It Starts At The Bottom

The Kick Real Estate May Need

Do you know where the turnaround in the housing market starts? It starts at the bottom. I’m not referring to the slums or the starter housing market, but with the rush for rental property and I have seen the change firsthand over the last six months.

The number of people moving here for work is actually rather amazing and since I provide short term furnished rentals for people moving to Calgary for work, I can see the how the market has changed over the last six months. In the early spring, a typical online ad for me would get 30 or 40 views and a call or two.

Prior to spring, many of my properties ran at only 50% occupancy, it was simply brutal. Looking at the rental market now though, things are incredibly different.

This past weekend I started an ad late in the day Friday and had almost 100 views by Saturday morning. It wasn’t just views either; I have easily talked to 20 people already with the majority being from outside of the area and their reason for coming is work.

Labour Markets Help Drive Real Estate Markets

Now this isn’t anything remarkable, it’s actually quite consistent with how the labour market works. Many of the labour and trades workers simply follow the jobs and the majority of the jobs in Canada appear to be occurring in Alberta.

What is remarkable though, is the speed in which it’s picked up and how similar it is to the market that occured in 2005, right before our last boom and when things went crazy. In January and February, we were barely half full in our furnished rentals, but by March, it started to change and it’s been following the  the labour markets trends the whole way.

Even though this is paralleling what we saw in 2005, it’s still not a true indicator of what may take place over the next couple years here, but it creates an interesting environment. It also starts to be a rather predictable cycle if you sit back and look at it, but we aren’t completely out of the woods and into the oilpatch yet.  The true test will be if our job market continues to be so stellar or even just maintains.

If the job growth continues to grow, things will just get better and better, if it maintains and chugs along without the steady growth we have seen, it will still work out quite well. At this point the only factor that could truly hurt us is the bottom dropping out of the oil industry, and it doesn’t appear to be in the cards.

Real Estate Growth Can Actually Be Predictable

The predictability works like this. First, the workers migrate to the jobs and as they continue to stay and work, they put pressure on the rental market. Second, as the rental market sees increased demand and less supply, rents start to slowly increase initially and then faster as the properties continue to get filled.

Eventually, it reaches a point where the cost of paying a mortgage is similar to the monthly rent. It’s also about this time that many of the workers who migrated here 12 to 24 months prior start to settle in and get comfortable. It becomes just comfortable enough that they also start transitioning to the idea of staying put and settling down.

This moves us to the next stage of the cycle where, slowly but steadily, people start transferring from the rental market to purchasing homes. Looking back to 2006, prices were significantly lower compared to where they are now. This will put an initial damper on any increases in values, but if there is enough demand and transition to people buying, it inevitably puts pressure on those values.

This is the type of pressure that boosts home prices upwards, which would make many people very happy. Of course, there are some variables and concerns still. Will the energy market continue onwards as it has the last year? Will interest rates stay relatively close to where they are now? Will everyone who couldn’t sell in 2008, 2009 and 2010, suddenly throw their property on the market at the first sign of true positive increases? Effectively stalling any price increases and oversupplying the market once again?

The next six months to a year will be very interesting times, so if you haven’t started paying attention yet, you might want too.

Investor’s Perspective

If you currently have a rental property you need to take a look at what is currently happening with vacancies and current rental rates out there for properties. As vacancies decrease, competition for good rental properties will increase.

For a Real Estate investor this is a sign that rents will start to increase. If you are keeping your properties in good shape (and you should be to attract the best tenants), there will be opportunities out there for you to increase rents in the near future.

The changes to the Residential Tenancy Act a few years ago reduced how often a landlord can increase their rent to only once a year. This ties in nicely with a year’s lease or two six month leases and presents an opportunity for you to likely work in a slight increase. I’m not talking anything crazy, but property taxes keep increasing, insurance costs keep increasing and even the cost to evict tenants keeps going up.

Increasing the rents isn’t gouging the tenants, it’s operating your rentals like a business. I’m sure you had to lower some rents when the market dropped out, don’t miss out on your upcoming opportunity for you to get them back to where they should be.

