Managing Multifamily During COVID-19 with Preston Walls

On the show today we have… Managing Multifamily During COVID-19 with Preston Walls!

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Show Links:

– Checkout Preston’s last podcast with us at seattleinvestorsclub.com/95
– Preston Walls LinkedIn
– SMARTCAP podcast with us (pre Covid-19 / post Covid-19)

Show notes for Managing Multifamily During COVID-19 with Preston Walls!

The Vantastic Life is…
– is in Chelan WA!

Today we have Preston Walls of Walls Property Group and Walls Property Management.

Checkout Preston’s LinkedIn page for all of the stuff that he’s been talking about. He’s been the local expert on rentals.

Julie
Today we are going to shift gears to talk about what’s been going on in the PNW.

How many units do you own or manage?

Preston
We are based in Ballard Seattle. I have about 500 units and we manage over 300 units. So 800 units in total. All in core Seattle.

Julie
So a good reflection in rents. Are those medium level rents?

Preston
There’s a pretty wide range of rents. From newer buildings, to lower range. The bulk is the B range though.

Julie
Great! So we are talking to the right person here!

We are plugged in right now, and we are hearing that most people didn’t have a problem with their April rent.

Preston
I was really pleasantly surprised with April collections. We are 94.5% collected at the 6th of the month. This was higher than projected.

There was also interesting stuff where we found a direct correlation with building quality and collections. The lower quality buildings were down at 79%.

Julie
Are the lower quality buildings yours or managed?

Preston
Managed. There was a lot of job loss in those buildings and the unemployment hasn’t caught up yet. And these people don’t have a lot of savings.

Julie
What’s the he feeling with those types of situations? Are we waiting for unemployment to kick in?

Preston
That’s the passive hope, yes. There are some things you can do on the management side. One of the things we’ve done is… offer the open to exit the lease with not lease break fees.

If you’ve found yourself in the wrong space for your situation we want to help them out.

That has created some turnover but it’s going to be good.

Julie
This brings up a thing with me. We have a Thursday at 11:30am we have an online meetup mastermind. That has been absolutely amazing! And things are changing weekly, if not daily. If we can share our experiences we can make adjustments faster.

Preston
There’s no playbook for this. It’s trial and error.

We were getting continual messages about job loss, we create a resident worker program. Where we trade rent credit for time worked.

Julie
This is so awesome! This is exactly what I was talking about on our last online meetup.

We were talking about a local Fiverr.

If you’re in dire financial situation you might need to bring in a roommate. So you can share rent for a while… I don’t know.

Preston
Yes, these are the creative ideas that are great to share around.

Julie
What if you said… hey I’ll give you half a month back if you bring in a new tenant.

Preston
Yeah, that’s a great one!

We’ve gotten into video tours and requesting videos from residents units.

If you are going to move out and you share a video of your space we will give you credit. This has helped with upcoming vacancies.

We’ve been signing people up with just video tours.

Julie
How does that work?

Preston
It operates as it would normally. Deposit, move in fees. We are doing a 90 risk free trial. So if the place isn’t what you expected… you can get out of the lease.

Julie
Has leasing activity slowed down?

Preston
The leasing traffic has slowed down a lot. There are less tire kickers, so the conversion rate has increased.

There’s not a lot of people just looking around.

In the short term there’s been a lot of demand for multi bedroom spaces. The roommate situation. The per person cost on that is much less.

We are seeing the most activity in the smallest most affordable studios, and the largest most shareable spaces.

Julie
What’s your screening policy?

Preston
3 times rent. Which is a challenge right now. We’ve had to get creative. It can be mitigated with savings. Or other income sources.

We use Apfolio.com for screening.

Julie
Are you giving them additional things to look at?

Preston
Our leasing agents have the ability to make changes if they feel they are appropriate.

Julie
Did you reach out to everyone?

Preston
Yeah, we reached out mid March as we were starting to get inquiries from residents.

It’s hard to see what May feels like. I think it will be worse than April.

Julie
There’s going to be… a lot of trickle.

Unemployment is $760/week+.

The income levels of the B rental product make…

Preston
That is about right.. 50-60k income levels. Unemployment should replace the bulk of it. It will be interesting to see how long it take people to file the claims and for the claims to get paid, and how long will the federal bonus stay in place.

Julie
We checked in with SMARTCAP and they are requiring their commercial tenants to apply for help from the government. I’m wondering if it makes sense to have a person to help people apply for help.

Preston
I hadn’t thought about that for the residential side. We are doing the same for the commercial side. The application process has been challenging.

Julie
When you are doing rent modifications… what are you doing if people want to stay?

Preston
Working backwards. Payment plans are my last resort. Once people get behind, it’s hard to dig out of.

Julie
Yeah, I was thinking about that. How do they ever catch up?

Preston
It’s hard to dig out of that hole. Things like being able to trade for rent credit. We are waiving credit card fees to put that amount on a credit card.

Julie
What percentage pay on credit card?

Preston
Before this… zero did. But we’ve had 2 so far.

We have set communication that goes out when the rent is late. So staring the 15th of the month we’ll start offering payment plans when all of the other stuff doesn’t work.

Julie
What about tenants that are renewing?

