My Search For The Truth About Current Vacancy Rates

April 9th, 2015 · Personal House, Property Management, Rental Property

vacancy 03.09.09 [68]Today I ended up in an article in Macleans magazine The Vacant Truth About Rental Condos for speaking out about vacancy rates.

I have known for quite a while that published vacancy numbers were complete balderdash but I had no idea how the mysterious 1% number came about. So I asked.

Initial Inquiry Email

I have a question for Benjamin Tal.  I was reading in the Globe http://www.theglobeandmail.com/report-on-business/report-warns-of-excess-supply-of-rental-units-in-toronto-and-vancouver/article16844345/ that the vacancy rate in Toronto is 1.7% and my calculations using all the properties I lease/manage end up with a vacancy rate of 7% or if I correct my sample by removing all new units that must inevitably be vacant in the beginning I still get a vacancy rate of 3.26% using my 100% accurate but admittedly small sample size.

So my question is… how exactly is Benjamin Tal coming up with a figure of 1.7% for the vacancy rate?

1% vacancy for one single condo is 3.65 days of vacancy, and 1.7% vacancy leaves me with an average of 6.21 days of vacancy per condo in Toronto. This calculation traditionally included repairs, renovations, painting and obviously leasing of the suite. Of course not every condo becomes vacant and many stay occupied for several years. In fact in my sample, a full 50% of condos sampled had 0% vacancy.

I thank you kindly for your time and eagerly await your response to my question.

What methodology is being used to calculate this 1.7% vacancy rate?

Response 1

Rachelle,

Mr. Tal  took these numbers from the latest CMHC quarterly, so he is only reporting the numbers. You would need to contact CMHC directly on the methodology for these rates.

Please let me know how your conversation with them goes.

Regards,

Kevin Dove

From CMHC

CMHC sent me the Condo Owner’s Survey which I discussed in What is Toronto’s Vacancy Rate? and the vacancy rate ranges from 10.1% in the first three years to 6.9% overall rate.

This made me even more curious. Because 10.1% or 6.9% is different from 1.3% or 1.7%. And this is CMHC who are ostensibly, part of the government and who also are responsible for publishing statistics that matter.

So I sent this email.

Hi Karine,

Here’s another recent article from the Post. Rental vacancy rates across the country remain very tight with Toronto under 2%, according to Canada Mortgage and Housing Corp. “We’re not hitting the highs we saw in the 1960s and 1970,” said Ted Tsiakopoulos, regional economist for Ontario for CMHC. “What’s driving this is rental vacancy rates [not including units from condo investors], they peaked in 2004 and they’ve been trending down.”

http://business.financialpost.com/2015/03/02/pension-funds-swoop-in-on-toronto-condo-towers-as-rental-market-heats-up/?__lsa=6498-1d35

I have speculated about why all of a sudden developers (Who are not known for their altruism) are selling prime condo building sites to Pension Funds and I can only come up with a a few answers.

  1. They need cash to finish building out other sites.
  2. Condos are no longer selling.

Again what is driving this move is the ultra low low vacancy rate. Under 2%. Wow that sure is low. Really super duper low. Amazing. It’s too bad it’s a fabrication but oh well.

Email sent to CIBC Media Inquiry

Hi Kevin,

I’m sure Mr Tal would love to update the real condo vacancy rate. http://landlordrescue.ca/what-is-torontos-condominium-vacancy-rate-not-1-thats-for-sure/ Here’s the CMHC report in question http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB4QFjAA&url=http%3A%2F%2Fwww.cmhc-schl.gc.ca%2Fodpub%2Fpdf%2F68161.pdf%3Ffr%3D1409775767290&ei=6N8BVdWbO5KYyATQrIG4BQ&usg=AFQjCNF2Me7NgM2Gg6JpYE6SOiZZ0U3wUg&sig2=gDV3RRClWVEIZMm74BNsRg&bvm=bv.87920726,d.aWw

Rachelle

At this point I’m really thinking that a legitimate error has been made. It’s not hard to make but it should be corrected. Benjamin Tal is the Deputy Chief Economist of CIBC World Markets Inc. in case you don’t know he’s a VIP. Unlike me who is a smelly, ignorant property manager.

Benjamin Tal’s  Email 1

Rachelle, thanks for your comments – the report stated clearly that the vacancy rate is for purpose-built  privately initiated apartment structures of three units and over– and the source is CMHC just go to their web site.  The report does not quote vacancy rates in the condo space . in that space my estimate is that the vacancy rate is between 3-4%.   Newspaper quotes might be misleading—when in doubt I suggest to read the actual  report. Thanks again

And then…

Rachelle, the 10.1% is out of COS (Condo Owner Survey) investors which is  17.1% of the market so 10% x 17.1% gives you 1.7% —I think the number is higher than that –but it is not 10% .

