‘Vulching’ a rental home

Over the past few weeks, I’ve received several questions related to renting a home.  Let me summarize my current situation since it seems to be a topic of interest to a number of readers.

I rent my current home.  I live in a fully updated and renovated 4 bedroom, 3 bathroom home with all the trimmings (granite countertops, slate and hardwood floors, etc.).  We live on 5 beautifully manicured acres backing onto a wooded area with trails through it.  I pay about half of what the home could rent for on the market, and I’ll explain how to find deals like that in a moment.  We are in a very secure 2 year lease with a written agreement by the owner not to sell the home for the duration of rental period.  Needless to say, I don’t buy the argument that renting a home is somehow a compromise on stability or living standards.  Not at all.

I’ve often said that I do feel that home ownership is an integral part of long term financial security.  I’m not against owning a home at all.  However, the argument that renters are ‘throwing their money away on rent’ is bunk.  It holds only the slightest element of truth when price to rental ratios are at or near their long-term averages.  Today they are an astonishing 2.5 standard deviations above their long-term norms, an extremely rare statistical occurence.

I shared a little anecdote in an earlier post, but I will repeat it just to drive home the fact that renting mitigates risk in time like these.  Shortly after moving in, our electric heat pump and a couple other things in the house needed to be replaced.  The final bill, footed entirely by the homeowner, was more than one year’s rent!  And that is before considering property taxes, taxes on the rental income, and the lost opportunity cost of the money tied up in the home.  People often forget about the impacts that taxes, maintenance, and interest payments have in reducing the overall financial return generated by a home.

So, if you considering renting as an option, let me share some tips on how to ‘vulch’ a nice rental place.

If you follow rental ads on kijiji, you’ll no doubt notice that there has been a significant increase in the number of house rentals in recent months.  Many of these rentals are people who tried selling, but could not get the price they wanted and have decided to rent it out until the market picks back up again.  I call them ‘accidental landlords’.  Many of them had no intention of renting their home out, but have been forced to due to circumstances or greed.  Psychology being what it is, people attach the highwater mark of home values to their home.  So if there was a time when they could have sold their home for $300K, that is its intrinsic value in their mind, and they will hold on to their home until prices rebound to those levels.  It makes no sense, but loss aversion is a powerful psychological driver of all sorts of irrational behaviours.

The point is that these accidental landlords are hoping to sell their house in the near future and are therefore often quite concerned about the quality of the tenant they will be getting.  They are nervous about how tenants will treat their home, the potential nuissances involved in being a landlord, possible legal issues, grow ops, etc.  If you are an excellent tennant and can alleviate these concerns, these are your prime targets!

Start by posting an ad on kijiji stating that you are looking for rental accommodations.  In the ad, highlight why you are such an ideal tennant: professional, stable jobs, excellent credit, no pets, no kids, non smokers, great references, etc.  Highlight whatever your strongest attributes are.  At the same time, it may not hurt to start emailing some of the rental home ads you may be interested in and inquire about some showings.  Remember that you really want to find those ‘accidental landlords’.  If you want to be sneaky, try emailing the advertisers using a separate email account and ask them if they are considering selling it.  They may just flat out tell you their story or indicate that they would be interested in selling, tipping their hand to you.  I’m not sure how ethical that is, though.  I never did it myself, but I may have if I hadn’t found the perfect house so quickly.

As it turned out, the person who actually contacted me had not even listed their home for rent yet.  It illustrates the fact that there may well be a bit of a ‘shadow inventory’ of potential home owners who would consider renting their home out to the ideal tennant.

When people begin contacting you about rental homes, make sure that you indicate that you are considering renting.  Indicate that the reason you are renting is that…you are considering pursuing a job in another part of the province at a later date…..you are new to the area and are not sure whether or not you want to stay….your job requires mobility…you’re awaiting a promotion that may move you to another area, .etc.  I’m not advocating being untruthful.  If none of these apply to your circumstance, don’t say they do.  I was never untruthful in any of our negotiations.  The point is that somehow you need to convey two things:  1)  You don’t need to rent and are therefore in the drivers seat; 2) You are choosing to rent for reasons not related to financing and not related to the fact that you think home prices will be lower in the future.  I’d keep that to yourself.

