To rent or not to rent? That is the question. I can see the fingers getting ready to type their rapid responses to this article already, but chill for now because the question is actually for home owners. Many of the people who have properties on the market today have to consider all their options in this market. So the topic today is: Rent or Sell?
If you are one of the many people around Edmonton with a beautiful new spec home you built with the sole purpose of turning it over for quick cash I’ve got news for you: put a tenant in it and immediately deduct at least 10% off of the value. Think of it like driving a new car off the lot – part of the value in a new home is that it is new, and that newness is going to fade really quickly with tenants in it. I’m generalizing of course but the majority of tenants don’t treat their rented home like an owner does. Yeah I know there are exceptions to the rule but just know that rules, even general ones may have some basis in truth.
Tenants in my experience, are especially hard on floors and landscaping. They don’t like to take their shoes off and those big dogs sure chew into that pretty exotic hardwood. I know the rental agreement will say “no pets” like many of mine have but the pets just have a way of showing up: "My dad’s, friend’s uncle is away and I’m looking after his Pit Bull while he’s away.” Funny thing is the guy never seems to come back to claim the monster. Those pets, and that lack of watering and cutting the lawn will turn that nice new yard into a wasteland.
Example: you spill a glass of wine on the carpet. As the home owner you race to the kitchen and get carpet cleaner, or soda water or whatever you prefer to use to get a stain out. Now remember what it was like when you were a tenant…sure you’ll give it a half-hearted attempt to get the stain out eventually, but you’re not exactly running off your feet to prevent it from setting in. Oh, and don’t forget about the tenants’ friends…they care even less about your home.
Becoming a landlord, like everything else in life can go quite well if your intentions from the start are to become a landlord and you plan it out and treat it like a business. Some properties are meant to be rentals while others are not; some of them will be rentals for a very long time. Smart landlords can make good money. In any case I never recommend renting a brand new home, but it maybe better than sitting vacant for a year. Tough decision.
Vacancy Rates
Last week CMHC released their semi-anual Rental Report. Many people are aware that the vacancy rates in Alberta, and Edmonton specifically have been extremely low for the last couple of years, causing rental rates to increase rapidly. Well, we are now seeing vacany rates hit more normal levels; the apartment vacany rate in Edmonton rose from 1.1% in April 2007 to 3.4% in April 2008. Despite the increase in vacancies rental rates have increased during that time (the average 2-bedroom rate in Edmonton went from $877 to $1000). However, with the number of second-home owners who only want to own one home and are now considering renting out that home, I expect the vacancy rate to continue to increase, causing a decrease in rental rates in the near future.
Selling a Tenant Occupied Home
Lastly, if you are considering renting out that home and trying to sell it at the same time you can pretty much forget that idea all together. In a normal market selling a home with a tenant in it is possible albeit more difficult than selling a vacant or seller occupied home. However, you have to keep in mind that there are over 11,000 homes for sale in the greater Edmonton area now. If I want to show a home with a tenant in it, the owner has to give that tenant 24-hours written notice, which means I pretty much have to give the listing agent 48 hours notice that I want to show it (so they can call their seller and have the seller notify the tenant in writing). Plus, if we do write an offer on the home, the owner has to give 90 days notice to the tenant, which means my client has to wait at least 3 months to get into their new home (30-60 days is generally preferred).
The buyer I’m working with has probably given me a list of 40-50 homes to view, which I have to narrow down to a reasonable number…The first thing I’m going to do is discard all the tenant occupied homes – we’ll get to those ones only if we don’t find something we like in the 30 other homes on the list. Now I know what you’re thinking, someone might want to buy the home and keep the tenants…right now there are not a lot of people out there looking for rental properties, especially not big detached homes on the outskirts of the city, and especially not new homes and condos that the tenants are going to destroy 
Also, rents haven’t yet risen enough to make renting out new homes or condos cash-flow positive.
We won’t be seeing prices go up more than inflation in the foreseeable future, so despite what the dozens of real estate investment seminars around the city are saying, subsidizing someone elses rent is a horrible investment.
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When the property has not been purchased as an income generating rental property then most likely renting it does not make financial sense.
If the property cannot generate positive cash flow then what is the point of renting it out?
The housing prices are unlikely to rise and more likely to fall so selling the property now even at a loss may be a better solution than having negative cash flow and generating more losses yet.
