMLS quoting the average up 11.5% and the median up 12.7%.

From the bottom of the market in 2012, Portland property values are up 71% to date. I expect prices in 2017 to rise between 8-10% due primarily to the low housing inventory in the Portland area and continued low interest rates. Historically, real estate values increase at about 3% per year. In this scenario a

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 9 property would double in value in 24 years, about the same time a 30-year loan is almost paid off. Increases in rents are to be expected as well over this period putting you in a position of increased asset value, increased cash flow, and a lower loan to value ratio.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 10

What effect will rent control have on the Portland market?

Our number one question this year is about rent control and how it will affect the market in Portland.

Over the last several decades, the City of Portland has joined with communities throughout the country to set policy to address homelessness and housing affordability. Most dramatically, the city council voted in favor of an emergency declaration allowing local government to push through measures that would help relieve homelessness in Portland and prevent a further skyrocketing of rents.

Some of the policies impact builders and developers with increased city fees and restrictions on the number of market rate units in a building. On a positive note there are some tax and financial benefits for builders for reserving low income housing in their developments. The biggest change is focused on no cause evictions and capping rent increases to 10% per year. The way that this crisis plays out and the policies enacted by the city will shape the future of our local neighborhoods.

Part One: What Just Happened?

Legal control vs. market forces

The issue of rent control in Portland peaked in late 2016. Chloe Eudaly, a local businesswoman and renter’s rights advocate, was elected to the Portland City Council on a platform of halting the “renter’s state of emergency” in the city.

Eudaly got swiftly to work fulfilling her electoral promise, and her supporters got the first true pay-off of her vision with Portland City Ordinance 188219 (https://sellpdx.com/portland-rent-control/) titled the Relocation Assistance Ordinance. Under this ordinance, within 45 days of giving a no-cause termination notice (including not renewing a that is at the end of its term), a

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 11 must pay relocation costs to the tenant from $2,900-$4,500 depending on the number of bedrooms in the house or apartment. If a tenant gets notice of a rent increase of 10 percent or more in a 12-month period, the tenant can attest in writing that they will have to move for economic reasons, forcing the landlord to pay relocation costs to them within 14 days of receipt of the notice.

The ordinance took effect in February 2017; within days of its passing, local media reported that landlords and tenants were already seeing the impacts of the ordinance. As of the time of writing this article, a lawsuit by local housing providers is pending. While this law was passed as a temporary bill set to sunset October 2017 many housing providers feel this will be renewed indefinitely.

State Lawmakers join the fight

Soon after the Portland ordinance took effect, lawmakers in Salem joined in by introducing House Bill 2004 (https://sellpdx.com/portland-rent-control/). The bill prohibits landlords from terminating month-to-month tenancy without cause after first six months of (except under certain circumstances) with 90 days’ written notice and payment of amount equal to one month’s rent. This bill would remove the statewide prohibition on rent control and allow cities to limit landlords with a “fair rate of return” as determined by that city or county. At the time of writing, this bill is currently in Senate.

Rent Control and Inclusionary Zoning

Broadly speaking, rent control is the practice of setting limits upon the market and the ownership rights of housing providers. A few ways that this can manifest include limiting the price that they can set for the rent of their units, the management of their tenant pool, or the development of their buildings.

Another similar practice is inclusionary zoning, which became legal in Oregon with the passage of SB 1533 in June 2016. In an inclusionary zoning situation, zoning laws are altered to require developers of multifamily dwellings to set aside a percentage of units in new buildings for low-income residents. Rent control typically takes the form of direct city codes or legislation that target landlords of existing buildings. Inclusionary zoning is a land use practice that targets developers who are aiming to build new housing developments.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 12

Housing Land Advocates, a local proponent of inclusionary zoning, articulates the core benefits of the practice:

“Inclusionary policies have been successful in creating affordable housing in many different communities, particularly in ‘hot’ housing markets where high volumes of development occur… By encouraging mixed-income communities, inclusionary policies can help to decentralize poverty. And by linking the creation of affordable housing with private development, it can be a powerful tool in combating displacement. This is a concern in Portland as the city gentrifies, in Oregon’s coastal communities experiencing resort and second home development, and throughout the state as mobile home parks close.

Advocates of inclusionary zoning assert that inclusionary zoning practices are flexible, particularly citing that the definitions of “affordability” and the percentage of units can be renegotiated as economic and real estate factors shift. Many jurisdictions also “sweeten the pot” by adding incentives for developers to inclusionary zoning plans in the form of expedited permitting, fee waivers, or density bonuses to help offset the cost of the affordable units.

Part Two: What Happens Next?

