Running head: MANAGERIAL ECONOMICS INTERVIEW PAPER
How Economic Fluctuations Effects Local Businesses, Employees, and the Consumer
BUSI 620: Managerial Economics Interview Paper
Heather Welch
Liberty University
December 13, 2016
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Part One: Description of the Company
Clayton Properties LLC. is a small business based in Portland, Oregon, which was
established in 1968. The company began as a small family-owned business which was operated
solely by family members. At first, the owners purchased properties and rented them in as is
condition. The business became very lucrative during the 1970s, when the Claytons were able to
purchase over 40 houses in foreclosure. Some of the houses were in desperate need of repair, so
the Claytons hired their son, who was a contractor, to repair the homes. In addition, the
contractor was utilized to make repairs in tenant occupied homes when needed. The sheer
number of new home purchases meant their son was unable to complete all of the repairs in a
timely manner and was in desperate need of assistance. This led to the first hire of a non-family
member. The company continued to grow and expand over the next 20 years into the 1990s. This
is when the Claytons decided to follow the design trends and begin remodeling their homes in
order to receive more in rent. By this point, the Claytons owned well over 150 rental homes, so
the task of remodeling was not small, nor would it be quick.
The Claytons chose to hire several more contractors, including their grandson who was a
seasoned carpenter, and their son-in-law, who was a contractor. Together, the two men divided
the properties so as to make the monumental task slightly more manageable. Each manager hired
several crews, which consisted of both skilled and unskilled laborers. Meanwhile, the Claytons
purchased a great deal of products for the homes at garage sales and other second hand locations.
This allowed them to choose nicer upgrades, and to include the option of renting appliances in
each of the homes. One of the crews was responsible for responding to tenant needs. This
consisted of everything from simple everyday maintenance, to building fences and pouring
concrete for new driveways and sidewalks. Before long, the maintenance crews were completely
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overwhelmed with work, so the Claytons hired two of their nephews to work as contractors.
These contractors hired several more work crews and completely took over the maintenance
portion of the business.
In the early 2000s, the Claytons decided it was time to start turning over some of the
office duties to their daughter so they were able to take some much-earned time off. The
Claytons were able to travel to only a few places before family responsibilities and illness kept
them home. In 2010 at the age of 78, Mr. Clayton was diagnosed with Parkinson’s Disease. This
spurred the couple to begin selling the rental homes and prepare for retirement. Unbeknown to
them, the federal government collected a large percentage of the sale of the homes through
capital gains taxes. This was a huge hit to the Claytons who felt that although they were well past
retirement age, they were being punished for making sound business decisions earlier in life.
Mrs. Clayton referred to the sale of the homes as her “old lady money,” which she intended to
use to support her throughout her old age. Mrs. Clayton explained that she and her brother were
supporting their mother who is living in a retirement condominium, because she had simply
outlived her retirement money, and that she did not want to burden her children in the same way.
Mrs. Clayton expressed fear of attempting to manage the company without her husband, who at
this point is severely disabled due to the Parkinson’s Disease as well as a series of strokes and
heart attacks. Unfortunately, Mrs. Clayton says, the only people the government seems to care
about are those who either failed to plan ahead, or those who chose a path which failed to
prepare them for retirement. Mrs. Clayton went on to explain that she was glad she did not know
that she would be paying so much in capital gains taxes, because she may not have given so
much to her church and to other charities.
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Part Two: Interview Questions
How does Clayton Properties prepare for and deal with economic downturns?
Mrs. Clayton says that their company thoroughly prepares for all economic scenarios.
Specifically, she explained that their company works to assure that each one of their properties
are in good repair on continual basis so that major expenses are kept to a minimum. They also
thoroughly screen all tenant candidates in order to prevent high turnover and to maintain a steady
rental income. One way in which the company deals with economic downturns is by attempting
to keep everything at steady levels of tenancy and rental income. The company also plans ahead
for capital expenses so there are fewer surprises. I asked Mrs. Clayton whether they have lines of
credit in case they have higher than expected expenses. Mrs. Clayton answered that the company
utilizes low interest credit lines, which they have available to them due to a long and strong
credit history. Additionally, Mrs. Clayton added that they watch current mortgage rates and only
purchase or refinance properties when the interest rates are sufficiently low. Currently, the
Claytons are slowly divesting properties in order to reduce the total number of units and have
begun to offer owner carried contracts. Since the owner carried contracts are financed with
private money, the Claytons offer the loans at slightly higher interest rates than the current
average mortgage rate.
Do you forecast the upturn and the downturn (the cycle) of your business?
Mrs. Clayton explained that they indeed try to be aware of current trends in housing, which
affect the cycle. One example she used was the weather. Here, Mrs. Clayton talked about how
families who wish to buy or move tend to do so when the children are out of school. Mrs.
Clayton said that if they know that mortgage rates are going to fall or climb, they may refrain
from purchasing a house or they may purchase a greater number of them. The Claytons prefer to
purchase pre-foreclosed or foreclosed homes. This is because they are able to acquire these
homes for a much lower cost, thus allowing them to purchase a greater number. Some of the
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houses are rehabbed immediately, while others are rented. This decision is based on the condition
of the home as well as a cost and benefit analysis. This analysis advises them on whether a
remodel will sufficiently increase the rent on the property, thus making it worth the investment.
Mrs. Clayton went on to explain that if there is a glut of housing that makes it harder to rent, they
must carefully observe the mortgage rates to know whether they should buy, sell, or simply wait
to see if there is going to be a trend of foreclosures, which make it much more cost effective to
buy.
How close is the cycle of your business related with the cycle of the whole economy
(the business cycle)?