Bad Math Response

It’s 10.1 percent of the representative sample. It’s just bad math to then divide that by the population.

For example if you call 100 people and 20 percent eat chocolate you can then use that data to extrapolate that 20000 of 100000 people eat chocolate but if you say only 20 of 100000 or .02 percent eat chocolate you have missed the entire point.

Benjamin Tal’s  Email 2

Sorry but I must disagree. The following is the situation: say they called 100 people and asked if they are investors. 17 of them said yes. That is the number that CMHC reports 17.1 percent. Then they take those 17 people and ask them if they have a vacant unit. 10 percent of those 17 people say yes. So it is 10 percent of those 17. That is the way it was done. As a footnote I was one of the people that helped to design the survey and vetted it so I know that that is the way it was done.

My Email Back…

Dear Benjamin,

You’re correct. Actually according to the methodology in the report 42,426 people were surveyed. 17.1 percent owned another condo. That’s 7212 investors with a second condo. Roughly 50% rent out their condos to tenants or 3606 people Additionally, 6.9 per cent of COS investors or 248 people  indicated that their last purchased unit was vacant (for sale, for rent or for other reasons such as renovations) This is the overall vacancy rate for condos according to the sample.

For new owners the vacancy rate is higher 10.1 % according to page 9 table 19 which has a vacancy rate of 10.1 % for condos purchased in the previous three years and around 5% for the rest. This is quite possible as new condos suffer from competition, and some blinds and light need to be installed. 100% of them are vacant and this increases the percentage of vacancy. Also new owners may be inexperienced and this may affect the percentage as well.

These numbers actually correlate with my own internal vacancy statistics, of 3.6 for management clients and 11% for new condos and all condos. However there is a bias, because people sometimes hire me specifically because of my skill with problem tenants. So that skews my number upward in the new clients segment. I am quite pleased with my managed properties vacancy rate though.

The point is that the vacancy rate for condos is high, much higher than the 1.6 % often quoted for much more affordable purpose built housing. Unfortunately that number is misused to convey to small investors  that the rental market is great, that rental prices are higher than they can get and that people are falling over themselves to rent their 500 square feet in the sky. That really is what I want to stop.

I have already sent a copy of this ignored report to the Toronto Star, The Globe & Mail and the Financial Post to get them to correct the numbers on several recent articles.

As a person of influence you have a responsibility to help spread proper information, and I hope that in the future you will be super clear about the vacancy rate for condos.

Many Thanks,

Rachelle Berube

CEO Landlord Rescue Inc.

Back To Benjamin Tal

I am with you. I think that the actual vacancy rate is higher and more importantly  will go higher.

But on this note in case you are going to quote their number from table 19 you have to look at table 4 and table 19 together . Table 4 gives you the distribution less than 3 years , four to five and so on. So for example  according to them 33.1%  bought the condo in the past three years.  Now you go to table 19, and you look at how many of this group say that they have a vacant unit. The number is 10.1%    . SO IT IS 10.1% OF THE 33.1%  OR AROUND 3%.  And so on…..the numbers on table 19 are not vacancy rates but the percentage of people out of each sub group that say they have a vacant unit.

Again in case you are thinking of using those numbers I just want to make sure that you use them correctly.  Best BT

Now I’m Kind Of Mad

Hi Benjamin

10.1 % is the correct vacancy rate. The subgroup is people who own condos and rent them out. You cannot go back and include people who own condos and live in them. That statistic just gives you the vacancy rate for all condos, not rental ones.  Why would anyone even care about the vacancy rate on owner occupied condos. Maybe people offering house sitting service?
What I care about and any investor cares about is the vacancy rate for condos that people are attempting to rent out. We don’t care about owner occupied ones because they don’t form part of that market so there is no point in adding back the greater sample size. That particular vacancy rate for condos being rented out is 6.9% overall, 10.1% for the first three years and around 5% thereafter.Also I’m not sure you realize this but the CMHC condo owner survey did not come out in time for your article in the Globe and Mail.  The last time I emailed Kevin, he told me to get back to you about what I found out.

However it appears that CMHC is still using that statistic in their rental market report even though it (hopefully) erroneously includes the owner occupied statistics. I will also be contacting CMHC next week and asking them to explain and or correct their figures. I wouldn’t want to suggest that a government agency is misleading the public because that would be awful.

Frankly, now that I think of it, I hope to heck CMHC is not using the same flawed formula for purpose built housing. Actually they probably are because I was just talking to my friend who manages Greenwin Properties and she told me that she too is noticing the vacancy rate is high.

