We often discuss risk with property owners and write about risk in The Owner’s Advocate. Our goal is not to instill unnecessary fear or say the “sky is falling”. Instead, our goal to have an honest conversation where we work to identify risks, help determine individual owners’ risk tolerance, and strategize ways to address risks moving forward. Risk for investment property owners comes in many different forms: physical structure risk, market risk, interest rate risk, owner-health risk, and concentration risk, just to name a few. However, there is one form of risk that is growing persistently, not only in Seattle, but in Washington State as a whole – regulatory risk.
From a regulatory standpoint, there has never been a more difficult time to operate as an independent landlord in Washington. The rate of regulatory change impacting residential rental property owners has increased dramatically over the past three years. The first major regulation to grab an owner’s attention was the passage of the City of Seattle’s “First-In-Time” ordinance in 2016. Presented as a way to combat “implicit bias” in the tenant selection process, the law requires a tenant screening criterion to be included on all rental applications and for landlords to lease their available units to the first applicants that meet the criteria. Once the ordinance passed, it was challenged and subsequently ruled unconstitutional by the King County Superior Court. The City of Seattle appealed the ruling to the Washington State Supreme Court and, in a largely unexpected turn of events, unanimously overturned the regulation. Following the ruling, Seattle resumed enforcement of the ordinance, effective November 2019.
Further pressure was placed on Washington landlords as a result of the 2019 revisions of the Washington Landlord-Tenant Act. The updates increase the time landlords are required to give tenants for a “Pay or Vacate Notice” from 3 days to 14 days, it reclassifies many required payments such late-fees as “non-rent” and thus, cannot lead to evictions, it lengthens the notice period for rent increases from 30 days to 60 days, and it requires landlords to accept court-ordered payment plans for late rent, among other updates.
Multiple municipalities have also passed various “Just Cause Eviction” ordinances. These ordinances limit allowable causes to terminate either a standing lease or, perhaps more importantly, end a month-to-month lease without having to pay for tenant relocation assistance. Federal Way is the most recent municipality to adopt a “Just Cause” ordinance. However, many anticipate that legislators will propose implementing “Just Cause” at the state level in 2020.
Owners and industry advocates saw the Seattle City Council elections as an opportunity to re-balance the political landscape. However, even with significant resources invested in local races, the results were far from favorable for independent landlords. The Seattle City Council elections are a perfect example of how Washington’s city councils continue to shift further away from supporting landlords who work diligently to provide much needed housing to our communities. Rent control and additional “Just-Cause” ordinances are already being discussed around the state, leading one to ask themselves, will the climate ever improve for the independent rental property provider?
Typically, risk can be addressed in four different ways. Risk can be accepted, it can be avoided, it can be mitigated, or it can be insured against. Unfortunately, with regulatory risk, one cannot insure against it, leaving only the first three options available. It is critical for property owners to understand the risks associated with our current and future regulatory landscape in order to make strategic and informed decisions to protect both their livelihood and their investments that they have worked so hard to build. It is especially critical for those who have a large portion of their net worth invested in rental property and are looking to these investments to fund their retirement years and families over the decades to come. If you feel overexposed to regulatory risk, there are options available to you to reduce your risk. There are options that seek to help reduce uncertainty and address both your financial and lifestyle objectives now and in the future. Speak to one of our 1031 Exchange professionals or schedule a complimentary consultation by calling 206-686-2211.
Roger W. Bowlin, Founding Partner of Real Estate Transition Solutions, provides exit strategy analysis, execution, income and equity replacement options for investment property owners. If you have questions relating to your investment property ownership, please email him at: firstname.lastname@example.org or call (206) 686-2211.
The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the sponsors Private Placement Memorandum (PPM) which is solely available to accredited investors and accredited entities. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee profits or guarantee protection against losses. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Aurora Securities, Inc. (ASI), Member: FINRA/SIPC. Advisory services offered through Secure Asset Management, LLC (SAM), a Registered Investment Advisor. ASI and SAM are affiliated companies. Real Estate Transition Solutions (RETS) is independent of ASI and SAM.