Let’s do an informal survey, if you are a landlord, leave me a comment about the last time you raised your rents, and if you’ll be doing it in the near future. As a side note to this, by charging higher rents, you weed out many of the problem tenants, so it not only helps cover increasing costs, it makes your life easier.

About admin

Bill has been investing in Calgary Real Estate since 2003 and has been writing about various Real Estate topics since shortly after he started. With a significant amount of Real Estate transactions and experiences he is able to pass his knowledge on to other investors and partners, and now you through his Real Estate blog. To automatically receive new posts, be sure to sign up on the top right of this page and I will send you a free ebook on Screening Tenants.
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17 Responses to It Starts At The Bottom

  1. Tim says:

    Hi Bill,

    Yes, we have been raising our rents since the early summer on our properties. Even with the rate increases, we are getting more responses to our ads and better quality applicants/tenants. Some of them are relocations from back east and their first physical viewing of the property is the move-in date.

    Tim

  2. Fay Whitford says:

    This is good news! Had to reduce rent rates last year. Maybe I will be able to raise rents next time I have a vacancy (currently everyone has leases, can’t do it now, even if the market does go up).
    Fay Whitford´s last blog post ..What is the iEffect

  3. In 2008 I raised my rents substantially on both my rentals… An average of $300 each property…I think I was undercharging though for years.

    I have recently bought a 500 sf unit just off 17 ave ..lower mount royal, and have hired a contractor to completely gut it and renovate the unit with top notch finishes…a 45k renovation…im not sure how to market the unit…short term…I could furnish it ….or yearly rental, and at what rent?
    Never done shower term rentals before but assume not as profitable

    Any advice?

  4. Bill Biko says:

    Hi Jody,

    Great job with raising the rents. Many landlords get trapped in the status quo and leave rents at the same level for years on end. Meanwhile, taxes, insurance and overall costs never stop increasing and suddenly their once profitable property suddenly costs them money each month to own.

    When landlords get caught in this situation they also find they don’t have the capital to maintain the property and eventually the tenant suffers as the property gets neglected.

    In your situation, I would suggest considering a regular rental versus the furnished, it is a very small market for furnished and competition would be tough. Vacancy rates as of November are quite low for affordable properties, so you could likely do quite nicely with this unit.

    Regards,

    Bill

  5. I haven’t raised the rent on one of my rental homes for nearly three years. I know that I could…and, I know that I should…but, I also know that the tenant takes good care of the house and I also know that the tenant has not received a pay increase from his employer in over two years. Yes, property management is a business, and this is my own business…but, if I lose this tenant, it may cost me more in the long run.

  6. Bill Biko says:

    You are also in an entirely different market in the US Rick and that makes a difference as well. On the other hand if your costs are going up, taxes, insurance etc, your property can go from an asset to a liability over a few years.
    There have been several articles talking about the US becoming a renter’s market versus a homeowner’s market and most of them are a bit presumptuous with their numbers. While there has been a drop in home ownership, well over 60% of Americans still own their homes and that still makes them the majority. It does however mean there will be more renters out there and could help with vacancy rates decreasing and provide opportunities for rents to increase.

    Regards,

    Bill

  7. Carmen says:

    Even though there are a lot of people moving to Calgary for work, prices are staying pretty flat, because I guess they are choosing to rent for the first year or two to see if they want to stay. I am currently fixing up a condo and haven’t decided yet if I will rent it or flip it. It is tough with condos because there are so many things that are out of your control like condo fees and special assessments. Those can kill any positive cash flow you might have really quick.

  8. Bill Biko says:

    Hi Carmen,

    We are seeing a bit of price creep appearing, but perhaps more importantly is the Days on Market (DOM) indicator. We’ve been steadily seeing the actual days it takes for a property to sell decrease. Obviously this is directly related to more buyers being out there, but it is another sign of a market getting better.