A one percent vacancy rate is almost impossible, it means that if one hundred tenants give notice, the day they move out ninety nine new tenants move in.  Using a daily calculation, one percent is 3.65 days of vacancy for each condo in Toronto. If you figure out that a most tenants will stay on for more than a year, say 2 years, then you get 7.3 days for the old tenant to move out, repairs to be done, renting/advertising/showing to be done, and the leases signed, in one week. for every condo in Toronto/Vancouver.

A ten percent vacancy rate is not so bad if you think of the flow of the rental market. First this is for the new condos, they get the keys to their condo, they have to order and put in window coverings and light fixtures, they have to take pictures, place ads, deal with an unfinished/dirty building and the competition, It’s not unusual to have 20-30 other mostly identical suites available in the same building. Using a daily calculation that’s 36.5 days on average before the new tenant moves in.

Or for the suites that are from the 3 year and on mark, 5% is also pretty good. We get 60 days notice and as long as we have a clean cooperative tenant we are able to show the place and possibly rent it with no days vacancy. Or if the incoming tenant is flexible a few days or 15 days after the 1st. Some suites may well need repairs and painting in which case it might be longer depending on what the repairs are. 5% equates to 18.25 days on the market, or if suites churn ever two years or 18 months, it’ll translate to more days empty when the suite does turn over. The most common scenario is that the old tenant moves out, the owner cleans and paints and the new people move in the following month. I’d wager that most owners prefer it that way, back to back rentals (old tenant leaves and new tenant arrives the same day) are stressful as heck.

Thank you for your time, I know this might seem pedantic, but the vacancy rate is a very important number. As someone who has advocated very heavily for small investors before http://www.theglobeandmail.com/report-on-business/rob-magazine/league-of-their-own/article16583968/?page=all I would prefer it if developers and their associates in the media and finance not use this inaccurate vacancy rate as a merchandising ploy.

I work very hard for small investors and I am alarmed that they are currently the prey in this unsustainable game. If they are misled to the amount of rent they can get, and the vacancy rate, and the purchase price is unlinked from the rent like it has been for the last 10 years it cannot end well. Currently most of these small investors are paying in monthly to cover the expenses. Call me a skeptic but I do not see that 50% of investors with no mortgage on their condos. I have one among my clientele but he’s a foreign investor. The vast majority are using leverage to play this game and many are using a HELOC for their downpayment and possibly the whole purchase (Smith Manoeuvre)

Many Thanks,
Rachelle

Back To Benjamin

Thanks for that. I respect your  commitment  to that cause. And I think I now understand where you are coming from. The issue  is that when CMHC or economists like me use the term vacancy rate the focus is the entire market. That is if say it is 10 percent of total units then it means that we should expect a significant increase in supply (as those disappointed investors sell) and lower prices and that’s why the size is important  here. The focus is on the potential impact of such situation on the stability of the market as a whole and not on the likelihood of a potential investor to successfully rent his or her unit. But I think that the later is your focus which I think is a legitimate focus. Therefore  I think the best thing is not to use the term vacancy rate but another  term (like likelihood of failure to rent) and then I think most people would  agree that in the condo space it can approach 10 percent for new condos. To the extent that a potential investor looks at a vacancy rate as the likelihood  of failure  then you are absolutely  right that they are wrong to do so. And here I think that what you do in terms of educating people about that is important.

I don’t really go along to get along

Dear Mr Tal,

The problem is that the term “vacancy rate” has had the same definition since long before we were born. What CMHC calls “vacancy rate” is not a vacancy rate.  This term were defined long before you or I were born as a measure of building and hotel performance.

Vacancy rate does not include all the residences in a city. It only includes those that are for rent.

“Likelihood of failure to rent” is a meaningless term and my colleagues would wonder if I suffered from aphasia if I used it to describe the vacancy rate.

This definition is from from Investipedia

Vacancy rate is the ratio of rental units not rented versus the total number in the building, city, state, etc.

How it works/Example:

The formula for vacancy rate is:

Vacancy rate = Units not rented out / Total units

For example, let’s assume that Company XYZ owns an apartment building that has 300 units. Of those units, 25 are not rented out. Using this information and the formula above, we can calculate that Company XYZ’s vacancy rate is:

Vacancy rate = 25/300 = 8.33%

Though our example uses units as the basis for calculating vacancy rate, it is possible to use square feet or rent dollars instead.

Why it Matters:

The vacancy rate is equal to 1 – Occupancy rate. In our example, the occupancy rate would equal 1 – 0.0833 = 91.67%.

I did not invent this, CMHC invented another calculation that is completely irrelevant and called it “vacancy rate” I would love to think this is in error but its hard to believe that not one person at CMHC’s entire department in charge of providing these statistics to the general public knows how to calculate a vacancy rate.

