October 2022

John,

What will your investments be worth in five years from now? Waitaminute … five years? Who wants to wait that long?

We all do. Because that’s the real question real estate investors should be asking. Not “Can we 2X this property in 2 years”, which is what many of us have been asking. It is what we’ve been accustomed to, but that’s not today’s reality.

Do you look at today’s interest rates and low loan-to-value ratios as “No thank you, I’ll wait until conditions stabilize”? If you do, thank you, and join the crowd, especially if you’re a buyer! Now hopefully fewer of you are competing for the good properties.

Sellers read the news too. Some will be content to roll in the cash flow, keep increasing rents as much as possible, and sell maybe in another year or two. Some have to sell now, though. They have shorter term debt, they’re fearful of impending doom, or they’re just fat, happy, and ready to hang it up.

If you think buyers like us may be missing an upcoming dip in the market, you might be right. But if you think five years from now we’ll regret having bought now, you’ll be wrong. Smart buying means not overpaying, not taking out short-term debt, and not buying in stagnant markets. Do it right and your patience will be rewarded.

Market Update

Bozeman, MT – Aside from being located in one of the most beautiful areas of the country, Bozeman has seen robust growth through the pandemic. It naturally attracts people seeking both a cultural and an outdoor oriented lifestyle, because it is home to Montana State University and is a short drive away from Yellowstone National Park. Mountains surround the area and there is lots of room for growth.

Rents? Among the highest increases since 2019, 21%, where the U.S. median increase was 12%. Population? About a 35% increase since 2012 to 48,000. That’s more than twice the growth rate of Boise.

Multifamily consists of student housing but not too many 100+ unit properties. That could change though. With multifamily vacancy at around 2% end of last year and now closer to 1.5%, construction is in high gear. Some reports say multifamily inventory could double in the next year or so because of projects nearing completion.

As any multifamily operator knows, finding good contractors to complete your new builds and renovations is extremely difficult. Not in recent memory has it been this hard. There are lots of reasons for this but when you are thinking about a tight market like Bozeman, you can see that a big reason for outsized rent growth is low inventory. It will be eased somewhat when new construction comes online but the demand will continue to grow.

It is a safe bet that, regardless of how much land is available for growth, it will be many years before supply catches up to demand. That is the true opportunity in Bozeman, particularly if properties under 50 units are your target.

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Finer Points

When does a renter need to leave

Property managers on larger properties can be faced with the question of when to require a tenant to leave every month. There’s always some issue, and not just rent payment. There are a few important considerations to take into account with these decisions, and they apply to all tenants, all property sizes. If your property is large, your manager knows how to make these decisions but will want you as owner to agree with their practice. If you have a smaller property or you manage the property yourself, these decisions can be agonizing.

Someone’s life is severely impacted if you need them to leave your property, so of course it is a difficult decision. You have several things to think about, very carefully.

The rules. The tenant agreed to them, signed on to them. Maybe they didn’t read them but that’s not your concern. They didn’t do something they needed to, or they did something they were not allowed to. You have a contract with them so you are allowed to enforce it.

How does what the tenant is doing or not doing impact you as owner of the property. That’s very broad but if you’re thinking of telling them they need to leave, it needs to be a serious issue that you can’t live with. The list of possible violations is long and includes non-payment of rent, not taking care of their unit, not parking their car properly, not allowing the property manage in with proper notice, having people live there who aren’t on the lease, and on and on. Would you tell them to leave because their kid left their bicycle in the courtyard? No probably not, and for several reasons.

First, it’s a minor offence. Second, you have to give them notice of a violation and the opportunity to correct it. And even then, it’s a minor thing. But what if it’s not a bicycle but they used a portable barbecue grill, set it right outside their back door, and left the coals burning when they were done? Again, you tell them it’s a problem, give them a notification, but it happens again. Your insurance almost certainly prohibits that. If you’re discovered, get ready for a higher premium or to be dropped. But mostly you need to hope they don’t cause a fire.

If they represent this kind of a danger to the property, they have to leave. Doesn’t matter if they pay rent on time.

Other tenants. How does this tenant’s violation impact them? I have had many situations where a tenant is just not nice to other tenants. Tenants feel uncomfortable around them, they avoid that tenant, and might even not feel safe around them. It is sometimes hard to identify this type of tenant, but they are poison, detrimental to the community you are trying to build. Again, doesn’t matter if they pay rent on time, they will hurt your property and decimate your growth plans. Just one tenant is all it takes. Stay close to your tenants and invite them to share what they’re seeing on the property. It is always helpful.

What about cleanliness? You do an inspection and their place is a mess. Confirm a few things. Is it a long term mess and the unit has not been cleaned in two years? Dirt piling up in all the edges and corners? Bathrooms look scary? Or is it mainly just some dirty laundry on the floor?

Also ask yourself about their payment record, and what is your own occupancy and financial status? If it’s just dirt and you really need this tenant to stay, maybe you give them a strong request to clean up, remind them of their obligation to keep it clean, and leave it at that, deferring a stay or leave decision until later when occupancy and collections are high.

A few other considerations. Did their job situation change? You should know your local rent assistance programs and agencies. They might not, so help them. Has this violation occurred previously? They’ve been late for rent for several months but have always paid? Are you getting late fees from them every month, or are their late payments more a problem than they’re worth? Maybe you can’t kick them out before their lease ends but when it does you can decline to renew their lease, have them leave now, or just let them transition to month-to-month and continue collecting their late fees.

If they’re harmful or threatening to your other tenants, or to you or your property, that’s easy, they need to leave. Otherwise you might need to take several factors into account.

Whatever practice you choose, document it and implement it consistently.

Who We Are

Cardinal Oak Investments acquires, improves, and manages under-valued commercial apartments. We buy B and C class properties of around 100 units in the Southeast and Midwest. We look for properties whose amenities, aesthetics, and appeal have fallen into obsolescence, whose care reflects tired management, and whose location is where a stable workforce wants to live.

And we partner with like-minded investors looking for stable assets that produce good cash flow and strong appreciation.

Founded and managed by John Todderud, Cardinal Oak Investments has acquired properties on both coasts and in between creating annual double-digit returns.

For more information, schedule time with me or contact us.

Please note: Past performance is no indication of future performance.