Inclusionary zoning and the Relocation Assistance Ordinance are now law in Portland and most experts give HB2004 a 50/50 chance of passing. So what happens next?

Already the effect of inclusionary zoning is a dramatic drop off in activity of land purchases for apartments and a cut in prices that sellers are able to get for their property. With construction costs on the rise and new limits on the return on a new development the only place to make up the difference is in the land prices. I’ve heard developers say that this law makes land 30-40% less valuable in Portland if you plan to build a 20 unit or larger apartment on the site.

Since the Relocation Assistance Ordinance doesn’t outlaw no cause evictions but instead hits the housing provider with a stiff penalty this change is more manageable for investors and owners. The market most affected by this ordinance is the under rented and fixer rental market. If the plan is to invest more money to renovate a property and you need the units vacant to do so you could be looking at huge fines. Look at the math on a 10 unit building with 2 bed units;

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 13 that’s $4,000 x 10 units = $40,000 in relocation fees paid to tenants. I expect that this cost will be split by the buyer and seller of a building depending upon other factors such as the number of interested buyers and the extent of work to be completed. At the end of the day this money comes out of the owners pocket and limits the number of owners willing to invest in updating and fixing their rental units. We haven’t seen a mass exodus of rentals being sold yet but I suspect that many owners aren’t even aware of the changes to the rules yet.

House Bill 2004 is currently in Senate with a predicted 50/50 chance of passing. This bill is much more ominous for property owner’s rights as it gives cities the ability to limit rents to a “fair rate of return,” and no one really knows how that will play out. This law also prohibits no cause evictions after 6 months even when a term lease is at the end of its term. This means tenants have very little obligation to the landlord but the landlord has almost endless obligation to the tenant.

Part Three: No Easy Solutions

Lest there be any confusion, it’s important to reiterate something here: there are people literally dying on the streets in Portland because they don’t have access to housing. Setting all issues of profit, property rights, and economic development aside and focusing purely on the human element for a moment: if people are dying in the streets, we’re in a crisis. However, rent control is simply not the long-term answer to this crisis, and will make things worse if it’s attempted as a short-term band-aid. Housing inequities are linked to supply and demand and to attempt to control it with laws will only create more of an issue by limiting new supply. The housing market relies primarily on market developers and to some extent subsidized housing and development. The more there are incentives to build the quicker our housing market will get back into balance.

Consider these two scenarios:

Scenario one: Enough housing

Joe and Susie rent a cute two-bedroom apartment for $1,200 a month in an up and coming part of town. One day they get a notice that their building is being sold since the owner passed away and left the property to his kids who live out of state. The buyer likes the building but it needs a lot of work and Joe and Susie get notice that they have to move out as the renovations will make the building

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 14 unlivable. They look online and drive around and find a handful of comparable apartments at the same rental rate in the same neighborhood and while moving is a hassle they relocate without much fanfare.

Scenario two: Not enough housing

Joe and Susie rent a cute two-bedroom apartment for $1,200 a month in an up and coming part of town. One day they get a notice that their building is being sold since the owner passed away and left the property to his kids who live out of state. The buyer likes the building but it needs a lot of work and Joe and Susie get notice that they have to move out as the renovations will make the building unlivable. Since they live in Portland they get $4,000 for relocation assistance from the owner and start looking online and driving around. Unfortunately, other two bedroom apartments in their neighborhood are $1,600 a month and so they have to start looking further from where they live. They decide to stay in the area at higher rents but the new landlord is aware of the move out fees she might have to pay and so they are only offered a month to month lease and the deposit is more expensive than their last apartment. The relocation fee helps but at $4,800 more per year in additional rent it doesn’t even last a year.

It’s clear that rent controls and relocation fees help existing tenants but when look ahead even a year out how can you help all the new people forming households or relocating to Portland? To try to fix a very big problem with a shot term solution steals from the future to pay for today. More costs to developers and landlords will result in less supply and stricter guidelines for accepting tenants since they might never move out.

If you leave the market alone it will take care of itself. It just takes time as housing, like many things, is cyclical. The market is on the edge of a change as well right now and these new laws couldn’t come a worse time. While I expect housing to continue to increase in price the apartment market is starting to look overbuilt. When a market is overbuilt, inventory and vacancy increases, this leads to lower rents and rent concessions. While this shift will start in the luxury market I think it will have a ripple effect that will lower, or at least stabilize, the middle and affordable housing market as well.

Part Four: How Did We Get Here?

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 15

A key driver for Portland residents and lawmakers to get behind rent control in 2016 were the increasing visibility of the homeless population in Portland and the stories of dramatic rent increases.