Of course each case is different but evaluating a property from the rental point of view after the purchase is like reading the label on a medication package after swallowing the dose. Unless one is really lucky the result may be at best painful and at worst tragic.
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As a landlord (25 years) who is asked for advice from want-to-be landlords frequently, your post is absolutely right on! There will be a lot of tears shed by owners discovering the damage and financial loss resulting from renting out homes intended for sale.
You should have seen what this one lady managed to do to all the plumbing in her rental unit, back when I was managing properties for my parents–
She totally messed up the garbage disposal by dropping in a large screw, a rubber stopper (and who knows what else).
She also took the lid off the toilet tank to stop an overflow and accidentally dropped the lid INTO the tank, breaking out the the bottom and flooding the bathroom.
There is nothing I like better than fixing toilets — especially other peoples’ toilets that are clogged up. Landlord life is not for the faint of heart.
We have been landlords of several entry-level detached homes for a few years. Before venturing out, we took several night classes and did a LOT of reading to understand the legal aspects of being a landlord and what we were getting into.
It’s amazing how many wrong assumptions one could make and get the tenant-landlord relationship totally off on the wrong foot.
So far, we have been blessed with outstanding tenants, but we are also working very hard to keep it that way.
We made sure the properties were in good shape when we rented them out, so that people who take pride in their surroundings were interested in moving in. We are also quick to fix things that need repair.
We get advice from the Landlord-Tenant Advisory board before we enter into any new agreements with our tenants, such as allowing them to take in roommates, or making upgrades to the property.
The “secret” though, in my opinion, is the fact that we are able to charge rents that are on the lower side. We can do so, because we purchased these homes before prices sky-rocketed.
Our tenants know that they are getting a very good deal, and they make sure to hold up their end of the rental agreement, especially since we also allow pets.
You can’t offer affordable rents and allow pets when you have to service a high mortgage and want to sell the house when the market gets better.
Also, not everybody has the personality to be a landlord. If you don’t like to deal with people or negotiate and resolve potential conflicts before they flare up, you would be better off lowering your asking price and taking a loss now, rather than later…..
Good information on the renting/selling aspect. Thank you.
Anyone familiar with “propertyguys.com”. First time I ever heard of or saw them, looks like a variation of Commfree.
Thank you.
I saw a house for sale the other day by propertyguys.com as well. It also was a first for me. Giving Comfree a little competition.
I see a lot of Comfree signs out there, they need some competition.
You guys are going to get edited for mentioning those.. guys..
Sara, I would have to disagree for making a general statement. First I oppose flipping, bad investment in many cases unless you are darn lucky. Here are general principles to help:
- Real estate investmenet must go for 5 years to pass the CRA test and the appreciation test. Flipping is like day trading.
- Screen your tenants. Choose people with good credit history and get them to sign an application that allows you to get collection agencies on their back if they damage the property. People with good credit will try to guard their credit. A collection record is not pretty.
- Never, ever fall in the mercy trap. Do not feel sorry, this includes families on welfare, single mothers, new immigrants, people on unemployment, etc. This is business, always look for good people to take care of your properties. Subscribe to tenant screening services, get their applications.
- Always try to inspect your properties on regular basis. Be firm and polite.
- Do not use property managers. The majority of them will get you in trouble than take off when the trouble hits you.
Page 7 of the Alberta Rental Market Report, Spring 2008, has a table showing the “availability” rate of private apartments.
Availability rate 2008:
Calgary CMA: 4.0%
Edmonton CMA: 4.4%
Availability rate 2007:
Calgary CMA: 1.8%
Edmonton CMA: 1.8%
The availability rate is a new category (since sometime in 2007) which measures what percentage of apartments are “available” to rent even if they don’t meet the more stringent technical definition of “vacant” apartment.
Here are some numbers from the Fall 2007 and Spring 2008 Alberta Rental Market Reports.
CMHC Fall 2007 Rental Market Report, Alberta
Table 1.1.3 October 2007, page 6, private apartments
City ————– # Vacant — Total universe
Calgary CMA —- 583 ——- 38,150
Edmonton CMA — 937 —— 61,824
CMHC Spring 2008 Rental Market Report, Alberta
Table 1.1.3 April 2008, page 6, private apartments
City ————– # Vacant — Total universe
Calgary CMA —- 763 ——- 37,861
Edmonton CMA — 2,050 —- 60,360
In each city the universe size has decreased, but the total number of vacant apartments has increased.