Preston
We are pushing them out for a short period of time. Another 60 days at the same rent. Trying not to get out of the summer season, so sooner than September, but the market is so abnormal.

Julie
Yeah! The bell curve may change.

Preston
We don’t want to adjust rents until the market shakes out.

Julie
I was wondering if it makes any sense to… with your best paying tenants. You have them on a 12 month lease. Looking at job status. Is there any sense in recasting their leases?

Preston
Occupancy is paramount right now. It’s hard to know. Some of the situations we’ve struggled around… let’s say a tenant came in during a slow time and their lease rate is 10-12% below where you think the market is right now… should you adjust the rent, or is it too chaotic right now. And can you adjust some and not others.

Julie
Can you do that?

Preston
On renewals, you can charge the market rents. It’s hard to know where that’s at though.

Julie
Let’s say that a tenant moves out from a current market rent. Have they dropped at all?

Preston
This is the crazy part! Rents have not dropped. You would think they would with the market and unemployment rates.

We’ve had rent increases on the 3 bedrooms because of demand for these.

As people get settled we’ll see some change.

Julie
How about in 2008-10?

Preston
Rents in that time they declined 10-12%.

Julie
This is different this time.

Preston
Yes, back in 2008 we had some time to adjust. Right now it’s happening so fast.

I would expect a rent decline over the next 6-12 months. As it shakes out.

Julie
If you own a building and have a loan maturing.. what are the loan terms people are putting on?

Preston
On the financing side your picture is not going to look better than right now for the next couple of years.

Banks are recognizing this as well.

Debt service ratios are going up to 130, from 125.

Julie
That’s not huge.

Preston
But that’s just one metric. Vacancy rates they are upping significantly.

Agency lenders are requesting 12 months of principle and interest. No cash out refinancing.

It’s a tough market for financing. It’s a lenders market.

If you have an opportunity to refinance right now, I would take it. Liquidity is the name of the game.

Julie

Preston
I can’t imagine many deals will trade right now.

Julie
What about seller financing?

Preston
These times are where you see a lot of creative deals get done.

This is a great time to be really creative.

Julie
Are you planning to proceed forward with selling financing?

Preston
Everything that I see comes through a broker. Listed or off market.

I don’t run into very many seller financing on the multi family side. This is the time when you’ll see more of those come out.

I’m under contract on a deal in Ballard, or I was until last week. And now we are renegotiating the price based on the new world we live in.

In my view, income producing buildings are worth far less today than they were in February.

Julie
Seller financing and creative deals are what I’m focusing on right now.

So Preston, what’s your biggest concern right now?

Preston
Banks.

In the last down turn my bank reduced without notice, and without reason, my primary credit line, and that’s my operating capital for the business and dry powder line to put down down payments.

So how destabilize the banking world will become.

Julie
Right, the whole chain down the line.

It seems like the policy in place didn’t understand.

Preston
Yeah, they were just looking at solving one thing.

Julie
The solution put in place was to calm public fears, and give them comfort. But Effed up the system.

Preston
$1200 to every tax payer funds like a week of income.

Julie
The forbearance thing helped people, but the down line of the process. It screwed everything up. In the lending process in general.

A very good explanation of how it all works. The Berry Hebeb thing.

I’ve learned a lot more about how it all works. The detailed chain.

I’m with you Preston.

Everyone should take some time to understand seller and creative financing.

Preston
To be clear… the banking situation is still in relatively good space. It’s harder to get a loan. And it impairs the value of those assets.

Julie
How does this work? You take the forbearance but go back to work.

Preston
To qualify for forbearance you have to document economic hardship. So you have tenants that are behind or cannot pay.

Julie
What have you applied for and how’s it going?

Preston
It’s painfully slow. Every small business in the country is trying to get financing through this right now. It’s creating great strain on banking to get them all processed and through the system.

The program is insufficient for the demand that’s out there. But it can get a number of businesses caught up on their rent.

Julie
Which did you apply for?

Preston
We are working on the PPP program, but haven’t found a bank that will process it.

Julie
Why can’t they work with you?

Preston
They have so much demand and little available piece of the pie.

Julie
Have you heard anything about the banks wanting to give priority to their biggest depositors?

Preston
Yes, absolutely! Banks are businesses as well.

The treasury is funding the money through the largest banks first. And then funding the smaller lenders after that. And the smaller lenders are who I work with. And it hasn’t gotten to them yet.

Julie
It seems like there’s a trend that people want to work with smaller lenders lately.

Do you think that landlords will start to want to be with bigger banks after this?

Preston
Ultimately this is a one off situation. The types of things that I’m in the market for are relationship driven loans.

Large banks don’t do this very well.

Julie
Good stuff! I didn’t think that we’d be on for so long this time.

We will have Preston of Walls Property Group back often. It’s a good time to check in and share ideas.

The things that we’re talking about here can be applied nationally.

Please join us on Thursday’s at 11:30am on our meetup.com/seattleinvestorsclub.

Follow us on our podcast. We are really trying to connect with the right people right now.

In the future we are talking with people on credit and 1031x. We are doubling up on podcasts right now.

Email julie@seattleinvestorsclub.com if you have topic ideas.