It’s very embarrassing for CMHC that’s for sure to have some lowly property manager bring to their attention how to calculate vacancy rate.

Many Thanks,
Rachelle Berube

Back To Benjamin Tal

We are talking about the same thing. In a purpose built apartment building it is true because everything is for rent and thus “total units” is by definition all units and that is the 1.7 percent that CMHC reports for purpose built. The issue is that you cannot apply the same to the condo market since only part of it is for rent. Again from a macro perspective we care about the absolute level to see to what extent this excess supply can lead to a massive increase in supply in the resale market.  For example if the vacancy rate as you measure it is 50 percent but the rental market is only one percent of all units this is hardly a macro issue that will lead to a massive sell off. I think it is a question of definition. If you want we can discuss it over the phone tomorrow.

My Final Email

Dear Benjamin,

That’s no problem we can talk. While drinking my Sunday coffee, I looked into the definition used by the US Census bureau and they too seem to agree with my definition and even New York has a vacancy rate of 5.9% (In housing New York is famous for their tight rental market) and many areas have double digit vacancy rates.

You certainly can apply this definition to the condo market. The ones for rent are part of the condo rental market. The others are not. It’s very simple. That is the 10.1 percent vacancy rate. I own a management company and this agrees with my own internal review of the Toronto condos I manage. Of course the sample size is very small.

Just like when looking at purpose built rentals you don’t include retirement homes, hospitals, police stations or office buildings when determining the vacancy rate. Actually this number looks really low too maybe they do.

The issue with the vacancy rate is that it includes all Toronto areas, Jane & Finch and Bayview & Bloor and even Scarborough so the numbers have to reflect that.

As for your concern, about a sell off,  I think that there is a very real possibility. I have been disseminating a cap rate spread sheet for the use of small investors for years and it does include such things as maintenance and vacancy. What you find when evaluating real estate in Toronto is that it makes no financial sense at all unless capital appreciation is relied upon to make the investment.

If there is one single act that would cause these condo investors to sell off as a group and cause significant problems, I would say that would be if the rent increase laws were changed. Currently any rental properties built after 1991 are exempt from the rent increase guideline. If maintenance fees go up and the rental market goes up a few $$$ the landlord is able to increase the rent above the measly guideline.

Rachelle

In Conclusion

The latest condo owner’s survey was taken in 2013, we are almost 2 years later. Since then about 20,000 units were completed in 2014 with apparently another 478 active projects on the go. Every single patch of grass in Toronto has become a condo project with a condo billboard on every street corner.

As someone who is renting these units out and dealing with the competition, unfinished state of the buildings, lack of cash flow for investors etc. I think we can finish what we have started and stop building. The condo vacancy rate is high. We don’t need more condos. We don’t need more high end rentals. What we need are affordable places for average people and families to live. There is no “trickle down effect” when you are dealing with condos because the costs are fixed and owners are already not making any money.

I took pictures of the Ice Building notices and there was floor after floor with obvious vacancies and what can only be described as an auction atmosphere for savvy tenants. The Ice building is not alone or an isolated case. I also rented a unit at 8 Mercer during the same time period, and 33 Singer Court, and I’m still renting a unit at 66 Forest Manor Drive. The owners haven’t reduced the price on that unit yet and so it sits, unloved and abandoned.

It is not acceptable that CMHC is not using the standard calculation for vacancy rate. I did not invent this number. It is used by countries all over the world.

“The truth may be puzzling. It may take some work to grapple with. It may be counter intuitive. It may contradict deeply held prejudices. It may not be consonant with what we desperately want to be true. But our preferences do not determine what’s true.” Carl Sagan.

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What Is Toronto’s Condominium Vacancy Rate ? (Not 1% That’s For Sure)

March 12th, 2015 · Property Management, Rental Property

vertical limitThe Emperor Has No Clothes. I’m not sure where the myth started that the condo vacancy rate was 1% (Give or take a few decimal points).  I have calculated the vacancy rate according to properties under my management and dug up a CMHC Condo Owner’s Survey so keep reading to the very end.

How To Calculate Vacancy Rate for your Condo

I calculated using time for each condo I manage.  1% of a year would be 3.65 days of vacancy. For a true rate though each condo in Toronto would be vacant for 3.65 days. As a measure of individual condo performance to calculate your vacancy percentage through the years, Take the number of days vacant and divide by 3.65. It’s quite common for the first tenant to move out on the 30th of the month and the new tenant to move in after a lick of paint and minor repairs 30 days later.  That’s an 8.22% vacancy rate.

Another methodology used to calculate a vacancy rate is to call hundreds of thousands of people who own condos and ask them if their condo is empty. For a 1% one person in 100 would have an empty condo.  This is the CMHC way.

