It is quite surprising how many tenants as well as how many agents representing tenants don’t understand how a landlord assesses a rental application and decides whether they want to proceed or keep looking for a better fit for their rental unit.
Given that in Toronto, the average rents for one-bedroom and two-bedroom apartments are now both at record levels, it is very important information for any tenant looking for a new place to call home. It’s equally crucial for landlords who may not have been following the best approach when choosing tenants and have since had less than stellar experiences.
Let’s review the current (July, 2022) rental market situation and then reveal the three top things that smart landlords look for in a tenant.
That is one tight rental market!
As of July 28, 2022, the condominium apartment rental market conditions have tightened dramatically when compared to a year ago.
Average rents for one-bedroom and two-bedroom apartments are now both at record levels, surpassing the previous peak in Q3 2019. There were 13,203 condo apartment rental transactions reported through the Toronto Regional Real Estate Board (TRREB) MLS® System in Q2 2022 – down 11.4 per cent compared to Q2 2021.
The dip in rentals was not the result of waning demand, but instead a much more pronounced dip in the number of rental listings, dropping by almost 30 per cent year-over-year. With less choice, it was much more difficult for renters to get deals done.
This is not likely to be a temporary, short-term situation either, as higher borrowing costs keep some buyers out of the market (and remaining in the tenant market) and the GTA population continues to grow alongside a booming regional economy. When you have consistent or even growing rental demand, with dropping rental supply, rental prices go up.
According to the latest TRREB data, average condo rents were up by double digits annually for all bedroom types in the second quarter. The average one-bedroom rent increased by 20.2 per cent year-over-year to $2,269. Over the same period, the average two-bedroom rent was up by 15.3 per cent to $2,979.
Whether you’re a tenant struggling to find a good place to rent or a landlord trying to decide among lots of interested applicants, it’s important to understand the most important factors in what makes a desirable tenant application. Smart landlords look to find a tenant where the answer to the three most important questions is always the same – a definitive yes.
Question #1 – Can they afford the place?
While this seems like the obvious starting point for whether a tenant will be favourably considered by a landlord, it is in fact the number one reason why a tenant is told no to their application.
A generally accepted rule of thumb is that you should spend no more than 30% of your gross (before tax) income on your housing costs. Some experts push that a bit to say up to 35% or even 40% but we have not encountered any credible sources that think spending more than that level of your income on shelter is sustainable. All people need funds for other costs like food and clothing, as well as some discretionary funds.
We often tell landlords to use the 1/3 rule as an easy way of assessing a potential tenant. If you have a unit where you’re asking rent of $2,400 per month and the tenant pays hydro and electricity of about $100 per month on top of that, the tenant has housing costs of $2,500 per month. That’s $30,000 per year. If the tenant makes less than $90,000 per year, you’re getting into a situation where they may not be able to afford the rent if some other unexpected expenses come up. If everything else looks good, a smart landlord might still proceed, but if they make less than $90K and have some other issues with the application, you’re asking for trouble if you hand the keys over.
Question #2 – Do they have a good track record?
This question gets to the heart of whether the prospective tenant will be a responsible occupant of the property on a mid to long-term basis. There are a number of ways in which a smart landlord can assess track record.
- What’s their credit score? A good credit score is established and maintained over a length of time by establishing financial commitments and living up to them. A tenant who has had a car loan for five years and had paid on time consistently is a good indication they understand financial commitments and have the stability to live up to their obligations.
- Have they been a tenant at other properties for typical lengths of time (one year or longer) or have they moved around from short-term tenancy to short-term tenancy? While there can be valid reasons for such activity, it is often the sign of a bad tenant who is being evicted or leaves their rental to escape problems they are encountering.
- Is their employment record consistent or inconsistent and has it changed recently? Someone who makes good money at a job they have had for a long time is likely to continue to be able to live and act in a way consistent with their past behaviour. A new job or role every couple of years is often accompanied with financial struggle and if they have just switched to a new role, it is worth considering how that might impact their track record moving forward.
A good track record isn’t necessarily a sign that they will continue to be responsible, consistent people moving forward, but it is certainly much preferred over someone with a spotty track record or no track record at all.
Question #3 – Do you feel comfortable with their overall package and approach?
This final question is more about following your gut. A smart landlord (with an experienced agent on their side) can identify red flags in applications and the approach being taken by the tenant or their agent that should cause concern.
A few questions that should clarify the situation are as follows. If the answer isn’t yes to these questions, then think twice before you proceed.
- Did they provide all of the requested information in the application package? A tenant who applies but skips certain aspects of the process is either inattentive, disorganized, or trying to hide a potential red flag. Regardless of the reason, if they can’t be bothered to follow the rules as established for the application, it does not bode well for them following the rules of the tenancy, such as payment on time, respecting condo rules, maintaining the property, etc.
- Does it seem (as far as you can tell) like they will continue to be reliable? It can be hard to be consistent and responsible when there are major changes in circumstances, so a smart landlord looks for recent or upcoming changes. If the tenant was employed full-time with a salary but started their own business two months ago, the past history of financial responsibility may not continue. If the tenant has a great credit score but has had a dozen credit checks performed by debt companies in the past three months, they may have encountered financial issues and are starting to build up debt that can cause financial issues moving forward. While changes in a tenant’s life don’t necessarily mean their track record will sudden change, it is worth looking to see if the circumstances that allowed them to be a good applicant will continue to be in place once you hand over the keys.
- Are their expectations and questions reasonable? A prospective tenant who is asking for unusual actions on the part of the landlord (such as agreement to take rent payments in cash or provide a minimum of 48 hours notice for visits) can indicate they are not reasonable individuals who may have some unreasonable plans for their time at the property. The reverse of this is true as well, and smart landlords look out for tenants who don’t care about things that most people would need to know. A tenant who says don’t worry about having it cleaned after the prior tenant leaves, or who reacts to news of a temporary defect (such as AC needing to be replaced as it isn’t functioning) with no concern can also be red flags. A good tenant, with good income and a good track record, has reasonable expectations for their rental and their landlord. Be wary of a tenant who doesn’t seem to care about anything most people would want to know more about.
There is no simple formula for assessing how comfortable a landlord will be with a prospective tenant, but whether you’re looking at it from a landlord’s side or a tenant’s side, think about the big picture and whether there might be some less tangible causes for concern.
In tight rental market conditions, landlords have more choice and tenants have more difficulty securing a rental home. If you’re a landlord, make sure you consider these three questions so that you’re choosing the best possible option amongst the applicants. If you’re a tenant, likewise review these three questions and consider what you could do in order to best present yourself.
In either case, if you want to work with agents that understand the rental process and will work with you to get it done properly, don’t hesitate to get in touch with us.