December 16th 2024
When it comes to selling your property, be it your home, a ‘fix and flip’ or an investment property, there are a number of different strategies you can use. You can start high. After all, studies have shown that for most people the largest chunk of their net worth is in their real property. And so, you want to realize as much equity as possible from the sale. And of course, the mind set often is ‘I can always come down’. And who knows, even if you are overpriced, there is always the possibility that someone will come along who absolutely falls in love with your property and is willing to pay what you are asking or beyond. You might get lucky.
For another seller, the strategy may be to price their home below market value in the hopes of receiving multiple offers. Starting a bidding war and ultimately getting more that their asking price.
A third seller may, after careful study of the market, try to price their property as close to what they feel is market value, as possible, believing that it will stack up well compared to the competition and given a reasonable amount of time the right buyer will come along.
Different strategies. But a common goal. To realize as high a price as is reasonably possible for the sale of their property. Bearing in mind their time constraints and personal circumstances.
When it comes to renting a property however the mind set needs to be a little different. Whether it is a single-family property or a unit within a multi-family building, price is still important. After all you are in the business of being a landlord because you want to make a profit. And decent cash flow is essential to cover the carrying costs, service the mortgage and look after maintenance and repairs. But there is one significant difference between the process of selling and that of renting. The issue of duration.
When you sell your property, it is a finite process. It has a completion date. You close the deal. You get paid. And you are done. Not so when you rent. Sure, you are giving up some of your bundle of rights. But you still own the property. And more significantly, you are entering into what will hopefully be a long-term relationship with a tenant. Unlike the sale process which is transaction based, the rental process is very much relationship based. And that reality should very much impact your decision as to how much rent you are going to charge. Let me explain.
I firmly believe when you rent your unit you would be well advised to set your rent a little below market rent. And stay there! Resist the temptation to hold out for top dollar. It’s a matter of selection. Just like home buyers, tenants will be shopping the market, looking for the best fit and the best value. So, who will likely choose one of your units? When you ask top dollar, the really good tenants will pass you by. Why wouldn’t they? They are in big demand. A landlord offering better value or a more attractive unit will snap them up. You’ll be left with the difficult to house. The tenants that move frequently, that don’t look after the property and have bad credit. Oh, you may not rent to them. At first. And that’s wise. Because once you say ‘yes’ the transaction isn’t over. It has only just begun. So, you say ‘no’, over and over. But in time you get tired of the showing process. Of carrying a vacant unit. And your standards start to slip. Eventually you may get the top dollar you were holding out for, but you may have traded cash for a host of headaches along the way.
I recently had two units come up for rent personally. One a very small 1 bedroom in an upper duplex. The other a backsplit semi. Both were in excellent shape. I set rent in both cases about 5% to 10% below top market rent. In both cases I had them available for viewings the day after the ads appeared on Kijiji and Marketplace. With the case of the small 1 bedroom, I had about 6-7 parties look at it. I got 3 applications and I selected one who I am very pleased with. In the case of the semi, again one day showing. Got a very acceptable tenant and a second I would have considered called me after the weekend devastated that it had been rented before they got their application in.
In contrast I have an agent who is moving out of the house she rents. The landlord has been trying for not just days, but weeks and into months to rent it out. The unit shows very well. But he is holding out for top dollar. He’s going to face some hard choices soon. Carry it vacant for an extended period. Lower his standards and make a decision he’ll regret, or lower his rental asking price.
I’ve been at this a long time. The one thing that drives landlords out of the rental business isn’t generally cash flow issues. It’s bad tenants. Put yourself in a position for long term success where you get to control the selection process. Keep your units in excellent condition, and moderate your rent. Remember, you are not just transaction based, like a house sale. You are relationship based. You are in it for the long haul. Approach each rental with that thought in mind. And set your rent accordingly.