My methodology

I manage quite a few properties, so I decided to calculate my own vacancy rate using properties I manage. I wanted a proper calculation so I removed all the houses, I removed all the condos that are outside Toronto. Most of the condos I get are vacant when the owner hires me, so I removed them too.  I only used condos that I have been managing for 2 or more years, that had been rented before 2104 to get an idea of the turn over.

Frankly, I think our rental process is one of the best in the business, once we get 60 day notice, we do a vacate inspection and use the photos we keep on file to put ads up and try to rent the place. We actively try to rent the unit for a day or so after the tenant moves out. That is our goal. We often succeed. I would not expect that this aggressive strategy is used as a general market condition.

I also removed all the new condos and non management properties from the calculation.

An exact 50% of these condos did not have any turnover and so their effective vacancy rate was 0%.  This obviously lowered the average percentage. With these strict criteria, my internal vacancy rate was 3.26% or an average of 11.89 days vacant. This is a best case scenario.

Adding in New Condos

When I added in new condominiums the rate jumped to 11.26% or 112 days on the market. This number also includes one condo that had two vacate periods during the year. The tenant moved out early and then we needed to rerent the condo and another condo where we had a bad tenant who moved out but didn’t turn in the keys, we eventually had to get a locksmith.  These are current market conditions and must be included in any calculation. The rental market does have tenants that are awful.

Market Conditions with a 1% Vacancy Rate

Once you realize how impossibly low a 1% vacancy rate is, you can quickly infer that there must be certain signs to a low rate. I actually know what they are because I’ve been in this business for 20 years and I’ve experienced these conditions as a professional and as a tenant. Here are some of the signs.

  1. As a tenant you would not give notice until you secured a place. The effect of of this was that you were quite likely to pay double rent for 30-60 days.
  2. Tenants were afraid their place would get rented before they found a new place.
  3. As a tenant you would take a place as is and fix it up yourself
  4. Intense competition, I’ve had 80 people show up for a showing
  5. People bring all their documents and cash so they can act quickly and rent the place.
  6. Rental Agents and Supers were offered bribes (Key deposits) to approve applications.
  7. The market was so painful, you did not want to move and would live with almost anything.
  8. Landlords did not fix anything, they didn’t have to.
  9. People would fill out 20 or 30 applications trying to get one apartment.
  10. Buildings had short hours, 9-5 with the office closed for lunch. The tenant would book off work to look for a place.
  11. Rents trended up.

To illustrate this a little further… during my property management school placement on Balliol Street downtown Toronto, I was tasked with accepting tenant work orders and showing apartments. First the only way work of any kind got done in the building was via City Work Order. All work orders were completely ignored except for flood, fire or emergency situations.

This particular incident stood out in my mind, I was showing an apartment and in the laundry room above there had been a leak and the ceiling had collapsed. The hole was very large and moldy. I asked the manager at the time if we could get it fixed. He gave a little laugh and with complete arrogance replied with a scoff “Someone will take it and they’ll fix it”. He was right. One day later that place was rented.

Later on I worked for a company called Macro Properties and to rent a property we would put an ad in the Toronto Star, they paid someone $500 per apartment to answer the phone. The volume of calls was staggering. I would set two appointments per week per vacancy. I would hand out applications and they would bring them back to the head office with a money order for first & last. After one particularly frenzied showing 13 people were at the head office before it opened, with their applications and money orders. I got in trouble from my boss because there were too many applicants and “What do I do with all of them?” The rent was $1600 and it was a 2 bedroom apartment. It was also under construction during the showing. It was not affordable housing.

These glory days for landlords are long long gone. These are not the present market conditions. Not even close.

Current Market Conditions

Renting is seasonal.  It’s been a long winter. Kijiji is now the biggest rental site. It also boasts a current 14,000 apartments & condos & houses for rent. Realtor.ca another 4600 approximately. (Other sites don’t have numbers) It’s no problem to answer my own phone. Before I even take on a property, I will do a market survey. If the price isn’t bang on, you don’t get any calls. These are brand new properties and really decent ones. A few years ago my marketing strategy would get about $100 more than the average.  Here’s evidence that the current vacancy rate is a lot higher than propagandized.

  1. Tenants expect a place that is clean and painted and in good condition.
  2. Buildings have late hours every day and even weekends to make it easy for the tenant to come to them
  3. I require people to confirm one hour ahead of time to make sure I don’t get stood up. I mostly have showings with just one person.
  4. The Toronto Real Estate Board’s own published statistics for the last quarter of 2014 state that 50% of places are not rented. The last quarter of 2014 10,611 of all types of properties were listed and 5036 were leased. How is this possible in a 1% vacancy rate situation?
  5. Tenants shop around and have lots of time to make up their mind.
  6. Competition is fierce for good tenants. Buildings are giving away TV’s, free month’s of rent and other promotions.
  7. It takes more than 3.65 days to rent a place and move a new tenant in.
  8. Rents trending down
  9. No depth to market, poor response to ads, few calls.

