Welcome to this month’s installment of Dear Urbaneer, where I answer real estate questions from our ever-inquisitive followers. Building on last month’s post, Dear Urbaneer: What’s Up With The Toronto Real Estate Rental Market?, where I assisted a client seeking advice about the current rental market as a tenant, in this post, I am going to address the other side of the rental equation: the landlord.
I really enjoy reading your blog and thought you might offer me your insight. I bought my investment property a couple of years ago, assuming that the strength of the Toronto rental market would sustain my investment. Unfortunately, with my unit now vacant while, I'm now finding it challenging to find tenants willing to pay an amount similar to what I was previously earning. Do you have any tips on how to find a tenant in the current market?
No question, there has been a seismic shift in the Toronto rental market that no one saw coming, which is creating unique challenges for landlords to maintain profitability, as the market has tipped towards an over-supply of rental product when demand suddenly declined. Much of that falls squarely on the impact of the pandemic; COVID-19 has created shifts and fissures in the Toronto real estate market significantly, as I write about regularly in my COVID-19 & Toronto Real Estate series.
Along with changes to Airbnb rules (here's my post called So Why Are There New Airbnb Regulations For Toronto?), the flow of immigration stemmed from border closures, the rise in the 'work from home' office, and the resulting need for more living space, the closing of many businesses and the resulting job losses, plus post-secondary education moving online for the academic year in most cases, demand has waned substantially for rental properties since we first experienced lockdown in Canada in March 2020. Meanwhile, the supply of product for rent has increased significantly - widening the gap - with Airbnb hosts turning to the long-term rental market and numerous condominium projects purchased by investors reaching completion.
And so what had been a razor-thin vacancy rate for some time in Toronto, seemingly overnight has shot directly upwards. It has heightened the competition to secure a credible tenant.
In this article from the Globe and Mail, "Toronto Apartment Vacancy Rates Spike To Record High, Monthly Rent Plunges", statistics from Urbanation show that apartment vacancies rocketed to 5.7 percent last year (it was 1.1 percent at the end of 2019, and had remained under 2 percent for over a decade). This, unfortunately, is the highest the rate has been in 50 years.
Meanwhile, rents have fallen sharply. Apartment rents have fallen by about 10 percent, year-over-year and condo rents dropped by 14 per cent in the City of Toronto.
The Road Ahead?
While demand is weak for rental units, most analysts concur that this is a blip in a longer-term trend, although pundits differ in their timelines; some cite a return to Toronto norms by the end of 2021 while others believe the market will stall through 2022. Once most Canadians have received their vaccinations, and the risk or return of the Coronavirus has been minimized, we will start seeing the population at large returning to their work environments and engaging in the amenities that urban living provides. And although the Work From Home movement is likely to be a change that sticks with the professional class the most, we are inherently social creatures by nature, so there will be a desire by many to return to our previous familiar ways of life.
Similarly, the borders will re-open. Immigration will resume. The retail, fitness, food, and entertainment industries will resume in capacities as they once did, or similar. And with these, the appetite for rental housing in Toronto will reignite and rebound.
Here is some press from BlogTO and NOW Toronto, predicting what is forecast for the Toronto rental market in 2021:
For now, though, depending on where your investment property is located, its size and condition, and what features it has which makes it unique against your competition, growing vacancies, and a swift and steady uptick in supply mean that, as a landlord, it is more essential than ever to have a sound, proactive strategy in place to manoeuver Toronto’s rental market. For many, it's no longer about keeping their rental property profitable but offsetting the high carrying costs with whatever supplemental income they can generate to mitigate the financial losses.
We've seen a fair bit in the press identifying where there is the greatest number of vacancies. Basically, the higher the density the greater the competition, and in Toronto "The Area Where Rents Are Falling The Fastest" is in the central core known as MLS District C01 located west of Yonge Street to Dufferin and from Bloor Street West south to Lake Ontario. It's for these property owners where finding tenants is most challenging, but other locations are being impacted. Basically, the greater the similarity of rental product the more negotiable a landlord has to be, including "Landlords Offering Free Rent As An Incentive To Secure Tenants".
Urbaneer has represented a number of landlords recently in their quest to secure tenants. In one instance, a one-bedroom newer contemporary condo near St. Lawrence Market was generating $2600 per month as a short-term furnished rental available for 3 to 6 month stays. As that market dried up, our client informed us he was emptying the suite of its contents and directed us to secure a qualified tenant immediately, which we placed within a few weeks of coming to market for $1750 per month. Although it was a drastic reduction in revenue, in part because furnished rentals have long earned higher rents than unfurnished, this pro-active client did well, as similar units in the area subsequently rented for sums less than this.