Continued …
The total number of private apartments decreased, probably because of condo conversions, some of which are for rent in what CMHC calls the secondary rental market.
Still, it’s interesting that there are more (significantly more in Edmonton) for rent even though the total number of private apartments has decreased.
Decreased universe of private rental apartments.
City ********* Oct 07 *** Apr 08 *** Change
Calgary **** 38,150 *** 37,861 *** (289)
Edmonton ** 61,824 ** 60,360 ** (1,464)
Increased # vacancies: 180 in Calgary; 1113 in Edmonton.
City ********* October 2007 ****** April 2008
Calgary ***** 583 of 38,150 ***** 763 of 37,861
Edmonton ** 937 of 61,824 *** 2,050 of 60,360
Continued …
If you want to rent your “second” house out, it looks like you’ve got more competition from private rental apartments in Edmonton CMA than in Calgary CMA.
You’re competing for the good, responsible tenants with landlords who are often full time, more experienced and with deeper pockets to withstand ups and downs.
Despite the two CMAs being similar in size (see below), in April 2008 Edmonton CMA has a much larger private apartment universe than Calgary CMA does: 60,360 vs 37,861.
Also in April 2008, Edmonton CMA has more private apartments vacant than Calgary CMA: 2,050 vs. 763.
CMA means Census metropolitan area. StatsCan shows the Census Metropolitan Areas of Calgary and Edmonton as having similar populations:
Calgary CMA 2006 – 1,079,310
Edmonton CMA 2006 – 1,034,945
The population of the cities themselves is not the same (found this on the web somewhere, but not sure if this is StatsCan’s information):
Calgary City 2006 – 1,019,942
Edmonton City 2006 – 730,372
Posted by: Anon | June 09, 2008 at 10:50 PM
I wonder if I am still “losing money” by renting….?
An associate of mine just accepted $90,000 less for his condo over the course of 4 months listed, plus lost some money for carrying costs over that period. He came out ahead, but not by a heck of a lot.
From what I observed on the kijiji rental section, apartments for rent has almost hit 1200 … I saw about half of that less than a year ago.
So we have a huge and growing for-sale inventory and a growing rental inventory. Who is going to absorb all of this inventory…”Skilled labourers” from shuttered manufacturing in Ontario?
***Comment deleted. Don’t copy and paste an entire article – see code of conduct. A brief summary and link is fine.
Interesting article. Many people don’t realise real costs of being a landlord. And it’s not only about money! You have to consider also the time it would consume. How much is worth one hour of your day? Are you prepared for nigh calls “our water pipes bursted, what now, what now?!”
Julie
Good post Sheldon – I rent out a townhouse for a couple hundred less per month (then normal market price) for the simple pleasure of being able to choose good tenants…. in turn it seems like my tenants appreciate this (touch wood)
What I am curious about Brent (and other doom and gloomers) is why are my clients (business owners, builders, and so on) are still complaining about not having enough staff? Where is this ‘slow down’? If there is one – shouldn’t businesses be laying off people en masse? (like GM and other eastern based companies) Instead they are still begging for staff to come through the door.
Maybe the new immigrant legislation that passed will bring us the necessary workers for us to relieve this concern – except these people need a place to live…. Oh yeah – we have that inventory – for a little while….
I would say that renting is something for people who own, or inherit something older, in the terms of houses. I mean if I had a brand new house built I wouldn’t let anynone live in it. It is a choice for appartement owners, but I don’t think that a house can generate too much of profit. I’m personally dealing with Toronto condos and in with renting I would opt for a condomonium.
Last year, I checked out a house **comment edited for privac concerns*** It was once rented to an artist. I estimated that the physical damage caused by the tenants was about $20k. The living room window was broken, when I first visited.
Since the owner does not live in Edmonton, it was very difficult for him to renovate the house. He missed the best opportunity to sell last year. He rejected my offer and then reduced to below my offer (I bought a house nearby). That’s another $50k loss here (10% market drop since initial listing time).
So, the the total loss is about $70k, about $2k+ loss every month that it’s been rented out.
As we speak, the house is not sold yet and it seems that the owner is trying to renovate it again.
How do the “rent to own” programs work? I keep seeing them on places like Kijiji, but it seems a little sketchy.
***Stay tuned Kat. I have written a post that will answer some of your questions but will more likely raise questions. Right now some are legit and some are downright fraud.
Sheldon
Rhettro,
They can’t fill their vacant positions because they don’t pay enough.
