Author: Mr. Cheap

One of the things I find interesting about human cognition is how we handle different intellectual tasks.  Catching a ball is an INCREDIBLY tough task on the surface, the catcher needs to:  estimate the ball’s current location, estimate it’s current direction and speed of travel, apply the force of gravity to it to determine its trajectory, position her hand in the right location and tense the muscles at the moment of impact.  We do this so effortlessly that children can learn to do it after a few attempts.

Compare this to deriving the area of a circle.  The concept is quite simple, but you have to think pretty hard to get your head around it the first time you come across it. Our brains are clearly better optimized for projectile motion than for geometry.

One of the things that throws us is rates of change.  To really bake someone’s noggin get them thinking about non-linear rates of change, such as exponential growth.  We all know compound interest is great for our money, but it’s very easy to make mistakes when we start trying to reason about, and make extrapolations in, such situations.

A number of investing myths are based on such misunderstandings, and one of the most popularly believed is that location inherently affects the appreciation rate of property.  As one real estate software site suggests:

The location of a property can affect how fast it appreciates in value.  Water properties have been increasing in value at a fast pace.  There is a finite amount of water property available in the United States and demand has been increasing.  More and more people are reaching retirement age fueling the demand for recreational property.

Sounds reasonable, a commentor many moons ago made exactly this argument.  Similar arguments are made about different price tiers of real estate and properties in world famous towns appreciating faster than the market as a whole.

John Reed responds to this myth (and, in my opinion neatly demolishes it) with comments such as:

“No price category appreciates faster consistently. It would be mathematically impossible because that category would eventually cost too much for anyone.”

and

“However, I have never bought the notion that high-priced homes appreciate at a higher rate than moderate-priced homes. If it were true, the disparity between the two would grow greater as a percentage year by year. Say that in 2004 the median price of a high home were $400,000 and the median price of a moderate home were $250,000. That means the moderate home is 62.5% of the high one.

Then say the high home appreciates 10% and the moderate, 5%. That gives new prices of $250,000 x 1.05 = $262,500 and $400,000 x 1.10 = $440,000. Now the moderate home is only $262,500 ÷ $440,000 =59.7% of the high. Run those numbers since the beginning of home building and you get something that bears no resemblance to current reality.”

I was convinced the first time I read the first quote.  Mr. Reed only talks about appreciation rates for different categories of the housing market, but to my mind the same logic clearly holds for other situations.

To be clear, I’m *not* saying that all houses in a town have the same value, and I’m *not* saying that housing in all towns have the same value and I’m *not* saying waterfront property has the same value as non-waterfront property and I’m *not* saying that transitional areas can’t appreciate at a different rate during the change.  What I’m saying is that all properties, on average, tend to appreciate at the same rate (so if waterfront property is twice the value of non-waterfront property, it will tend to remain twice the value into the future).

So, say non-waterfront property was worth $100k and a waterfront property was worth $200k.  If the non-waterfront property went up $10K and the waterfront property went up $20K (over some period of time), their appreciation rates are identical (10% in both cases).

While factors exist that may temporarily distort appreciation (often economic issues that lead to more people moving into or out of a community), these WILL be temporary.  If an aging population fuels higher appreciation of waterfront property, then once this population gets to an age they can’t enjoy these properties any more there will be a lower appreciation as these properties flood back onto the market.

Let’s go through an thought exercise for anyone who still doesn’t believe it.  You (the reader) and I are two Roman siblings who move to Egypt in 10 AD (or, in 10 CE for people who are morons).  I buy a nice little villa in the heart of Alexandria for 10,000 denarii and you buy a similar villa (on the water) for 20,000 dinarii.  We each marry locals and have many children – our Greek slaves shout opa! – who each remain in these ancestral homes, maintaining them, updating them, dealing with political turmoil, and living their lives.  The properties get passed down through the next 2000 years at which point our descendants get together to compare the values of the identical modern houses they’ve each had recently built on our respective plots of land…

Say we accept that there’s a higher appreciation rate for waterfront property, and let’s make it TINY (a 1% difference).  Proponents of faster appreciation claim MUCH higher rates than this.  Currently, in Alexandria, your property is valued at LE 800000.00 (or $147,378.16 Canadian), quite reasonable for what looks like a beautiful place to live.