Alternatively, another client contacted us to rent his vintage brick and beam loft in the downtown core. Although they were hoping to achieve a rent that was significantly higher than the $2700 per month we had leased the loft for 7 years earlier, to mitigate the risk of it being vacant for an extended period of time, they accepted an offer to lease for $2900 per month after using the one month period between tenancies to refresh the unit and attend to its deficiencies.
We have found that properties offered for lease in more established neighbourhoods where the product is more 'house-like' are retaining their market rents. For example, a furnished 2-bed suite in a purpose-built duplex in Riverdale having outdoor space and parking available for terms of 2 months or longer consistently finds tenants who are either renovating their residences in the area, who have family and friends in proximity to the dwelling, or who are relocating and want to be in a central family-friendly neighbourhood with abundant green space. The key takeaway here is that the less competition one has, the less negotiable a landlord has to be. However, do not lose sight that every month you aren't generating income impacts your annual revenue. If you were getting a rent of $2000 per month and you have a tenant willing to move in immediately without any vacancy for $1833 per month, your annual income will be the same as if you lose one month's rent. At times you will be well-served to negotiate.
Furthermore, at this moment in time, the values of most Toronto condominiums are flatlining or declining. And while this is not the focus of this post, it signals how this particular property type is suffering compared to the freehold housing market. I offer my insights in my Overview Of The 2020 Toronto Condo Market And What Lies Ahead: Part One - and - Part Two that summarizes how the condominium market has long been sustained by two buyer profiles: the first-time buyer and the mom and pop investor, both of whom are susceptible to shift in value.
This recent article in The Globe And Mail called "Toronto’s Downtown Condo Market Hit By ‘Seller Fatigue’ explains how the lack of securing tenants fueled a number of sellers to list their condos for sale with lukewarm interest. As Realosophy's John Pasalis recently wrote in his January 2021 report: "Even with the recent decline in condo prices, it takes a lot of confidence to invest in a condo that is priced at 2019 levels when rents are at 2013 levels and falling".
Be Aware Of Policy
Even beyond market conditions, being a landlord can be challenging. Back in 2018, I wrote, The Other Side Of Rent Control And Toronto Real Estate, when the rental market was in a very different situation. I talked about a number of issues, including how rent control was updated with the Fair Housing Act of 2017 to close loopholes and to create more affordable housing. While rent control in spirit does accomplish these, there are many who interpret rent control measures to favour tenants, especially from an investment and ROI standpoint for the landlord.
Now more than ever, it is advisable to be well versed with rules and regulations governing landlords and tenants. Refresh your familiarity with the Residential Tenancies Act, especially the rules and regulations that have come about during COVID-19. For instance, enforcement of evictions has been temporarily paused in order to “ensure that people are not forced to leave their homes while the provincial declaration of emergency is in effect”. It would be wise to consult the Landlord and Tenant Board (LTC) often for up-to-date information. Their FAQ portion of their website in particular is very helpful.
The key message I'm imparting here is that knowledge is power, especially when it comes to policy and regulations - many of which could either help or hinder your efforts to conduct your business as a landlord. It’s advisable to have your finger on the pulse of policy.
Beyond doing research and understanding market dynamics to help you manage your property investment well, here are some helpful, tactical tips to assist in leasing your property and finding tenants that fit in well with your lifestyle and objectives as a landlord.
Never Underestimate The Power Of Excellent Property Promotion
The search for ideal tenants starts with a powerful property promotion.
The presence of COVID-19 has reduced in-person viewings, which is why marketing your property is more important than ever - to make your process more efficient and, ultimately, successful. It is helpful to know your target market, and where they might be most likely reached. Does your prospective tenant live on social media? Which apps are their favourites?
When it comes to promoting the property itself, details matter. Much like when you are trying to sell a property, you must present your property in its best, most alluring light to draw tenants without misrepresentation. In this respect, small steps can yield big results. Before listing, have a deep clean done professionally of your property. Don’t forget the appliances - including the inside of the oven! A fresh coat of neutral paint will make any space feel brighter and fresher - and communicate that it has been well cared for.
Professional photography is a real plus, and can best demonstrate the benefits of your rental, showing the proportion of space, lighting, and more. Poor photography can really do your property a disservice and may deter people from considering your listing - in error! Overconfidence is snapping photos with your Pixel or iPhone may not serve you well, here.
At Urbaneer, we have a uniquely tailored approach to help landlords promote their properties. It’s all about exposure. We advertise your property on MLS/Realtor.ca and also advertise through a number of other avenues where prospective tenants are looking for leases, like Facebook Marketplace, Craigslist, Kijiji (paid promotion using top ad or banner as required), Viewit.ca, Padmapper, and Zumper.com. We also tap into social media, with listings on Urbaneer.com, and Urbaneer’s Facebook page, Instagram, and Twitter feed, including sponsored promotions.
We develop a comprehensive feature sheet to promote your rental property because every dwelling tells a story. We focus on the benefits of the property itself and communicate key features, but also highlight the location, amenities, and area benefits.