Third world immigrant workers will take the jobs though if you can get them here and they don’t even have to know how speak English for the jobs their filling. They will sleep 6 to a motel room too which helps the employer stay on the cheap. Good luck counting on them to make any dent in the glut of inventory though.
LOL
Rhettro
I would not put to much stock into what the news says and a couple of businessmen say about the economy. If you take the news they are about a year behind what is actually happening. I am still amazed at how positive some tradesmen are about there prospects for income even with the slowdown in housing. The slowdown will be here for at least a year. There is a major slowdown this year it is looking like it will be my slowest year since 1989. There will be no layoffs because the last few years have scared employers into keeping unneeded staff
That being said real estate should be alright hopefully they will start the up grader construction in Redwater.
PS I have many cash flow properties that I will keep for a long time. long term real estate investing with proper leverage will beat out all other investments over time
Speculator – I agree -now is not the time to be selling rental properties. And I also agree that the media is behind on a lot of things – hence why information from sites such as this help us keep ahead of the herd.
However, right now, if this is a ‘slow down’ – WE NEED IT! My point pertained to the fact that overall from my accounts and contacts – business is still good – and like you eluded to – 2009 appears to be revving up for another boomtime.
As for immigrants – Brent – I work with contracting companies that are bringing engineers and other skilled labour over for companies such as SNC Lavalin and Colt Engineering (not low paying service industry job – I know those are out there) and they (SNC and Colt) can’t seem to bring these people over fast enough. Plus they are renting – and not by the 2 to 3 families per household – it is 1 family per apartment/townhouse unit – based on my personal experience. (Again I have other friends in the service industry that tell me the stories similar to yours)
The other arguement is that while eastern Canada continues to struggle with a high dollar/lower exports/reductions in manufacturing – the west holds steady – how long will it take for some people to be like many of their ancestors and “GO WEST”….
Just my $.02
Just to warn posters, Brent lives in the US midwest and comes here to spell doom and gloom in an envious spirit. He has never been to Alberta.
Brent,
I was approved to bring in foreign workers before this slowdown hit me. A trained monkey could do most of the work I need done. The govt determined that I need to pay at least $18.30 per hour long way from minimum wage. When I hire a Canadian they have to show up for 2 weeks straight to get that pay most don’t as Alberta is full of the laziest people I have ever seen.
Thanks for the heads up Mike. Without your words of wisdom I would have lost my retirement fund on the assumption that Brent lived in Fort Sask with you.
A one horse town of Fort Saskatchewan? No thanks.
Nate
Please Please do not make investment decisions from a bunch of losers on a blog myself included. The real successful never post Se if Don Campbell ever posts I doubt it
Living in a college town (Bryan & College Station, Tx – home of the Texas Aggies) MANY people purchase, live in a property for a while and then lease and move on. It is a great way to let someone else build your equity. And, being a college town with a great real estate market we are having very little trouble keeping nice properties rented.
Brent,
I’m waiting for your take on Bob Truman’s stats for June 1-9.
You’re usually pretty quick to make comments on the most currents stats.
You’d have to wait for a long time DREM. Brent is busy waiting on a long like to get his unemployment application processed at the Detroit office. I really feel very sorry for what’s happening with the autoworkers in midwest and Ontario.
According to the daily oil bulletin today, there are project announced for 300 billion dollars in oil sand development (apart from gas, coal and methane). In the same article, DOB mentioned that these project need at least the oil to be at $60 per barrel to proceed. Listening to Don Campbell speaking last week and referring to the same facts and that Alberta would need in excess of 300,000 workers within the next 2 decades. Don is a firm believer that by 2010, the real estate would be back to normal and what we see today would be a real “bargain” comapred to few years ahead. I do believe Don and trust his research. He uses to notch economists and well connected into the idustry.
For those who don’t know PropertyGuys.com is huge compared to Comfree. They get something like 56 million hits a month compared to Comfree’s 3 million and they are in every province in Canada. I am from the east coast and I laugh when I hear people saying CF are so big. None of my family or friends have ever heard of CF, but everybody and their dog knows PropertyGuys.com in the east. They are everywhere. My twin sister was in BC and apparently they are huge there as well. I’ve never used Comfree but tons of my friends have used PG and there service is phenomenal. My one friend in Toronto sold his house in a day and my cousin in St John barely got the sign in the lawn when it was sold.