Homelessness is an extremely complex issue, and it’s very difficult to pinpoint a single social, personal, economic, cultural, or political factor as a cause. Communities all over the nation have struggled both to address the root causes of homelessness as well as to address the effects that homeless populations have upon the infrastructure, aesthetics, and economic landscape of urban areas in particular. Portland is no different – except that here, the problem is worse.

In her 2015 special report on the city’s homeless crisis, Anna Griffin of The Oregonian wrote:

A decade ago, federal housing officials made a deal with more than 300 American communities: Let’s end chronic homelessness in 10 years.

Local leaders nationwide embraced the challenge. They drafted plans, created budgets, held public meetings and congratulated themselves on being part of a national movement to get people off the streets.

Then most failed. Miserably, in many cases.

Nowhere has that failure been more obvious or galling than the Portland region… Despite Portland’s liberal politics and deep commitment to doing good, this region has seen less success than the country as a whole in the quest to get the poorest of the poor indoors: The last count showed almost 4,000 homeless men, women and children in Multnomah County, and experts estimate the actual number of people who are sleeping outdoors, in shelters, in their cars, in temporary transitional housing or on someone else’s couch may be four times that.

Nationally, the number of homeless has dropped by 11 percent since 2007. In Portland, the 2014 point-in-time count showed nine more people than the 2007 total.1

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 16

To put it in as solid of terms as possible: what this means is that, in a city of approximately 620,000 people, there could be upwards of 16,000 people without permanent housing on any given day in Portland.

A Spotlight Upon a Problem

A further impact that caused the city and state to adopt a higher scrutiny to the issue of homelessness was the rise of Portland as a world-class tourist destination. TV shows such as Portlandia, along with aggressive tourism campaigns elevated the Rose City’s stature during the early 2000s and 2010s. Cultural centers like Tokyo2 and Paris3 even threw week-long “Keep Portland Weird Festivals” in 2015 and 2012 respectively to celebrate the ethos and aesthetic of the city. As a result, thousands of tourists from all over the world began pouring into the city, bringing with them the sort of money that makes city economists jump for joy.

What did those tourists find when they arrived, though? A striking and distinctive visibility of homelessness that was unlike virtually any other American city. As Anna Griffin wrote:

Step outside in practically any neighborhood or suburb, and you’ll soon find evidence of human habitation: broken-down cardboard boxes, tarps, fast-food wrappers and shopping carts.

“I’ve had other people come to this city and say, ‘Wow. This is really bad,’” said Doreen Binder, recently retired executive director of Transition Projects Inc., a nonprofit that helps homeless men and women find stability. “And we’re considered a leader.”

Final Thoughts

Lawmakers are in a tough spot. Our city is changing dramatically and roughly half the city rents. I’ve heard many lawmakers say “we need to do something” and in the same breath acknowledge that rent control is not the real solution they want but they need to show some progress. The renter’s voice has certainly been heard in Portland and we await to see if the state of Oregon will follow suit. I hope the lawmakers keep in mind that half the population owns, and provides most of the housing for the renters, and that owners have rights as well. The

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 17 world we live in wants immediate solutions but housing shortages and real estate cycles take time to correct. We are on the cusp of a correction in the rental market and my hope is that the energy is directed at incentivizing affordable housing and not penalizing the very people who are providing housing to people who can’t or don’t want to buy their own home.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 18

Is this a bubble market? if not when will the market peak, and what are some black swan events that could hurt the market?

The market for real estate in Portland and the market anywhere is fundamentally about supply and demand. Too many homes and not enough buyers and you get declines in price like 2008-2012, with the worst hit areas being the most overbuilt. Too many buyers and not enough homes and you get the market we have right now in Portland and many areas across the country with multiple-offer bidding wars and rising prices. I updated this article I wrote in 2013 because almost all of it still holds true today. In short I do not feel we are in a bubble in Portland and this should explain why:

The Four Horsemen of a : Why 2015-2017 is not a bubble market.

I just re-read this post from 2013 and I feel it is appropriate to update it for 2017 as the fundamentals I discuss are virtually the same as they were in 2013 when I first wrote it. In just over four years since the real estate market hit the bottom the bounce back has been dramatic with double digit price appreciation across the board and many areas seeing 50+% jumps. At first, the return to a positive market was a relief from the long grinding crash that lasted for years. Now as we head into the fifth recovery year there is talk of a new bubble. At first look this makes sense; buyers are in bidding wars on homes which are routinely selling over asking price, some at huge margins. Homes sell before the sign even hits the yard and inventory is at lows not seen since the peak of the last boom. In December of 2015 inventory hit an all-time low in the metro area of 1.2 months and in March of 2017 it is only 1.3 months. Despite the fact that the velocity of the recovery has many people worried, we are not in a new real estate bubble. In a real estate bubble there are four horsemen that tell of a coming crash: Affordability, Rents, Inventory/Vacancy, and Easy Money. To show why there

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 19 isn’t a bubble about to burst let me illustrate the difference between 2007 and 2017.