    As more buyers appear properties move faster, inventories get reduced and values push upwards as supply and demand changes pricing. As you pointed out condos can be tough due to the extra fees associated, but also since they typically have lower price points they provide a better starting point for new buyers.

    Historically if you watch the gap between house prices and condo prices, you can have an idea where the market is heading. If the gap is small, more people move to single family houses increasing the gap, once the gap becomes too large, people start moving to condos as they are more affordable. It becomes an elastic relationship.

    You also mentioned special assessments which are the true bane of condo owners. Having been through numerous instances myself with rental properties, it’s part of the reason I avoid buying condos as rental units. It’s also why it’s so important to have all the condo minutes reviewed and the reserve funds before making any purchasing decision regarding a condo.

    Things are definitely happening in the market and more of the forecasts are looking rosier and rosier, so my opinion is that if you could hang on for another year, you could likely sell it for more, you just have to weigh that against whether you end up carrying it potentially for a loss for the next year.

    Regards,

    Bill

  9. AlexMexCan@yahoo.es says:

    Hi Bill,
    I have not increased rent in more than a year, on the contrary I reduced rent a year ago or so but property taxes and special assessments are going always up.
    In November, I talked to my tenant and I have given a 30-day notice of rent increase starting Jan-2013 (May be I am the Grinch?)

    Thanks again for educating others and sharing!
    Alex

  10. Bill Biko says:

    Hello Alex,

    From your email address it appears you are not originally from Alberta? In Alberta to increase the rent in most circumstances requires a 90 day notice to the tenants by law. Make sure you check your local Landlord and Tenant laws to make sure the 30 notice you provided is legal!

    Bill

  11. Angella says:

    I only own one townhouse – lived there myself for 5 years before converting it to a rental. My first tenant got a sweet deal… and got herself evicted after being there only 7 months. I increased the rent to about $50 under market… was swamped with calls. My new tenants have been in my place for almost a year – and I love them.

    I have no intention of increasing the rent in the near future. I am confident that my tenants are caring for the place. Their rent pays the mortgage, condo fees, mortgage insurance, owner’s insurance, and property tax with better than $200 left over each month. I can afford to keep them happy by not increasing their rent. Plus, I know the state of the condos I’m in – there is no danger of levies – all the major work has been done, and ahead of schedule.

    If they move, I’ll likely bump up to a bit below market again.

    On the market front… been watching it… and, in Edmonton anyway, it seems lately the townhouses are selling at or above list.

  12. Bill Biko says:

    Hi Angella,

    Thanks for your thoughts, as always!

    If you have great tenants, it may not make sense to upset the apple cart and raise rents, however, if you don’t you end up penalizing yourself. Over time your taxes increase, your insurance increases and as interest rates eventually increase, so will your payments.

    If you have great tenants, they will surely understand a $25 or even $50 increase just to offset your increased costs. Especially if you show what other places are currently renting for and in your case how much of a bargain they still receive.

    As for advertising below market rents, it’s a duel edged sword. By offering discount prices, you attract discount buyers. Yes, you’ll receive many more people calling, but many of them you simply don’t want. Some are calling you because it’s all they can afford (which makes them higher risk), some will call because they aren’t concerned with value (meaning they typically won’t value your home as it is simply a commodity) and some will call because it saves them a few dollars (which may be a good thing).

    I find by upgrading my properties above the standards of the surrounding rental properties and by advertising at a slight premium versus the other rentals I get several benefits. First I get less calls and frankly I’m busy enough, I don’t need to field 100 calls on a weekend where 90% of the calls are from tenants who would never be qualified to rent my property. Second, if I charge slightly more and have a nicer looking place it will appeal more to the tenants I desire to have in place, tenants who can afford more and want a nicer place. Third, when tenants do view my property and then go look at the other properties which aren’t of the same standard, that extra $50, $100 or even $150 suddenly is’t as important, they simply want the nicer place. Finally since it’s a nicer property they tend to take better care of it for me as well. Now to be fair the last point isn’t always true, but it happens more often than not as they are spending extra money for the privilege of a nicer place.

