We receive phone calls regularly from people who want to sell their investment property and, of course, they want to fetch market value for it. These phone calls become heightened after we disclose a record breaking sale such as our most recent one at 233 Wychwood Avenue listed at $989,000 which sold for $1,208,500. Of course every caller insists that their investment property is also worth the same or more than 233 Wychwood Avenue because the market is "very hot".
It is true that the investment property market is very strong but unlike single family homes whose ultimate high sold price can reflect an element of emotion, investment property sold prices are influenced more by an investment return. A huge factor that will determine market value for your property will be the income it generates.
During these conversations we probe deeper and ask many questions about the condition of the property and especially about the income it generates before we voice our opinion on value. The caller usually answers "well the rent is low but I like my tenant" or "the rent is low but my tenant has been here for a long time" or "I have a really good tenant who takes care of the property so I have given him/her a reduced rent".
So then we respond "that's really nice that you have a good tenant, but an investor who will pay you market value for your property also expects market value rents". They respond "well they can always ask the tenant to leave".
In reality a new owner cannot ask the tenant to leave and being a landlord you should know this. A tenant can only be asked to vacate, if they do not have a lease, and under these circumstances:
- if the purchaser requires the rental unit for their own use, or for an immediate family member
- if the purchaser requires the rental unit for a person who will provide care services to the landlord or a member of the landlord's immediate family provided that the person receiving the care services lives in the same building
- if the purchaser plans major repairs or renovations that require a building permit and vacant possession but, regardless, the tenant has the "right of first refusal" which is first choice to re-rent the unit when the renovations or repairs are done
- if the tenant is not paying rent in full or paying late
- if the tenant is causing damage to the rental unit
- if the tenant is performing illegal activity
- if the tenant is affecting the safety of others
- if the tenant is disturbing the enjoyment of other tenants, or
- if the tenant is allowing too many people to live in the rental unit referred to as "overcrowding"
As you can see a new buyer cannot arbitrarily "get rid of a tenant". Then these callers keep insisting that their property generating a cap rate of 2% to 3% is worth the same as one that generates a 5% cap rate simply because the market is hot. Unfortunately that is not the case. In reality if you have two identical properties in the exact same location in similar condition with one generating an annual net income of $50,000 while the other an annual net income of $40,000, the property generating the higher net income will sell for a much higher price.
So what can you do to ensure that your investment property will increase in value according to the market?
- First and foremost treat your investment property like a business and increase the rent the allowable amount every year.
- If your tenant is helping you take care of the property then pay them a monthly fee instead of reducing their rent. This way the new owner can increase the rent from the higher amount and choose to keep this "caretaker" arrangement or not.
- When your tenant vacates research market value rents in the area and charge market value rent for the unit.
- Maintain the property because well maintained properties get top dollar.
- Do not give your tenant a long term lease because if you choose to sell it the new owner will not appreciate the lack of flexibility especially if they want to move in.
- Don't assume that because your tenant has a professional career that they will take care of the property better than someone who does not. Filth, hoarding and difficult tenants are not restricted to non professionals.
- Do not give the tenant any unusual rights in a lease. Recently we sold a bungalow with a basement tenant. The owner was an elderly lady and did not use the backyard so she gave the basement tenant the right to use it in a lease. She decided to sell the house and understandably the potential buyers did not appreciate that if they purchased this home they would have to share the backyard with their basement tenants. Do you think this reduced the pool of interested buyers? Of course it did.
If you own an investment property and you want to maximize its value it's important you know the law especially because the Residential Tenancies Act is very pro tenant. Also, remember to treat this investment like a business and not get too chummy with the tenants because you may allow emotion to cloud your judgement about rental increases and privileges you may be inclined to give the tenant that can affect the resale value.
Time and time again we list tenanted properties and of course they require tenant co-operation for viewing times and presentation of the property. Many sellers will say "oh my tenant will be very co-operative and flexible because I've been so good to them over the years by keeping their rent low etc" only to witness, after the landlord tells the tenant they are selling, an overly uncooperative tenant or one that insists you abide by the letter of the law. Most tenants do not appreciate the possibility of being displaced whether you have been good to them or not so treat it like a business because most tenants assuredly will. Furthermore align yourself with a trustworthy real estate agent who will advice you properly on how to go about maximizing the resale value of your investment.