All of these existing numbers prove to me that the market is not nearly as tight as 1%.  The evidence says it’s not and as more and more buildings come on the market, it takes months for the area to absorb the 50-60 suites of inventory.

Here’s a few examples out of the last month.

8 Mercer Street is one of the most unfinished buildings I’ve ever rented. There are 20-30 suites available currently and they just opened the 6th floor. So there’s a whack of more floors to provide even more inventory. I put the price to $1599 for a one plus a den at John & Wellington right in the heart of the financial district. I get not one phone call in one week. I drop the price to $1499 I get one call and one inquiry right away. As it turns out, my new resident has seen a lot of suites in the building, she has selected the 07 layout as the best one. She likes the floor it’s on because the door to the rooftop garden is right beside her unit. Does this sound like a tight supply to you?

I listed another unit at 33 Singer Court at Leslie & Sheppard in the Discovery Developments. This group of buildings includes some of the best amenities I’ve ever seen, including a dog spa area so you can wash poochie after his walk. It is also rented now but when I did my market survey there were 27 one plus dens for rent in those buildings.

These are simply not low vacancy conditions.

Quest For The Numbers

In my search for some kind of reliable numbers I emailed CIBC’s media spokesperson about this old article in the Globe that came out in February 2014.  I was told they got the number of 1.7 % raising to a little over 2% from CMHC. So I emailed CMHC and they said they did not know where CIBC got that number from and to ask them.  They also said this was an old article, so then I sent them this horrible article from the Financial Post. Even Toronto Life’s moment (Not available online) quoted this low rental vacancy number.

That Financial Post article needs a full blog post on it’s own to fight the propaganda in it. The only motivation for selling these condo sites to a pension fund as a rental building is because condos are getting harder and harder to sell. Or they are short on cash or some other internal reason. It’s not because of the downtown condo rental market strength that’s for sure.

Then… CMHC emails me this report called the Condo Owner’s Survey in which they just called thousands of people and ask if their units are vacant, under repair, or occupied. You can read the whole thing or you can skip to page 6 table 9 which states a vacancy rate of 6.9% or page 9 table 19 which has a vacancy rate of 10.1 % for condos purchased in the previous three years and around 5% for the rest.

This report was published in August of 2014 but surveyed 2013 obviously. Due to the nature of the rental market it’s really hard to get a more recent survey. I doubt that the thousands of investment condos that have come out since then have improved the vacancy rate. The vacancy rate has gone up from the 6.9% or 10.1% rate quoted by CMHC.

Deceptive Marketing 101

I’m sick of hearing about the low low condo rental vacancy rate. It’s a complete fabrication and has been for years. If anyone knows where this information comes from I’m all ears. Probably Brad Lamb in 2012. Who knows. The CMHC report is the best source we have for a true vacancy rate for condos in Toronto. The only people who benefit from this astonishingly inaccurate statistic is the real estate developer, one with a lot of condos to sell.

As someone with experience in navigating the difficulties of renting and managing these new condos, I think it’s time for the Bad News Fairy to sprinkle the condo market with a healthy dose of reality. It’s almost a yard sale out there, with condo owners having to adjust their price expectations as tenant shop for the best deal.  The vacancy rate is closer to 10% than to 1%.

Feel free to question my numbers and methodology in the comments.

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The Art of Above The Guideline Rent Increases

February 7th, 2015 · Property Management, Rental Property

Awesome

I rent a lot of new condos, and it’s not always easy. Frankly the halls and lobby are dirty and dusty, some of the elevators don’t work, the amenities are not ready and a host of other not-so-easy-to-justify-those-condo-rent-prices issues. It seems that every year developers are occupying the suites that are finished with the common areas more and more unfinished.

Then there’s the other elephant in the room… competition from other landlords. A few years ago I saw the same suite I was renting for $1600 rented by another landlord for $1250. Considering there was about 10 close to identical units available for rent at the same time, I can understand the desire to “just get it rented”.

Bad time of year, competition, less than decent rental conditions all lead to landlords giving tenants some very good deals at times. Regardless one year later the landlord can increase the rent to help offset some of the good deal they were forced to give away by adverse market conditions.

Here’s some examples.

169 Fort York Boulevard – The Garrison

I rented this large one plus den for $1600 originally, the tenants stayed for well over a year and I gave them and above guideline increase to $1650. They moved out and we added a nice double french doorway to the den  and it now rents for $1700.