    As for the market, the next couple of years will be very interesting. With the tighter and tighter rental market situation it’s going to really put pressure on the resale market. Hopefully it doesn’t explode, but rather it continues it’s slow steady increase. Townhouses and starter properties are real indicators of what’s going on in the market and as more people find rents becoming higher than the cost of owning these properties become the hotbed of activity for people moving from the rental market to becoming owners.

    Regards,

    Bill

  13. Angella says:

    Ugh… tell me about it. I received more calls than I could count – some from great people, others not so much. One of the more noteable callees – repeat, in fact – was a woman who sounded completely baked on the phone. Her message went something like:

    “Hi, my name is…. I was calling about your place. I have four kids and I’m on social assistance cause I’m pregnant (um… no… if you were off work cause you were pregnant you’d be on ei, not social assistance, but you know… I’m stupid and all), well three kids, and I’m going into the hospital at the end of the month to have another, but that’s OK cause my friend will move me in. So call me…

    uh yeah…

    There are some easy things that I’m often surprised landlords don’t think about… for example… if you have a tenant who wants to move in for the middle of the month – especially the 17th… they’re screwing their last landlord… paying you the damage instead of their landlord the rent, plus then they only have to come up with half a month’s rent to move in

    When you get references, check the numbers in a reverse directory to make sure they belong to the landlord. Then, check to make the “landlord” actually owns the property.

    I google/facebook people all the time. I also check out the employer. I weeded out one prospect because his employer was facing major lawsuits and about to go under. Not to mention his (out of province) references didn’t jive with what he said after a google search. Google, not just the tenant, but the references too.

    Even the smallest lie, for me, is enough to weed you out. I advertised a pet friendly place – and one of my applicants claimed to have no pets, yet her facebook was littered with pics of her cat. She would have done better to be honest about the cat.

    Finally, I like to find an excuse to visit them at their place if possible – a doc that needs signing, need to meet the pet, particularly “mid-sized” dogs – one of whom, for me, was a Louisiana leopard dog – on the large end of the breed standard scale – with owners who rushed out the front door to meet me with the dog and, foolishly, told me about how they’d just spent two hours playing with him before I came. At the very least, particularly if they live in a house/townhouse, do a drive by to see how the place is maintained.

  14. Bill Biko says:

    More great comments and ideas thanks Angella!

    I also recommend Googling employers to make sure a) companies exist and b) they are actually somewhat close to the property. If it’s an hour drive to work, they may suddenly not like the place in three months and want to break the lease.

    Also when it comes to calling references, never call direct numbers first. Use the switchboard after Googling the company and then ask to get transferred or verify the number first. Many tenants now just have friends provide phoney references.

    And when calling landlord references, also plug the number into Google. If they are real landlords you should be able to find old or current rental ads for the property. If you can’t another red flag!

    Regards,

    Bill

  15. Igor says:

    “What is remarkable though, is the speed in which it’s picked up”
    Do you think it’s going to drop down just as fast at the end off busy time?

    Thanks for sharing useful info Bill!
    I’m not a landlord yet, trying get enough knowledge to become one )

  16. Bill Biko says:

    Hi Igor,

    It likely will drop off just as fast, but that won’t be for a while, right now there is simply to much economic growth going on in Alberta for the next several years. Between Saskatchewan and Alberta we will be bouncing back and forth for the lead in economic growth for the next three to five years.

    With areas like Ontario still struggling and potentially years away from having steady streams of jobs, we will continue to see people coming here for work, looking for places to live and putting pressure on both the rental and the purchasing side of the housing market.

    The recent floods will cause a brief flurry of activity as people need to get into properties ASAP, but that will slow in the fall, although still remain strong in my opinion.

    Bill

    P.S. If you’re looking for information about being a landlord, you may want to check out another site of mine,

  17. Calgary is the best place to invest in real estate right now. The economy is good and property sales are booming since last February of 2014 and the outlook for this year is great.

    Check out the MLS listings because rental properties are already included.

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