Just like a purchase, where a rental property is located often ranks high for tenants, which is why being informed on current area amenities, like green space, essential food, and retail locations, help promote the convenience of your dwelling. In the heightened restrictions associated with lockdown, of great importance to prospective tenants is what is available in proximity to the front door of the property, as much as to the features inside. As a landlord, you will be well-served to raise awareness around neighbourhood amenities and resources.
In fact, we have found focusing on the benefits of nearby amenities is critical in a challenging market. This approach was the cornerstone of our sales and marketing program for our seller client’s condominium in West Queen West where there was a lot of competing supply. We documented this in our post called How Urbaneer’s Tailored Toronto Real Estate Marketing Sold This Condo During The Pandemic.
We also provide support with showing feedback and help with offers, tenant reference/background checks and help with closing tasks.
Once you’ve received interest in your property, it is time to find the right tenant. One of the most important steps in finding quality tenants is asking the right questions. Treat the process like a job interview. Feel free to add questions about behaviours and traits in a tenant that matter to you, but here is a good list to work from:
• Do you currently rent, and if so, where?
• How long have you lived in your current home?
• Why are you looking for a new place to live?
• What date would you want to move in?
• What kind of work do you do?
• What is a rough estimate of your income?
• How many people would be living with you?
• How many people living with you smoke?
• How many parking spaces would you require if you rent here?
• How many pets do you have?
• Do you think your current landlord will give you a favorable reference?
• Does your current landlord know you are thinking of moving?
• Have you ever had an eviction?
• Are you familiar with our rental application process?
• Have you filed for bankruptcy recently?
• Would you be able to pay the security deposit of ($ amount) at the lease signing?
• Are you willing to sign a 1-year lease agreement?
• Do you have any questions for me about the process?
Past behaviour is often predictor of future behaviour, which is why you enquire about things like bankruptcy, eviction history, and references. You can also gauge tenant lifestyle with questions around smoking, pets, guests, how many people would be living there, etc.
Keeping Good Tenants
It goes without saying, but finding quality tenants is crucial to making your property investment viable. This projected success is increased if you can retain those tenants for the long term.
Have you read my past post: Dear Urbaneer: How Do I Find And Keep Good Tenants? In it, I offer some helpful tips on the process of landing quality tenants, including ideas for advertising and staging properties for lease.
Once you’ve signed a tenant, how do you maintain them for the long term? Reducing tenant turnover is preferable. A long-term tenant represents long-term, steady income, without the costs associated with marketing and advertising your property. You can also forgo the hassle and work of landing new tenants repeatedly. There is also the possibility that a longer-term tenant may be more inclined to take greater care in using the property.
Like so many things in a successful business, it comes down to building relationships. Make sure that you offer open lines of communication to your tenant. Many issues can be resolved before they become problems simply by discussing them ahead of time.
Be timely with repairs and maintenance. Not only will this help to preserve the integrity and state of your property investment, but it also communicates that you are invested in your tenant’s happiness and comfort as well. It’s even better if you fix things before they get to the point where they are broken. Being proactive goes a long way.
As a rule of thumb, be reasonable with rent collection. If there is a short-term problem (which has emerged more commonly during COVID-19 due to job losses and income interruption) that might be temporary, be accommodating. It goes far in establishing that relationship that will encourage tenants to stay put.
This article from the Toronto Star "Thinking Of Renting Out Your Condo, Basement Or House? Two Experts Have Crucial Advice On How To Avoid A Disaster" offers sage advice.
Something To Think About: A Financial Cushion
It’s a good idea, especially in the current market, to make sure that you have a financial cushion on hand, just in case that you are unable to secure a tenant. Preferably, if you can bank six month’s worth of mortgage and other carrying costs, as a backup, that should mitigate your financial risk.
Also, something to keep in mind during the pandemic, and in the future. Securing a tenant who is seeking a rental with a specific exit date in mind may serve you better for the long term. After all, given we anticipate the rental market to improve moving forward, you may be able to realize a higher rent within the next 10 to 18 months. This is particularly important for those who own properties that were completed pre-2018 that are bound by Ontario's rent control guidelines. If you rent to a tenant who has a pre-determined exit date you may find you will be able to garner a higher rent at that time which will be greater than the rent guidelines prescribed by the province annually.
Here are some of our past blogs relating to renting and apartments:
Are you a property investor who is finding it challenging to rent units during the pandemic? With decades of experience navigating the ups and downs of the market cycles of Toronto real estate successfully and profitably, my team and I have unique strategies to support you.
My team and I are here to help!
With decades of experience navigating the ever-changing Toronto real estate market, a commitment to promote the sale of properties like yours with interesting and relevant information, and the ability to guide Buyers with credible insights and well-informed guidance, we are here to help without pressure or hassle.
Thanks for reading!
-The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-800
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