Given a 1% difference in appreciation, this would mean my comparable, inland property would be worth LE 0.0018 (800 000 / (1.01)^2000)).  This would be 0.03 CENTS Canadian.

As Mr. Reed eloquently puts it, “you get something that bears no resemblance to current reality.”

This post is part of a five-part series about tenants leaving a condo and finding and screening the new tenants:

• How to screen tenants
• Screening Tenants – Advertising and Showings
• Screening Tenants – Filling Out Applications
• Screening Tenants – Credit Check
• Screening Tenants – Lease Agreement And Repairs

Repairs

Alexandra and Rachelle had more good advice when it came to repairs. I was getting anxious about how to handle the trade-off, and had visions of one set of tenants leaving at 11:59 pm and the new tenants arriving at 12:01 am the next day. The current tenants promised to leave the apartment clean (as it was when they took possession), but I was terrified of having to finding cleaning and painting ninjas to blow through the place in tight time between tenants.

I can’t find a reference to it while writing this, but I’m 99% sure that I read an official guideline that Ontario tenants moving out are suppose to leave at noon on the last day of their tenancy, and that new tenancies start at noon, so in theory there’d be a 24 hour window between tenants in the worst case scenario (if anyone has a link to this or can find it in the RTA I’d appreciate it if you could post a link in the comments).

What the expert advice was was to do the repairs while the current tenants are still in place. They may not be overjoyed about it, but landlords can certainly get access to a unit to make repairs. I think painting would be a big pain with tenants still in place, and cleaning would be a fools errand: it would just get messy again during the move out. If there was anything MAJOR that needed to be repaired, while the current tenants are still in place would definitely be the time to do it in my opinion. It’s somewhat mercenary, but the tenants are leaving so a landlord’s commitment to customer service can be relaxed.

I was able to assess the unit when I started showing it, and my tenants were upfront about the “damage” they had done to the unit (it was basically some scrapped up baseboards, a few paint chips and a couple longer gouges through the paint). In my opinion, very reasonable wear-and-tear over 3.5 years of tenancy (I told them the condition was fine with me as long as they left it clean).

I’m not a handy guy at all, and I really didn’t want to paint the entire unit (or pay someone to do it) when it still looked like it was in good shape. I got some spackling paste (available at any hardware store and most dollar stores / department stores) and patched up the chips and gouges in the wall. I bought the smallest can possible of the colours I used for the walls and baseboards, and JUST painted the spackled / damaged areas. It cleaned up AMAZING and you couldn’t see it had been repainted unless you were up close and knew what you were looking for. Many painting sites warn about “flashing” where new paint has a different sheen the the rest of the wall with the old colour. For whatever reason, even with a 3.5 year difference between the paint coats this wasn’t an issue. I used Benjamin Moore’s Barely Beige CC140 for my walls. Maybe this is better for not showing flashing – I don’t know why it worked out as well as it did.

In my opinion there’s nothing worse than moving into an apartment that’s dirty from a previous tenant, so if the previous tenants didn’t clean the place SPOTLESS, I’d make sure it is for the new tenants.

Lease

You want to use a legal lease. You can get a tenancy agreement form if you’re a member of the landlord self-help center, from your property owner associations (most communities have one), from a friend who is a landlord in the same province / state, many book stores sell legal forms that probably includes a residential lease agreement, or you can buy from a website (a number of lawyers will sell them on-line for a nominal fee – do a Google search and make sure it’s applicable for where you live).

I go through the entire lease, item-by-item, and discuss each with the tenant, explaining what each obligates them, and myself, to. It’s often an excellent opportunity to make sure you’re on the same page. It is a very GOOD sign if a tenant asks many questions and clarifications and reads through carefully. Rather than indicating that they’ll be contentious, this shows me that they’re taking it seriously and intend to follow their legal responsibilities (which is all I, as a landlord, ask for).

