Since many of you already own a primary residence, let’s turn our attention to rental properties. There are 4 ways that investors can make money with rental properties; The 1st way is from a positive cash flow. You have a positive cash flow when the rent that you collect exceeds ALL of the expenses of owning a rental property. Your expenses will include (but are not limited to) your mortgage, taxes, insurance, vacancy rate, all repairs and maintenance costs, advertising & signs, legal and accounting costs, gas and wear & tear on your car from your being the property manager, or hiring a property manager, etc. In the beginning years you should not expect to have a positive cash flow, unless you are prepared to invest a substantial down-payment. Since Portland real estate has appreciated at a much higher rate than rent increases, in recent years, you will most likely have a negative cash flow for a period of several (and possibly more) years..
You MUST be able to afford this negative cash flow or you simply should NOT own rental property. However, if you can afford the negative cash flow, I will show you how profitable rental properties can be over time. Of course, you will try to raise the rent every year by a 3% to 5% increase (or whatever the market will bear) and eventually you will begin to receive a positive cash flow.

The 2nd way you will profit is from having your tenants pay your mortgage for you. Due to the way that lenders calculate interest, you actually pay more interest in the beginning of your loan that you do later on. For this reason, the amount your mortgage is reduced is not as big as you might think, but again, this amount gets bigger and bigger over time.

The next way you profit is from tax benefits. Previously called Depreciation, now called Cost Recovery, the government really likes it that you are providing housing to those who can not afford to own. They let you write off the entire purchase price against your income. You can not do this all at once but over time (currently 27.5 years). So if you bought a property that costs $275,000 you would get a $10,000 tax write off against your income. The higher your tax bracket, the better the benefit. As you can see, if you own a handful of properties you can shield much of your income from taxes. As I am not an accountant and can not give tax advice, you must check with your tax adviser before purchasing any investment real estate to see how this will affect your specific tax situation. Plus, this benefit is temporary. Just as your money grows tax deferred in a traditional IRA account and you pay taxes as you receive the money many years later, you will also have to pay the taxes (called capital gains) when you sell the property. I do not have enough space to explain why this is still a great benefit but feel free to call me and ask me about this.

The final way you will profit is from Appreciation. Right now, Portland is appreciating at record high rates, but if you read my last article, you saw that Portland has averaged a little over 7% since 1991. So let’s use that number and see what happens if you buy an average home.

The median price (half sell above & half sell below) is about $250,000. Let’s assume you use a 10% down payment and have a mortgage of $225,000. With an interest rate of about 6.75 (higher for non-owner occupied). your principal & interest payment for 30 years will be about $1,460. With taxes and insurance it will be around $1,750 per month. Let’s assume you can rent the property for about $1,000 per month. You are now the proud owner of a $9,000 per year negative cash flow. At the end of the first year: 1) You should get a tax write-off of $9,000 off against your taxable income. Assuming a 25% tax rate this comes out to $2,250. 2) Your mortgage will be reduced by $2,400. 3) Your home should be worth $267,500. Let’s add it all up and see how you did.

$2,250 (tax write-off) $2,400 (mortgage reduction) $17,500 (appreciation) = $22,150 – $9,000 (negative cash flow) = $13,150 equity growth on your initial investment of $25,000 down. This is a 52.6% rate of return! If you could average 10% appreciation over time, then the amounts change to $20,650 equity growth and an 82.6% return on your original investment. Plus, your mortgage reduction gets bigger every year, your appreciation grows compounded, and your negative cash becomes smaller and eventually turns positive. Please understand that I did not factor in other expenses such as vacancy rates & repairs, etc. This example is to simply have you get the concept. I hope that you have and that you will consider owning a rental property. Of course, real estate, like all investments come with risk. It is absolutely possible to lose money, especially in the beginning before the value of the property grows. Once you get through the first 2 or 3 years it really gets much easier and safer.

One last consideration, the rental market has gotten softer over the last two or three years. As record numbers of renters have been buying their first homes, there are less renters in the market. Also, as more people have been buying rentals, there are more rental homes available. Less demand, more supply. This is what has caused rents to stay low and some vacancy rates to rise. Thusly, it is prudent to have some reserve money in case of any problems.

By the way, the Oregonian just reported on Jan. 17th, 2006 that Portland real estate has appreciated 20.4% from December, 2004 through December, 2005. Wow!

Steve Bennett
Principal Broker, GRI, CRS

2005 set an all time record for real estate in Portland with a volume of $10.6 billion. Compared with 2004’s $8.1 billion that is an increase of 30.9%. 2006 is a slower year for sales but it is still one of the strongest years Portland has ever seen. Please remember, you can not have an all time record every year. So while newspapers, and other media, are still shouting about the cooling housing market, and the market is truly slowing down across the nation, Portland continues to be very strong. Let’s take a look at the closed # of real estate transactions through September (three quarters of way through the year) of the past decade to see how 2006 stacks up:

September 1997 18,018 closed sales
September 1998 19,425 closed sales
September 1999 19,413 closed sales
September 2000 18,490 closed sales
September 2001 20,652 closed sales
September 2002 20,641 closed sales
September 2003 23,357 closed sales
September 2004 24,784 closed sales
September 2005 28,724 closed sales
September 2006 25,185 closed sales

You can see that although the Portland real estate market is slowing compared with last year, it looks like it will be the second best year we’ve had in the past ten years. That’s not too shabby in my book!