Affordability

The cornerstone of the current market strength is affordability. This factor alone shows the remarkable difference between the real estate bubble of 2007 and the current recovery. Affordability is simply a measure of how many households with median income can afford the mortgage on a median home both nationally and in a given city. Affordability came close to historic highs in 2013. In 2017 we’re still more affordable than most West Coast cities. Why is affordability so high? Three things affect affordability: home prices, interest rates, and median income. At the peak of the market in 2007 homes had largely become unaffordable for many families in America. Prices were 20%-30% less in 2013 than in 2007 and interest rates would have to go up 50% to match the interest rates of 2007. In 2016 the average price was about the same as where it was in the peak in 2007. Anecdotally, my first mortgage in 2006 was 7.25% and my current mortgage is at 3.5%. For a 30-year fixed rate loan of $400,000 in 2006 that means you’d be paying $2,728 a month. How big is the effect of lower interest rates on that same loan today? At 3.5% the monthly payment drops to $1,796 a month, a savings of $932 per month. As I write this interest rates are hovering around 4%. Another positive aspect of affordability is that the median household income in Portland is finally rising. This rising wage growth helps keep homes affordable even as prices go up.

Rents

The increased rents have also dramatically strengthened the investment market which was the first card to fold in the crash. Not only are investors able to get loans at roughly half the monthly cost of the peak of the market, but rents are up significantly. Lower cost, higher income and increasing market values mean there is little chance that your average investor is going to be at risk of today. For many people who currently don’t own homes, buying a house actually saves them money instead of paying continuously increasing monthly rent. Rentals cash flow better for investors and renters are motivated to buy due to relatively low ownership costs.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 20

Portland apartment rents in 2008 averaged $0.86 per square foot but by 2012 they were at $1.03 per square foot, an increase of 20%. Luxury rentals and newer buildings have reported rents from $2.25-$2.85 per square foot. In 2016 Portland led the country with the highest increase in average rent at 12% over one year. Older buildings are routinely charging a $1.50 per square foot with newer buildings being in the $2.50 to $3 a square foot range in some cases.

For more on this, check out the 2017 Barry Apartment Report in the Appendix or at https://sellpdx.com/wp-content/uploads/2017/05/2017Spring- BarryApartmentReport.pdf

Inventory/Vacancy

At the peak of the market home building was far exceeding actual demand. In cities hit the hardest by the crash they were building two units for every one that was actually needed for the population growth and migration. Vacancy therefore went up to new highs. According to the Census Bureau, housing vacancy hit a high in the West in 2008 when it got to 2.9%. The first quarter of 2013 ended with a vacancy rate of 1.5%, almost half the vacancy we saw at the height of the crash. Even in 2006 it was at an average of 2.1%. The higher vacancy was driven by builders oversupplying the market, and that building frenzy was driven by speculation and easy money. In the apartment market the vacancy rate in Portland dropped in 2015 to an all-time low of 2.9%, (as of this report Q1 2017 apartment vacancy is around 4.7%) despite thousands of new units going on the market and thousands more in the construction pipeline. When you take into account the years of very slow building during the recession, we started to lose inventory that was needed to support the growth of our market. It looks like we are about to be in over supply of luxury rentals but still underbuilt for affordable housing and due to our restrictive development policies in Oregon and Portland it’s not looking to get any easier to build. In 2017 the inventory of existing homes for sale is still only 1.3 months which is 0.1 months off all time lows. With inventory this low, prices are looking to continue to rise in Portland.

Easy Money

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 21

If you or someone you know has bought or refinanced a home in the last 5 years, you are aware that the process is significantly more cumbersome than in 2004- 2006. Gone are the exotic loans and the no income verification loans. In today’s market lenders want to know everything about a borrower’s credit and all of their finances. Gone also are the days of zero down investment loans on properties with no income or not enough income to even cover the mortgage. While the rates are low on today’s loans, buyers need to have real money down and a clear ability to afford their mortgage. These stringent requirements for borrowers ensure that the market growth is sustainable and that homeowners and investors alike can afford to make the payments. In 2006 this wasn’t always the case, and if an investor has no money invested in a property, and the market goes south, there is no motivation to try to make it through the hard times. Simply put, borrowers in 2013 have to actually be qualified and able to afford their loans. Fast-forward to 2017 and loan qualifications are still very strict. You might also be surprised to learn that 33% of the purchases have been all cash in the last few years. If there's no mortgage, there's no risk of foreclosure, and that gives a lot of stability to the market.