One of my father’s friends knowingly puts a number of illegal conditions in his lease. His attitude is that if the tenant doesn’t know these are illegal, he can “encourage” them to follow those rules (even if he doesn’t have the law to back them up). Many contracts are “severable” which means even if specific clauses are illegal and unenforceable, the rest of the contract remains valid. Many of us are familiar with this from employment contract, such as:

In the event that any provision or portion of this agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this agreement shall be unaffected thereby and shall remain in full force and effect to the full extent as permitted by law.

or something to that effect. I’m not a lawyer, and some things I’ve read warn that an illegal clause CAN invalidate an entire lease agreement. I wouldn’t be happy if someone tried to trick me into signing a contract with clauses they know are illegal, so I don’t do this with my tenants.

Trade Off

Once you have the full deposit (first and last month’s rent in Ontario) cleared, the old tenants moved out, the place repairs and cleaned, you’re ready to move the new folks in! Meet up to hand over the keys and cross your fingers that the new tenants will work out.

You’ve done everything you can at this point and the rest is up to lady luck.

Thanks again to Rachelle and Alexandra!

This post is part of a five-part series about tenants leaving a condo and finding and screening the new tenants:

• How to screen tenants
• Screening Tenants – Advertising and Showings
• Screening Tenants – Filling Out Applications
• Screening Tenants – Credit Check
• Screening Tenants – Lease Agreement And Repairs

Credit Check

Check out Rachelle‘s excellent post on this. She recommends Tenant Verification Services, which I don’t find as enticing as she does. I joined the Landlord’s Self Help Center which includes a membership for Rent Check Credit Bureau whom I’ve used and like.

Whichever service you use, sign up early.  It takes time for them to give you a membership, so if you wait until you’re ready to process an applicant before you sign up, you’ll be scrambling to get them to authorize you.  I’d sign up with a credit check service at least a week or two before you’ll need to run a check.

Because the credit check costs money, do this after everything else has checked out.  On the other hand, a $20 credit check is the best money you’ll ever spend, so don’t skip doing one to save some cash!  Look at their credit history and try to figure out what their story is. I looked at some people with MASSIVE debt. They had a bunch of delinquencies from 3 years ago and had been steadily paying down their debt since. It was pretty obvious to me that they were people who were turning their life around after some mistakes, and I was willing to rent to them (in spite of their sub-optimal credit).

Often landlords will say that you won’t get applicants with perfect credit: people with perfect credit buy, they don’t rent. I haven’t found this to be completely true (students and young professionals will often have good credit and still rent). Depending on your target market, it may not be realistic to hunt for someone with perfect credit. I’ve never had to rent to someone with awful credit, and in fact probably wouldn’t. If they don’t pay other people, why would they pay me?  I don’t own low-income housing, people who do will probably have to accept far rougher credit histories.

If at all possible, it is very helpful to have someone who knows what they’re doing go over a few credit reports with you.  They’re a little daunting to interpret the first time you see one.

My mantra when renting is “no tenant is better than a bad tenant”

Rejecting Applicants

At the screening or credit check steps you’ll rule out a number of applicants.  There are different schools of thought on how to go about rejecting them.  Both Rachelle and Alexandra told me not to commit to getting back to applicants on a specific timetable.  I can’t help myself from following the golden rule, and I haven’t followed this advice (although it’s probably wise).  I’d be very annoyed if a landlord wouldn’t tell me when I’d hear back from them and I usually tell tenants I’ll let them know in 2 or 3 days.

Alexandra advocates not giving them a timetable and instead of rejecting applicants, just don’t contact them again.  If they contact you, just tell them you’re still processing applications (or have rented to someone else if you have).  She says they’ll get the message and look elsewhere when they haven’t heard from you for a week or so.  This is probably the safest approach from a legal perspective, but I couldn’t bring myself to do it.

Rachelle advocates the following:

Use exactly these words.

“I am sorry to inform you that your application is not accepted”.

If he asks you why? Tell him that you don’t need to give him a reason.

“I’m not giving you a reason. I am not renting the apartment to you.”

Again, this is probably a great approach, but seemed quite harsh to me.

A buddy who has a lot of experience as a landlord advised me to just say “I’ve decided to rent to someone else”.  He said, even if there isn’t someone else he’s renting to, it’s technically true if he’s decided to rent to someone else in the future instead of the current applicant.  I asked him if rejected applicants have ever gotten angry when they see him advertising a unit after rejecting them, and he said it’s never come up for him (but thought it was a funny idea and would be an awkward conversation if they called him on it).