As a reminder, I am not speaking about the national real estate market, only the Portland market. Some other markets are not doing nearly so well as ours and, of course, there are specific reasons why our market is doing better than the nation’s: our urban growth boundary, our local government’s policy of in-fill vs. sprawl, the desirability of our city, the growing population, and Portland’s modest growth rate during the real estate boom.

In the past 12 months (September 2006 to September 2005) appreciation rates for the average home in Portland went up 15.4%! The most popular areas of the, for our clients, appreciated:

North Portland 21.3%
Northeast Portland 16.8%
Southeast Portland 15.8%

Clearly, the 1st three quarters of 2006 has been tremendous for the Portland real estate market. So what is in store for the rest of 2006 and for 2007? In my opinion, the Portland market will continue to do well, although I do believe it will slow even more than it has so far, compared to the record breaking year of 2005. We are seeing the market slowing down, especially in the past three months. How this continues will depend upon: the local and national economy, if new jobs continue to grow or decline, the pressure of increased energy costs and the costs of the war in Iraq. We will have to see what the Feds will do about raising short term interest rates. They have finally taken a pause and not raised rates at their last three meetings. If the Feds continue to stop raising short term rates – and inflation seems less likely, as it does – then the market will continue to be strong as it was in 2001, 2002, 2003 and 2004. If, however, short term rates go up so that mortgage interest rates get to 7.5% or even 8%, then the market will begin an even larger slowdown. I do not believe that interest rates will go above 7% before the end of 2007. As a matter of fact, current mortgage rates have been going down for the past 6 months. I believe that appreciation rates will come down to around 10% for 2007, which is still very strong. Of course, these are only my opinions and there is no way to know if I am correct or not until I write to you again next year. However, I am a big believer of buying Portland real estate and holding on to it for a long time, ten years and longer. If you take the long term perspective in buying real estate, I can not imagine any other outcome other than your extreme satisfaction.

If you, or anyone you know, are looking to buy or sell Portland real estate, please call us at 503-238-7617. Portland’s Alternative Realtors have now closed nearly 1,000 real estate transactions. Let us put our experience to work for you.

Steve Bennett, Principal Broker, GRI, CRS

We first heard about Taggart when our friend, and former co-worker, Sky Yeager, was turning his one man play, “Body Memories”, into a movie. Sky hired Taggart as his director. Then when we (Kundalini and Steve) were visiting Sky at his home in central Mexico a couple of years ago, we finally met Taggart and his friend, John Petersen, who owns one of the largest organic community supported agriculture farms in the US. Taggart has been filming John for about 25 years!

Well they finally finished the movie and it has been picked up by the people who distributed “What the Bleep Do We Know?” The movie is called, “The Real Dirt on Farmer John”. So far, it has won 16 awards at film festivals, and the Oregonian film critic, Shawn Levy, has put it on his top ten list for 2005! It is a story about the disappearing family farms, and of loss and ultimate redemption through community. It is terrific!

This film is only being shown in 4 cities with a very limited release, just as “What the Bleep” was scheduled. Hopefully, this newsletter will get to you in time for you to go see the movie at Cinema 21. It will run from Feb. 1st through Feb. 9th. If the film does well at the box office in these 4 cities, it will then get released nationwide! Taggart is moving his family to Portland this summer. Let’s show him how Portland supports local artists and people who are trying to bring community together. Please tell your friends.

Go to www.therealdirt.net

Steve Bennett

From April 2007 to April 2008, we have just seen Portland’s first price decline in average price since 2002 (from $338,200 to $325,000). One factor that has contributed to this decrease is the drop in sales for higher end homes (over one million dollars; from 43 down to 21), which has skewed the average lower.

The number of homes for sale is 10.3 months of inventory. This is down from January’s high of 12.8 months of inventory but is still considerably higher than last April’s 4.4 months of inventory.

The average time it takes to sell a home in Portland has increased from 63 days to 82 days. This is from the first 4 months of 2008 compared with the first 4 months of 2007.

While the Greater Portland metropolitan Area has just started to decrease, there is still good news for the majority of our clients as the close-in neighborhoods and areas that we specialize in are still increasing in value. From April 2007 through April 2008 single family homes in:

North Portland increased in value by 7.7%.
Northeast Portland increased in value by 6.7%
Southeast Portland increased in value by 4.5%

Additionally, as first time buyers are waiting to purchase now, rents in Portland have really started to rise over the past 3 years. Rental vacancy rates are historically quite low. This could be a very good time to purchase a rental property or consider exchanging your single family rentals into a larger multifamily complex.

If you have any questions about the Portland market, or your home specifically, please call us at 503.238.7617 or e-mail us at info@altpdx.com