Summary

The intent of this article is to highlight the major differences between the bubble market of 2006, the recovering market of 2013, and the most recent data from 2017. Today’s market is fundamentally more sustainable across the board. Affordability is very high relative to the rest of the west coast. Rents are up, inventory and vacancy is down and easy money is gone. These four horsemen of a real estate bubble are the factors you need to consider when looking at the health of the real estate market. Right now all the indicators are pointing to a healthy and appreciating market.

I’m a big real estate nerd and I love studying my local market and talking shop with people abroad when I travel. In looking at the last bubble to learn what might

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 22 signal a peak market in the future I uncovered that there is a substantial delay from when inventory hits a bottom (or the peak of demand) and when prices hit a peak (when supply matches and starts to exceed demand). In the last cycle it took about two years between the bottom of supply and a subsequent peak in pricing. Each cycle will be different but a real estate market is like an oil tanker - it doesn’t turn on a dime. I have compiled over a decade of data to show you the trends between these important figures. Watch the video below where I explain what I found in detail:

The Relationship Between Home Values and Inventory

Watch the video here:

sellpdx.com/2016/04/what-is-the-relationship-between-home-values-and- inventory/

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 23

Why is home inventory so low and why there aren’t more new condos?

To answer the question of why the inventory of homes is so low in Portland we have to go back to the supply and demand basics of economics. We had our last peak market in the summer of 2007 and after that we went into decline for five years straight. During that decline, new home construction came to almost a complete standstill with the units built not being close to satisfying the number of units needed for the increasing population and in-migration. I remember being at an economic luncheon forum and someone on stage, a very well-known economist, said that we were going to have a housing shortage crisis in Portland over the next coming years. Everyone at my table was shaking their head because we had lots of homes to sell, and nothing was selling with prices continuing to decline, and we were thinking how could there possibly be a housing crisis on the horizon when we had so many vacant homes to sell standing around in Portland? But the statement made that day at that lunch couldn't have been more true. For years there were not enough apartments or homes being built in Portland yet people kept moving here. People kept getting married, having kids, families kept growing, kids kept leaving their homes to go to college and get jobs, and all of those people created a need for more housing. In short, the main cause of the housing shortage now is that there are not enough homes being built to meet the current demand.

Take into account the fact that we were not creating enough supply of housing in Portland and prices continue to increase. In 2012 affordability in Portland hit an all-time high with almost everyone with a median income able to afford a median- priced home. At the same time rents were increasing rapidly in Portland and this caused an exodus of people using credit they built from being renters to purchase homes. Throw even more fuel on the fire for demand with interest rates

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 24 going from over 6% in 2007 down to 3.5% in 2012. I believe these factors would have caused a housing shortage even if we didn't have all the in-migration that Oregon has been experiencing over the last couple years. Almost three years running now Oregon has been the most moved to state in the U.S., further leading to our housing crisis woes.

If during a recession housing and apartment building slows down, then condo building comes to a complete halt. With many properties selling for below replacement value there was no economic motivation to build new condos in Portland during the recession. To compound the cost of building condos almost all of the newer condos in the Portland area experienced litigation over building defect issues of some sort usually related to water penetration in windows, doors, and siding. This costly litigation over building defects increases the cost to insure a new condo building for a builder. This increase in insurance cost made an already difficult process is almost impossible. It is only recently where we’re starting to see new condo buildings come to the market, most notably the Cosmopolitan building downtown in the pearl. Around town you can find other examples of small condo projects. The update for 2017 is that condo development is on the upswing again with many projects underway and many more to be delivered in 2018.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 25

Where are the next hot neighborhoods and affordable areas?

To understand the Portland Oregon market, you need to realize that this city is very downtown centric. What I mean by that is property values are typically higher closer to the core of the city, and lower as you get further and further away from downtown. For many years I've advised people that to get the best value in a property they should try to find a property with the most land as close to the Burnside bridge as possible. Of course the reality is much more subtle. Portland has pocket neighborhoods, and suburbs with high-end homes in very good areas that are not necessarily close to downtown.

The best way to illustrate this is to show you maps of the city showing available homes at different price points. With our average home price just below $400,000, your average monthly payment at 10% down would be roughly $2,200 a month.

www.realestateabc.com/calculators/PITI.htm

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 26

Portland under $250k

Portland $250k-$350k

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 27

Portland $350k-$500k

Portland $500k-$750k

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 28

Portland over $750k

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 29

What are the current hot neighborhoods?

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 30

Are we are becoming unaffordable as a city?