In the end, I wasn’t 100% comfortable with any of these, and as a compromise politely rejected people by e-mail (which is perhaps cowardly) and hoped no one called.  No one argued or fished for more details.

Offering the Unit

Just because you say “the unit is yours”, it isn’t a done deal until the lease is signed.  I had a nice couple who ran into financial problems three years ago but looked pretty good.  I offered them the unit and was coming a couple of days later to sign the lease with them.  They were grateful and happy I offered the unit to them.  The day of the signing the man called me and asked if I was still in Waterloo or in Toronto.  Turns out, they’d continued their apartment hunting, found a place they liked better and decided not to rent from me after all.

Some people I told about this said they’d have been angry at the couple (saying they wanted to take the place and backing out at the 11th hour before signing the lease).  I was just grateful that they told me before I’d rented a car and gone to Toronto.

If I offered the unit to someone who started delaying signing the lease, I’d probably offer it to someone else (as they’re clearly using the unit as a “back up”).

Along with signing the lease, I get the first and last months rent from the applicant.  They don’t get the keys until the current tenants have moved out, so there’s a bit of time to make sure checks clear and whatnot before they have a key and possession.

Thanks again to Rachelle and Alexandra! More details in future posts…

This post is part of a five-part series about tenants leaving a condo and finding and screening the new tenants:

• How to screen tenants
• Screening Tenants – Advertising and Showings
• Screening Tenants – Filling Out Applications
• Screening Tenants – Credit Check
• Screening Tenants – Lease Agreement And Repairs

Application

After showing the apartment to potential tenants, the million dollar question is “would you like to fill out an application?”. If the person doesn’t fill out an application, on the spot, they aren’t interested. I CONTINUALLY fool myself with this, someone will look me in the eye, say it’s a great unit, they’ll fill out the application and fax it to me. They even ask about details like “would it be acceptable to scan it and e-mail the application to you as an image?”. They won’t do so. I had 3 people say something along these lines to me this time and a number say similar things to me 3.5 years ago, I believed each of them (and mentioned to friends and family that there were more applications that were coming in), and none of them followed through.

If you get the once in a lifetime person who actually does this, enjoy, but if they don’t fill out an application immediately after the showing, treat it as if they said “thanks, but I’m not interested”.

If you don’t get at least 1/2 the people who see the unit filling out applications, it means your asking rent is too high. Keep dropping it until 1/2 the people who see it fill out applications (then pick the best applicant).

Some people will ask if it’s first come first served, or if they’re guaranteed to get the apartment if they fill out an application. I always answer this with: “Just like you’re trying to find the best apartment, I’m trying to find the best tenant. I’ll process all the applications and offer it first to the applicant that looks best, then to any others who are acceptable“. People don’t seem to love this answer, but they accept it.

Rental applications are a bit tricky. You obviously don’t want one that asks any illegal questions, but it can be tough at times to be sure what you’re asking is 100% legal or not (there are a large number of opinions on what is ok to ask about and what isn’t). In Ontario, joining the Landlord’s Self Help Center is worthwhile (more on this in the next post) and they provide a pdf rental application form to members. Most local property owner associations will have an application for members (I use one I got from a friend who got it from his association). Be careful if using a form downl0aded randomly off of the internet (it may be appropriate for another country / province but not for where you are).

Some people will ask “do I have to fill out this question?”, often followed up with “will it hurt my application if I don’t?”. I always answer “you don’t have to fill in any part of the application you don’t want to” to the first question, and “the more information you give me, the easier it will be for me to rent to you” for the second. If they repeatedly ask, I repeatedly answer the same way. It’s dangerous legal ground to go beyond this, so I avoid the issue entirely. I can’t process a credit report without a SSN (which legally they aren’t required to provide) and it makes it harder for me to do screening without the other info, so unless they have a good reason (that they give me) for not being able to fill out a field, I accept incomplete applications but I don’t bother processing them.

Screening

Screening tenants is half art, half science. Read as much about other people’s thoughts on this as possible. The first “filter” is your impression meeting them. If someone creeps you out or gives you a bad vibe, reject them. I had one guy who walked around the place talking quite slowly and gushing about how much he loved his dog. I thought, well I’m fine renting to this “good ol’ boy“, and he filled out half the application, then announced that he’s a lawyer and he didn’t have to providing any other information. I don’t know if he was a simple guy pretending to be a lawyer, or a lawyer pretending to be a simple guy, but either way I didn’t want to have anything to do with him.

