We work with both landlords as well as tenants and we genuinely love when we connect good people together on a rental deal. It can in theory happen on the buy and sell side as well, but the fear of whether both sides are being properly represented makes it challenging.
When it comes to rentals, however, a good tenant being connected with a good landlord is a win-win for both parties.
Just like the resale market, rental markets shift over time and it can go from being easy to rent a property, to being quite challenging. Supply and demand play a big part, but unlike in the resale market, we see more consistency in the rental market as to when it is a good time to try to rent a property – and when it’s a bad time.
In addition, there are a number of factors play into why it can be difficult to rent a property out, and we wanted to share our experiences in that regard and also talk about the math for landlords as to when it is worth lowering the asking rent to get a quality tenant in the property. This article is mostly focused on advice to landlords, so we give you our Key Landlord Takeaways at the end of each section. Let’s get to it!
I’d love to move in the middle of winter.
When it comes to renting out properties, the absolute worst time to do it is the dead of winter. A rental listing that comes up for rent on January 1st is far more likely to sit on the market, vacant and with no income being received, than a unit that came on the market at any other time of the year. While it is broadly true that sales slow down in January for resale homes as well, it is nowhere near as dramatic as what occurs in the rental market.
We think a number of factors influence why the rental market is slow in winter, including the joy of doing anything in a Canadian winter. The timing of school ending and starting, traditionally a big impact on the rental market, is also months away.
Key Landlord Takeaway: If you can avoid signing a lease that ends in January or February, do so. While tenants have the right to continue a set term lease on a month to month basis, they also have the right to leave at the end of the lease, meaning you’re trying to rent out a property amongst the slush and snow.
You’re perfect. Can you move in tomorrow?
Most landlords don’t plan very far in advance when it comes to listing a property for rent. This is partially due to the challenges with showing a place for rent that is still tenanted, and also due to the likelihood that the place may need some sprucing up to show well and command the highest rent.
As a result of this understandable approach, landlords go from receiving rental income to help pay expenses and the mortgage, to receiving no rent in the last month of the lease (when the deposit the tenant paid at the start of the lease is applied), followed by a period of no tenancy with no income, followed by realtor fees for the new tenancy.
Put it all together, and landlords are eager to get a new tenant in place to get the rental income flowing again. While there are some circumstances where a great tenant is available to move in immediately, it is more often than not a red flag if a tenant is fine with a quick occupancy. When we ask questions about the lack of notice they’re giving their current landlord, why they don’t have any furniture to move and so forth, the answers rarely fill us with confidence.
Key Landlord Takeaway: Avoid the pain of vacancy by planning in advance to get the unit rented sooner rather than later. A good agent can work with current tenants to minimize the disruption to them and they are actually often great advocates for a property if they enjoyed their time there. We often advise our landlord tenants to push a bit higher on the asking rent during this period, with the commitment to spruce up the unit in the hopefully brief vacancy period between tenants.
But, I need to get more!
It’s time to touch on one of the more challenging aspects of renting a property out – the rental rate! In many cases, the landlord has significant financial obligations and doesn’t own the property outright. Mortgage payments, property tax, utilities (if included in the rent) – these are costs that the landlord has to pay for, ideally out of the rental income.
We’ve seen a number of examples during the recent rising interest rate cycle where landlords faced increasing costs at a higher level than they were permitted to raise rents. In such circumstances, landlords have to contribute funds out of pocket to cover any deficit and we have had a number of clients who sold properties simply to stop “losing” money each month. We put that in quotes because even with higher interest rates, each mortgage payment includes a principal component and as such, part of the payment is in essence a forced savings plan to build equity in the property. Nonetheless, when you have to find money to deposit each month, it doesn’t feel like you own a property that is working out well for you!
While landlords will naturally want to optimize the rental income they receive, a change in supply or demand can result in properties sitting on the market. While it can be tempting to hold the line and keep the same asking price until you get it, the math shows that can be the wrong approach.
Consider the example of a landlord who is renting out a property for $2,500 a month. The tenant leaves and the landlord decides to hire our team to relist it at $3,000 a month. If we get that rental rate, that’s $36,000 a year, which works out to about $99 a day.
We list the property on October 5th, after the landlord does some minor cosmetic updates, and in the first week of the listing, a tenant applies who is great in every way except their budget. They can only pay $2,800 a month, so they offer that, with a starting date of November 1st. While the landlord likes their profile and is fine with a November 1st start, they don’t like the $2,800 per month. That’s $200 less a month, which means, in their mind, they’re losing $2,400 a year. They decline, the tenant goes away and the listing continues.
A few other applicants apply, but the landlord doesn’t like their credit history and income levels compared to the rent and declines to move ahead with them. Weeks pass and we’re into late October before another good tenant offers on the unit. This tenant offers the asking rent, but has to give notice to their current landlord, so they request a January 1st occupancy. We negotiate and they agree to take it December 15th and have a period where they are paying rent on both places briefly. The landlord is happy because they got the rental rate they wanted, but are less keen on the month and half of additional vacancy.
Which was a better option, the initial tenant at a lower rate, or the eventual tenant at the asking rate?
The initial tenant who was offering $2,800 with a November 1st start would have seen the math work out as follows.
- October 1st to 31st – Vacant, so the landlord “loses” $3,000 of their asking rent
- November 1st – Occupied, so the landlord receives $2,800 for the next 12 months, which means they “lost” a total of $5,800 with this option.
The second tenant who eventually arrives is willing to pay the $3,000 but not until December 15th, which means the math works as follows.
- October 1st to 31st – Vacant, so the landlord “loses” $3,000 of their asking rent
- November 1st to 30th – Vacant, so there goes another $3,000.
- December 1st to 15th – Vacant, so add another $1,500 into the tally, which brings us to a total of $7,500 of “lost” income. The landlord received their $3,000 rental rate, so didn’t lose anything else by accepting a lower rate.
Compare the two and you see that taking the first tenant would have saved the landlord about $1,700 in income. Obviously the amount of income received (or not received and “lost”) is dependent on how long it is vacant and the eventual rental rate received, but time and again we see a version of this scenario play out.
Key Landlord Takeaway: Ask for the rental rate that you think the place is worth but be prepared to accept a lower rate for a quicker occupancy. If you’re not getting any showings or applications, then lower your asking rate to get it sold. Any perceived loss in income from lowering your rental rate or taking a lowered offered rental rate is quickly eaten up by vacancy periods.
We admire the landlord clients we work with as they are taking a real risk to try to build a property empire. It can be quite challenging to make it work financially and many of our landlord clients are far from real estate moguls with hundreds of rental properties. If you’re thinking about buying an income property and want to make sure the numbers work – or you’re a landlord who wants an agent on their side who understands how important it is to fill a vacancy – then get in touch with us!