Affordability has three components: Home prices, interest rates, and median household income. The way that the National Association of Realtors formulates affordability is to take the median household income in a market and determine what percentage of people can afford a median priced home based on current interest rates. At the bottom of the recession in 2012 the affordability index hit a high of 170. Currently, Portland was 131 in the last reported period which was 2015 but I expect that to drop to 117 based on home price increases in 2016. In layman's terms that means you don't need to make the median income to afford a median priced home in Portland.

Even though prices have jumped up dramatically since our lows in 2012, interest rates have in the same proportionate amount dropped, keeping affordability above par. The other factor that gives me hope that our market still has a couple years of appreciation is that the median household income in Portland is finally rising. If interest rates stay the same and household income rises as much as home prices, then affordability will stay the same.

When comparing Portland to other major cities on the West Coast consider that San Francisco, including Oakland and Fremont, has an affordability index of 73. Los Angeles is almost the same at 74. That means Portland is almost twice as affordable as these other major West Coast cities.

From: www.realtor.org/topics/housing-affordability-index

“The NATIONAL ASSOCIATION OF REALTORS® affordability index measures whether or not a typical family could qualify for a on a typical home. The calculation assumes a down payment of 20 percent of the home price and it assumes a qualifying ratio of 25 percent. That means

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 31

the monthly P&I payment cannot exceed 25 percent of the median family monthly income.”

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 32

What the current returns are for investment property?

Many people who responded to our survey noted how getting information about commercial real estate is significantly more difficult than residential. The chart below is a report on the close-in Portland apartment market from RMLS. Only 130 out of the 180 properties even had information about their cap rate and gross rent multiplier. I could tell from a quick survey that a lot of the information that realtors included was incorrect as well. You’ll need to take this information with a grain of salt, but it shows the averages for the close-in small multiplex market in Portland.

In the larger Portland Metro market, the cap rates are higher and the gross rent multipliers are lower which provides a better return for investors.

Each year I attend the Mark Barry apartment report at my local CCIM meeting. Mark was kind enough to allow me to use slides from his presentation and 2015 report. According to Mark’s report cap rates actually peaked in the summer of 2015 with rates rising due to lower demand for apartments. Price per unit also appears to be dropping right now. Anecdotally I can say that I haven't seen this in the market yet and interest in apartments seems to still be at a fever pitch. It could be that my instincts and the report are both true with people having a flight to quality and expecting a higher rate of return on suburban assets while paying more for urban class A assets. This is just a sample of the report and I highly encourage you to look at Mark's site or to check out the Appendix for more from Mark.

www.barryapartmentreport.com

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 33

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 34

1. Leverage: You can use debt to acquire larger properties and increase your cash-on-cash return in properties with positive leverage. [I’ll explain these terms in detail later in the report]. Residential: Up to 97%-100% if owner occupied, 80% if investment Commercial: Up to 90% LTV owner occupied 75%-80% if investment Apartments: Up to 80% LTV

2. Insurance: If it burns down you can rebuild it, often with income replacement for investment property while re-building.

3. Depreciation: You can depreciate the value of the building over the course of 27.5 years for residential and 39 years for commercial. This helps shield income from taxes. Using cost segregation, you can sometimes accelerate the depreciation.

4. Income: You can rent the property and collect income and this happens regardless of shifts in the market and property values.

5. Tax Deferral: Using a 1031 exchange you can defer taxes when trading like-kind properties. “Like-kind” simply means real estate in the USA held for business or investment purposes.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 35

One of the main reasons to use debt is to create positive leverage. Positive leverage exists when the cost of money [your interest rate on your loan] is lower than the return on your investment. This is also known as a “cash-on-cash” return. Your cash-on-cash return is calculated by dividing the net income after debt service by the actual cash investment [ex. Down payment].

Example: You buy a $500,000 apartment with a 6% return.

Scenario #1: Pay Cash: Your cash-on-cash return is the same as the return on investment, 6%. $500,000 invested, $30,000 annual income = 6%

In scenarios #2 and #3, the interest rate on a loan is 4% with a 30 year term.

Scenario #2: 50% Down: Cash-on-cash return goes to 8% $250,000 invested, $20,000 annual income = 8%

Scenario #3: 25% Down: Cash-on-cash return goes to 12% $125,000 invested, $15,000 annual income = 12% As you can see, using positive leverage in this current real world scenario can take a 6% return and double it a 12% return.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 36

Real Estate Broker: A good broker should be the main point of contact in your team. They need to know market trends and have a solid understanding of the continual changes in contracts, lending, disclosures, and types of inspections. When selling, your agent should have a good and current track record of success and use the latest tools and technology. To market my listings, I use HD video tours, a professional photographer and a listing syndicator which ensures that my listings are on nearly every website that deals in real estate. A good broker will help you sell quicker and identify good deals when buying. Real estate brokers charge a commission when selling but typically there is no fee when you buy a property.