The Claytons believe that their business is not closely related to the cycle of the
whole
economy. Instead, Mrs. Clayton said, their company’s cycle is slower than the economic
cycle in most cases. They do not see a big change in their cycle until there has been a large
change in housing availability. When the economy improves, they see renters buying houses and
moving out of their units, which reduces the pool of good renters. This is when they look at
whether they should continue to rent or sell particular properties. The Claytons offer the first
right of refusal to the current renter(s), if they are in good standing. This means that prior to
placing the property on the market, the Claytons first approach their renter, as long as they have a
good rental record, and ask them if they are interested in purchasing the home. Sometimes the
renter chooses to utilize a traditional bank loan, while other times the renter enters into an owner
carried contract so they are able to save the money to put down on a traditional loan after a few
years.
Does your company handle an upturn or boom in the economy differently, or do you
tend to follow the same business plan regardless?
The Claytons claim to follow the same general business plan regardless of the current
economy. The Claytons are both retired from their regular employment, so their plan is
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significantly different than someone who is just starting in the rental home business. At this point
in their careers, the Claytons say they are mostly just locking in their retirement and making sure
they are able to take care of themselves financially in their old age. Mrs. Clayton asserts that they
do not take high risks, rather they try to remain at low risk due to their stage in life.
In this type of industry, one could assume that fluctuations in the economy have a
great effect on your profit margin. Do you find this to be true for you?
Mrs. Clayton disclosed that she believes this to be accurate for their business. She
disclosed
that when things are costing more their profits decline, because they are unable to raise
rents every time there is a blip in the economy. They are only able to respond to the changes in
the economy about once per year in relation to rent prices. There is a vacancy rate of about on
half point on average. The higher the cost of materials, labor, etc., must be forecasted into their
rental prices.
What is your process for choosing between tenancy applicants, and does this process
change when the economy shifts high or low?
The Clayton’s process for choosing between tenancy applicants is always the same. It
is one
that is a review of income, rent history, job history, credit, criminal background checks,
and a personal meeting. Mrs. Clayton says that they are unable to change the screening process,
because they must ensure that the applicant is reliable enough to have in their house. Mrs.
Clayton stated that although they do not intend to change the application process, it does have its
limitations, resulting in ending up with lemons for tenants from time to time.
How do you know when to raise or lower rents in the local vicinity? Does this change
during different economic situations?
Mrs. Clayton explained that they raise their rents approximately only once per year. This is in
part due to the federal, state, and local government legal guidelines, which dictate the frequency
and amount landlords may change rental amounts. Most local governments only permit a small
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rent raise per year, so landlords are not able to raise the rent just because they want to. The other
reason for only raising their rents once per year is so that they are able to retain high quality
renters. Mrs. Clayton says that they keep their rents reasonably low in order to make a small
profit, while also remaining ethical.
Are your rental properties located in diverse areas, such as rural, suburban and
urban, or have you chosen to purchase properties within one type of area?
Mrs. Clayton explained that their properties are primarily in urban areas within a
thirty
minute drive of their home. I asked Mrs. Clayton the follow up question, why they had
not purchased properties in other areas. She answered that for one thing, having properties within
a certain driving distance makes it easier to address requests, emergencies, etc. It is easier to
manage properties that are closer in proximity to you. If the properties were further out, there
would be a greater need for assistance with managing, which in turn increases costs.
Do the rental prices reflect the location and condition of the property, or do you
charge the same amount simply depending upon square footage and amenities?
The Claytons maintain that rents are based primarily on square footage and amenities,
but
location is a significant factor that can affect the rent they charge. One example given
was a house which is over 5000 square feet on 2 acres of land in a community requiring a short
commute. This home is rented for approximately the same amount as a one bedroom
condominium they own in an upscale building in the middle of Portland, Oregon. Mrs. Clayton
also explained that some of the homes have been completely updated, which requires a higher
rent in order to recuperate their costs.
As a small business, do you find it necessary to lay off employees or lower wages
during downturns in the economy?
Mrs. Clayton said that there has been time when they have been required to decrease the
amount of help they receive. Other times they have had to decrease their employee’s hours. They
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do not ever choose to cut the amount of pay that an employee makes as they believe this is more
detrimental than simply laying them off. The Claytons do not like to make the decision to lay off
workers or to cut hours. This is partially because it forces them to perform more of the work
themselves, and also because it is difficult on the employees and their families. Since many of
the employees are family, this can also become problematic for family relationships.
During an economic downturn, do you find that you receive more people seeking
employment are college educated or is there no difference?
Mrs. Clayton said that the applicants they receive tend to be based more on the
position as opposed to the economy. When seeking an office management position, the rate of
education among the applicants seems to increase incrementally. For example, they may see
several applicants with bachelor degrees, fewer with master’s degrees and even fewer with a
doctoral degree. This is true for each of the positions offered within the company. Conversely,
Mrs. Clayton explained that since this is a family business, they choose to hire children and
grandchildren first if possible, even if they lack the education typically required of the position.
If and when more help is unavailable within the family, yet warranted, they will reach outside of
that pool.
Part Three: Personal Reflection
This was a very interesting interview with a woman who clearly has a firm grasp
on business. The answers given were only vague when it was clear that Mrs. Clayton wanted to
protect proprietary information. Otherwise, the answers were quite thoughtful, informative, and
deep. The answers given reflect a path to a lucrative business, but also the way in which one
could fail miserably if they were to enter such a business without a great amount of research and
financial backing. Mrs. Clayton’s responses regarding the effect the economy has on her business
were enlightening. There is much more to the rental home business than I first understood. It
appears that the economy effects this type of business to a greater extent than many others. This
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is mainly due to the multitude of factors with economic ties, such as interest rates, bank loans
and rental and mortgage rates. Prior to the interview with Mrs. Clayton, I was considering
purchasing my first rental property. However, I have decided to delay my entry into the business
in order to conduct further research on the entire process.