Call up where they work. Legally there’s a minimal amount of information employers can provide, but they should be able to verify that the person actually works there, their position title, and their annual salary.

Call up their past landlords. Their current landlord isn’t to be trusted (perhaps they’re bad tenants and he’s lying to get rid of them). It’s more their older landlords that will be honest with you. Read between the lines (if they don’t want to give much information and keep repeating things like “they were my tenant from this date to that date”) it’s a bad sign. They should be able to tell you if the tenant was ever late on rent payments (which is an automatic rejection for me: I need tenants that pay the rent).

Google as much information as possible. A woman applied the first time I was renting the unit and looked reasonably good. She even cut me a check for a deposit and gave it to me with the application. I Googled her “landlord’s” phone number and it was the number for a company, owned by a man with the same last name as her that did the same work she’d told me her father did. I called, talked to a nice woman who gushed about what a good tenant she was, and after I asked if she had any relationship with the application other than being her landlord there was a pause, then she said “no, we met her for the first time when she rented from us”. I don’t rent to people who lie to me (and something MUST be going on if she has to get someone to pretend to be her landlord).

Personal references don’t need to be contacted. I’m sure Jeffrey Dahmer or Adolf Hitler could have easily provide 3 or 4 people who would say how wonderful they are. You get these contacts NOW in case you need to track the tenant down later. If they disappear in the night and leave owing money, you have the name and numbers of 3 of their friends / family to try to find them.

Thanks again to Alexandra and Rachelle! More details in future posts…

As much as I like real estate, I also like saving money, so I always perk up when I come across articles or postings comparing buying vs renting.  The real estate people in the crowd will say that buying real estate has numerous advantages (I’ve discussed many of them in previous posts) and that when you rent “you’re throwing money down the drain”.  It’s quite arguable that keeping a roof over your head is “money down the drain” so lets start there.

I’m currently paying $500 / month for a room in a house (which I share with two other tenants).  This covers all utilities and everything.  This $500 is gone, but it’s purchasing me some of the necessities of life.

Buying vs renting

Say I bought a 1 bedroom condo in Crescent Town (one of the cheaper areas in Toronto, Keifer Sutherland grew up there – it’s pretty depressing these days).  Right off the top condo fees will run me $376, which cover utilities, ground and common area maintenance and whatnot.  This is “money down the drain” just as surely as my rent is.  I’d be paying about $70 / month in property taxes, which pays for things like schools, transit and mayor David Miller’s golf club membership.  This is money down the drain too.  Of my $683.65 monthly mortgage payment (say $110k at 5.69%), $515.51 is going to interest rather then equity (money down the drain again).

If you’re saying to yourself (“well, those condo fees are outrageous”) please keep in mind that apparently for a single family home, you’ll typically spend 2.5% of the house value on maintenance annually.  Plus you’re paying all the utilities and property taxes.

The rent advocates will talk about how you could rent, then invest the difference in the stock market, average a 10% return and be better off.  This is all true for what it is.  If someone tells you after renting for 10 years you have nothing to show for it, you can smile and show them your stock portfolio and say “this is what I have to show for it”.  Or you can show them pictures from your last 10 trips to Hawaii and say this is what you have to show for it.

The big question ultimately is where do you want to live and what are you willing to pay to live there.  If it’s going to drive you nuts having to get the landlord’s permission to paint your bedroom purple, or getting a rent increase every year, you might be better off as a homeowner.  If you like to move every 2 years or want to live in a bare-bones ultra-cheap accommodation, renting might be better for you.

For me I could live where I am for $500 / month, or I could be living in a 1 bedroom in Crescent Town for ~$950 / month (I’d have to pay more than this, but the extra would be going into equity).  Right now the flexibility and low-price makes this preferable (but if my roommates piss me off, I’d quickly switch into condo hunting mode).  It’s not as simple as saying that the condo costs $450 / month more as I’d be getting appreciation from the condo, as well as protection from rent increases (although I’d be exposing myself to increases in the condo fees and the property tax).

Just make sure not to buy into the absolute of one is better then the other, it is highly dependent on who you are and what you want.