Lender: If you want to use leverage you need a lender or banker that can give you access to all the different lending programs. The speed at which these loan programs change is unbelievable so it is imperative that your lender be up to date on a weekly basis. Lenders charge “points” which is a percentage of the loan amount.

Real Estate Attorney: A good attorney can help with contracts but also with the more difficult issues like easements, partnerships, LLC agreements, , tenants in common and more. The more complicated and larger the deals get the more you’ll need a great attorney. Attorneys are paid hourly, typically $300-$500 an hour, unless they are on a retainer.

CPA: Since there are huge tax benefits to owning real estate having a CPA (Certified Public Accountant) that can help you take advantage of all of them will increase your return on investment. CPA’s typically charge a flat fee or hourly rate.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 37

Title and Escrow Company: These companies insure title to real estate and offer escrow services. In some states title and escrow/ are separate or done by attorney’s. Escrow services typically charge a flat fee and insurance is based on the value of the property that is being insured.

Property Management: Many investors love the idea of real estate but don’t want to deal with calls from tenants and leasing up properties. This is where a can take a lot of the headaches out of owning real estate. Managers typically get paid a percentage, 5%-10% for long term and 20%-30% for vacation rentals, of the gross rents to screen tenants and manage the property.

Contractor: If you plan to buy a value add property you will need a good contractor to give you a realistic expectation on how much money and time it will take to get the property rentable. This knowledge is essential if you want to compare a fixer to a well maintained investment.

Inspector: You’re going to need a couple different inspectors when you buy a property. The main inspector is the home inspector who looks are the structure and systems and the fire/life safety of a home. You will also likely need environmental inspectors for things like lead based paint, radon gas, and underground oil tanks. If there are some more specific issues with a property you might be talking with a HVAC (heating and cooling) company, electricians, plumbers, or roofers.

Architect: If you want to build a new home or do a sizable renovation or addition you’ll need an architect. Architects draw up plans of what you have (as-builts) and then create the plans of what you’re going to build. The builder and city will need the plans for permits and to know what to build.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 38

While the distressed property market is smaller as a percentage of available property it can still be a great way to invest. Right now in Portland the distressed market is around 5% of all property sold. But what do distressed properties really mean to you as an investor?

REO (aka) Bank Owned: 1. Condition: Many REO ( by a bank) properties are in pretty rough shape. They almost always have the water and heat turned off so do not expect a warm fuzzy feeling when looking at an REO. These might also have fixtures and appliances missing so factor that into what you are willing to spend. 2. Disclosure: Banks are exempt from giving the buyer a property disclosure. Make sure you get a thorough inspection of the property. 3. Shorter inspections and higher costs: To inspect a home you need the utilities on and that cost is passed on to the buyer with most REOs. 4. Financing: Some banks offer financing deals on REOs but many don’t treat these any differently. If you are using a loan make sure there are not broken windows or holes in walls – this will cause problems with an appraisal unless you are getting a rehab loan or paying cash. 5. Look at all properties: Just because it says REO does not mean it is the best deal – look at all available properties before making a decision.

Short Sales: A short sale is where a lender agrees to let a seller sell their home for less than what is owed on the property. That is the basic idea but the reality is much more complicated and the process often takes quite a bit longer than a traditional 30 day close. Expect 30-120 days for a response from the lender and accept that many short sales end up in foreclosure even if they receive offers. Patience is the name of the game. Many banks also try to put restrictions on what you can do with the property once you own it, so make sure to carefully review all contracts.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 39

To illustrate the value of investing in real estate I’m going to share a story of a triplex I own in North Portland. I’m also including the actual APOD. Please note that the APOD is from 2012 and I have since increased rents and repairs and taxes are now lower. I will also include the 2015 APOD to show the difference in value and income. I bought this property from a bank at the bottom of the market for $235,000 with broken windows, graffiti, and more! I expected it to cost $25,000 to repair, but the costs added up closer to $60,000. Work was completed right before Thanksgiving, and the lease up took three months with rents being lower than expected due to the slowness of the season. Even though it cost more to repair, took longer to get ready, and rented for less than expected it still made money. Currently after all expenses are paid it makes about $1,000 a month net. I have a $198,000 loan at 4.25% so I have an actual investment of roughly $90,000 in the property, which appraised for $286,000 in 2012, and is worth around $450,000 as of 2015. I am projecting this property will yield 8.65% per year which is hard to beat when considering the tax advantages of real estate. In 30 years if property keeps appreciating at 3% a year this triplex will be worth $728,000. The tenants will also have paid off the loan completely by that point. $12,000 a year in net rents will be a total of $360,000 in 30 years assuming expenses go up at the same rate as rents but in reality rents will likely outpace expenses. My water bill and insurance have gone up, but rent increases have offset the cost which is maintaining the same net income. In 30 years my $90,000 investment will yield $1,088,000 which is 8.65% compounding. This also assumes I don’t reinvest any of the $360,000 in rental income which will be enough to buy another property in 8 years, and again 10 years after that.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 40