105 The Queensway – NXT2

I rented this large one plus den for $145o with a parking, again in mid construction, with some quite major deficiencies that still needed to be repaired. Once the tenant moved in, the washing machine was missing a part and the tenants had no washing machine for a month. It took numerous attempts to get the right part and was by all intents a major f-up that required daily telephone calls to address.  It was quite similar to  the dishwasher situation that had me steaming.

However the rent prices for the area were unusually strong and so I recently did a market survey and the area rents are around $1600 to $1650 for the same suite. The owner and I decided on a rent increase of $100 and we sent a nice letter to the tenant, explaining that the maintenance fees have increased, and that our market survey showed that similar suites were renting for $200 more than they were paying. We also sent the Above the Guideline Increase For Partially Exempt Properties according to Ontario law and the tenants are paying the increased rent. The owner did not want them to move because they are really decent people and because suite turnover cost lots of dough. Chances are you will end up with a month of vacancy and possible some painting and fixing of the apartment and there goes your brilliant rent increase “profit” for 3 years.

61 Town Center Court – Forest Vista

This gorgeous apartment again a one plus a den was rented at an awful time. When the owner was buying the suite we did a market survey and we agreed that we could get $1450 as it is a very lovely quiet condo building. The suite is very spacious. The amenities are fantastic and the place backs onto a park and you can throw a stone at public transportation. Unfortunately by the time the suite had closed and possession had turned over to the owner, a brand spanking new condo down the street had opened up for occupancy and there were more than 50 suites available in that building for several months.

Needless to say we had to change our pricing strategy, and the suite rented for $1300. The owner was looking around the area and over a year later prices have adjusted back to the original market conditions and suites in that building are renting for $1450. Once again we gave a nice letter to the tenants, showing them a market survey, telling them about the inevitable maintenance fee increases and telling them we want them to stay along with the Rent Increase.  They now pay $1400 and so they are getting a deal from prices in the area and the owner also gets to keep their good tenants.

225 Sherway Gardens Road – One Sherway

Somehow during the rental process, these tenants ended up getting free hydro instead of having to pay, and they’ve been there for several years now. We gave them an increase of $100 which just brings them up to par with what the other units we are managing in the same building have rented for recently. They are lovely people but have outgrown the apartment and are actively looking for another apartment. I know they are planning to leave, and I want them to cover their costs while they live there.

I love this building by the way and these tenants above are really fantastic and looking for a 2 bedroom in that building complex if anyone has one.

Best Practices For Above The Guideline Rent Increase For Units Partially Exempt

  1. You must use the Ontario Landlord & Tenant Board Approved Form
  2. Send a nice letter thanking your tenants and asking them to stay.
  3. Explain why you are increasing the rent, in most new condos there is a jump in maintenance fees after the condo is taken over by the owners and the new management company.
  4. Do a market survey first, some suites are not renting for more than I could get for them 3-4 years ago, tenants aren’t stupid, they can and will move out to the suite down the hall if you get it wrong.
  5. Give the tenant a deal, if prices have gone up $200 then raise the rent $150 and the tenant will still get a $50 below market rate apartment and the landlord will recoup at least some of the money they are paying out to mortgages and maintenance fees.

While many landlords do not want to risk losing a tenant, some landlords want tenants to pay closer to market rates for rent and are willing to take that chance. I have found that many tenants are willing to pay the premium price for a premium property and are reasonable when it comes to paying for the services they get.

I do love the challenge of renting and managing all these new condos, it keeps me on my toes. There’s always something new and interesting coming up.

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Reader Question – Should I Assume Existing Tenants

November 19th, 2014 · Landlord & Tenant Board, Property Management, Rental Property

 

"Woodfall's Law of Landlord and Tenant"

First reader Mike gives me compliments and then he asks me a question. This is a sure way to be featured on the blog. As a woman the easiest way to my heart is through flattery.

Reader Question About Assuming Existing Tenants

I’ve been following your posts for some time now.  Partly because I’ve been considering getting into landlording and partly because your stuff is just so damn entertaining.  Now I’m starting to get more serious about finding a rental property.  I’m new at this so it may take me some time to find the right one.  But I figure I can shorten my learning curve by talking to experts like yourself.

Here’s something I’ve been wondering about.  Should I be concerned about existing tenants?  They could be great or terrible.  In your experience is it better to assume the existing tenants or start fresh with your own?  Is it possible to do credit checks on them before putting in an offer?  And if I don’t want them can I legally ask the seller to give me vacant possession?

Mike in Toronto

Rachelle’s Answer

For truly good questions, there are no easy answers.  Lets go one at a time….