Example APOD (Annual Property Operating Data)

2013 APOD

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 41

2016 APOD

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 42

How to use an APOD: Now all these numbers are great right? But what the heck does it all mean? Often Realtors and investors will banter around these numbers without really knowing what they truly mean and how they affect the value of an investment property. The simplest metric to use is a gross rent multiplier, which is simply how many times the annual gross rent goes into the purchase price of a property. The lower the GRM the better it is for the buyer, and the higher it is the better it is for the seller. The problem with gross rent multipliers is that they don’t take into account the expenses of a property. The most commonly used metric for comparing investment properties is a CAP rate, or . A cap rate is more accurate because it accounts for all of the expenses excluding debt service, or your loan payment. Cap rates are expressed as percentages, and are calculated by dividing the net operating income of a property into the purchase price. An even more accurate measurement of an investment on a property is the cash-on-cash return. To calculate the cash-on-cash return you take the after debt service net income divided into the amount of cash that you invested which is your down payment and any other closing costs or rehab costs that were not financed.

Soft vs. hard costs: Hard costs are absolute and you will incur them whether the property is vacant or fully occupied. Soft costs are things like vacancy or management costs, which go up and down based on your market and the local cost of doing business. The debate between buyers and sellers over soft costs explains a lot of why people often disagree over accuracy on APODs.

Purchase price: The purchase price is actually your purchase price plus all of the costs to close that which might include loan fees or any rehab costs to get the property up and running.

Potential rental income: Potential rental income is the theoretical annual amount you would get in rent if there were no vacancies.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 43

Vacancy: Vacancy is a soft number which means that it is the market average for that property type. You can calculate effective rental income by taking the potential rental income and subtracting the vacancy cost.

Gross operating income: If you have other income such as laundry, parking, or storage units you would add it in here, and the sum of your effective rental income plus other income equals your gross operating income.

Operating expenses: There are two types of operating expenses. One is soft costs which are variable, and the other is hard costs which are fixed, such as your property taxes. Your major expenses are typically going to be taxes, , repairs, maintenance, and utilities. Keep in mind that all of these expenses and everything else on an APOD is annualized which means that if your water bill is $200 a month and you want to include it as an expense, you would put it down as $2,400 per year.

NOI (net operating income): To get your net operating income take your gross operating income and subtract all of your operating expenses.

CFBT (cashflow before taxes): To calculate your cash flow before taxes, take your net operating income and take out your annual debt service. Make sure you're not double-counting your insurance and property taxes as those are considered operating expenses and your debt service is your interest payment and your principal reduction payment.

CAP Rate (capitalization rate): To calculate your cap rate divide your net operating income into your purchase price. Make sure that if you buy a value-add property also known as a fixer that you include your repair costs into your purchase price to get an accurate number.

Cash-on-cash: To figure your cash-on-cash return take your cash flow before taxes and divide that into your down payment. You should also

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 44

include in your down payment figure any repairs or maintenance you performed before putting the property in service.

GRM (gross rent multiplier): To calculate your gross rent multiplier divide the purchase price by the potential rental income. The lower this number the better return for the buyer and the higher this number of the better a sales price for a seller.

Down payment: The down payment includes your actual down payment, any loan costs, and any other costs to close. I also suggest that you add any initial rehab costs to this figure to get an accurate cash-on-cash return.

Loan amount: The loan amount is the total amount of money financed into the purchase the property or refinanced out.

Interest rate: The interest rate is the rate of interest charged on the loan on the property.

Term: The term is figured in years and is needed to figure out how much the payments will be per month. The longer the term typically the lower the monthly payment. With commercial loans you might have a 20 to 30 year term, but have a call with the loan balance due in five, seven, or ten years. If that's the case it would mean you would need to refinance or pay off the loan balance at that time.

Monthly rents: If the property is already rented you want to use the actual monthly rents from the building. If the property is vacant or the rents are well below market, you want to use a projection of what the monthly rent will be in order to arrive at what a market return will be on the property.

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 45

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 46

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 47

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 48

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 49

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]

2017 Portland Real Estate Report P a g e | 50

Nick Krautter 35 NE Weidler, Portland OR 97232

Principal Broker in Oregon (503) 703-5102 Sellpdx Team at Keller Williams Portland Central [email protected]