Should you be concerned about existing tenants?

  1. Yes, you should be very concerned.

In your experience is it better to assume the existing tenants or start fresh with your own? 

Again it depends, if they are good tenants or not.  It is easier and you will start making money right away. As a manager I have found that when you rent to people yourself, you rent to people that you can relate to and have some kind of connection with. The existing tenant has already been through the turmoil of a sale of the property and lots of showings and has possibly years of accumulated resentment against their former landlord. It’s a bit of a crapshoot. Some of the tenants will be very good, the hard part is telling which is which.

Is it possible to do credit checks on them before putting in an offer? 

Not that I’m aware of. Once you purchase the property, you should ask for and receive tenant files and information. You should also get a Tenant Acknowledgement from the lawyer. This is an official document stating if they have last month’s rent, how much the rent amount is and if they have any rent arrears.

However; nothing at all is keeping you from using your eyes, ears and mind to evaluate the tenants. Credit is only about 30% of the application decision in my process. First and foremost is my evaluation and judgement of the tenant’s presentation, appearance, appointment setting and attitude. I’d love to be able to do home visits on all my potential tenants but I can’t, it’s just not practical.  You will have a golden opportunity to do a “home inspection”  so you can see exactly how the people live, if they are clean, if their cat poos in or out of the litterbox and so much more.

How they treat their existing landlord and the real estate agent will tell you volumes about how they will treat you once you are their landlord. Watch, look and listen.

And if I don’t want them can I legally ask the seller to give me vacant possession?

Uh boy. Well you would have to tell the owner that you need the property for your own use. Good news is that I am not aware of any buyers getting in trouble for the previous landlord giving notice in bad faith. Technically you are only supposed to give notice if you are actually going to live there, but if you have any doubt that the tenants are excellent, this may be your only chance to get them out. Some landlords will insist that you assume the tenants knowing the problems that can happen at if the tenant’s contest at the Landlord & Tenant Board.

This only really works with small properties obviously. It’ll be a hard sell to explain to an adjudicator why you need two or three full sized apartments in a four plex obviously.

The Most Important Question

Why is the landlord selling the property? Generally you won’t find landlords selling great cash flow, trouble free properties unless they are dead (estate sale), retiring, buying other properties, getting divorced or making their problem tenants into your problem tenants. You cannot count on the real estate agent t0 tell you that you are taking on a trouble tenant.

There is another category of landlords who have just discovered they do not like being a landlord. This business is not for everyone.

Secondary Question

In every business transaction there is risk. What if the landlord is selling the property with their problem tenant in it?  What is your plan? Are you so strapped for cash that going even one month without rent will mean that you’ll have to eat baloney sandwiches for a month until the rent gets paid? Do you have a contingency fund for legal fees and do you have a solid understanding of what tenants rights are in Ontario? I always recommend that landlord go to the Landlord & Tenant Board just to see that part of the business.

My feeling is that if a tenant is so bad that it causes a landlord to sell a property, it is worth a significant discount on the price. I’ve dealt with some of the worst tenants that this city has created and it can take years and tens of thousands of dollars in legal fees and expertise to evict a tenant. For instance I know of one lady that has a beautiful unrentable main and second floor of a house for over a year, because her basement tenants have 4 unneutered male cats living in a one bedroom apartment. It smells disgusting. Now that owner gets to go to the Landlord & Tenant Board to prove a smell.

Another lovely lady I know had a realtor estimate that her horrible tenant would cost her $70,000.

Specific Red Flags

  • The tenant does not cooperate with showings
  • The tenant will not fill out sale related forms
  • Their home is unusually messy, smelly etc.
  • The tenant hates their landlord
  • The tenant complains a lot about minor maintenance issues
  • The tenant brags about taking their landlord to the Landlord & Tenant Board
  • The tenant seems “crazy” or “not quite right in the head”
  • The place smells like weed
  • The tenant suffers from Meth teeth or is drunk when you get there.
  • The tenant is a “victim” of anything.
  • So many more… but that’s a start.

As in most real estate transactions, Buyer Beware!

 

 

 

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Lousy Weather Makes For Lousy Renting

November 11th, 2014 · Property Management, Rental Property

Dandelion

If you’ve ever done any type of sales, you know which days are going to be good selling days. Bright sunny dry days are the best, even in winter.  Dank, humid, blathering days are never good.

You’re trying to present the place at it’s best and houses and apartments look better when it’s sunny out.

I have learned that I have an abnormal amount of cancellations during bad weather.  It’s depressing, but it’s a fact. You cannot control the weather.

You have a nice property but the weather is not on your side? Try looking and booking according to the weather forecast (a little bit) Remember we only need one good tenant anyways.

Happy Renting

 

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