When you do decide on a rental home to pursue, and if you have the financial means to do this, consider offering them an entire year (or two) of rent up front for cash, but at a very substantial discount to their asking price.  If they do accept, you’ve just scored much cheaper rent, a guaranteed lease length, and an imputed guaranteed rate of return far greater than you can get on any bond of equal duration.  If not (and I would make it so low that they’re unlikely to take it), you’ve just conveyed to them that you are in a strong cash position and they don’t need to worry about you not having the means to pay your rent.  It further bolsters your credibility when you do eventually low ball them.  ADDED:  See John’s insightful response in the comment section for a bit of perspective on the risk involved in prepaying rent.
When it comes time to discuss the rental price, indicate to them that at the current price, it may make more sense for you to consider buying rather than renting, but you would consider it if they could drop the rental price to X (LOW BALL!…at least a 40% reduction).  Sweeten it by agreeing to do all yardwork, maintain all gardens at your own expense, take care of snow removal and all minor home maintenance, and possibly even do some minor reno work to improve the value of the home.

If you’ve presented yourself well and if they are convinced that you will be an ideal tennant, they may consider it.

Once you an agreement to rent the home, be involved in the creation of a rental agreement that mutually protects both of you.  Make sure you include a clause that the current owners may not sell for the duration of the lease.  It will protect you from having the house sold out from under you except in the unlikely circumstance that the owner dies during the lease period.

This is largely my story.  I do want to stress a couple things:  Once you do find the house you want to live in, treat it like your own.  Be completely respectful of the property and do everything you can to help preserve and enhance the value of the home for the owner.  If the owner has been good enough to meet your ridiculous demands for cheap rent, repay them by being the best tenant you can be.  Ultimately you are in a mutually beneficial agreement.  You get cheap rent in exchange for keeping the house in immaculate shape, so make sure you live up to your end of the bargain; It’s called integrity.

ADDED:  A great comment from Jay

I had been scanning the MLS listings in our area mainly to get a sense of what the market was doing. Eight months ago I ran across a very elegant house and said to my sweetie, if we ever had the money this is the house I’d buy. I kept my eye on it. It changed agents and the price dropped 20%. And the new agent’s pictures indicated that the house was now vacant. I knew that the listing agreement was set to expire in just over a month (usual agreement is 90 days).

I wrote the agent asking if the owners might be interested in leasing. They called me within an hour of my email getting to their agent. Completely reasonable rent – in fact, amazing.

Thanks, Jay.  Great insight!

Happy vulching!

Ben

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13 Responses to ‘Vulching’ a rental home

  1. Jay says:

    I did much the same thing a couple of months ago. But in a slightly different way.

    I had been scanning the MLS listings in our area mainly to get a sense of what the market was doing. Eight months ago I ran across a very elegant house and said to my sweetie, if we ever had the money this is the house I’d buy. I kept my eye on it. It changed agents and the price dropped 20%. And the new agent’s pictures indicated that the house was now vacant. I knew that the listing agreement was set to expire in just over a month (usual agreement is 90 days).

    I wrote the agent asking if the owners might be interested in leasing. They called me within an hour of my email getting to their agent. Completely reasonable rent – in fact, amazing.

  2. John says:

    I agree completely with renting over buying in this current market.

    Just one note that it is very dangerous to offer 1yr upfront, the discount does not come without a large risk. Please see the following case from the RTA where a tenant pre-paid for a year and the house was foreclosed on. The bank did not recognize the prepayment and forced the tenant to pay again (The following applies for residents of Ontario)

    EL-11712 25/08/2008
    “The prepayment of rent was not a covenant intended to run with the land. The Member also found that subsection 106 (2) of the RTA precludes prepayment of a security deposit in excess of one month’s rent. The amount paid by the Tenant to the previous Landlord was not in accordance with the RTA, and was illegal.”
    http://www.ltb.gov.on.ca/stdprodconsume/groups/csc/@ltb/@law/documents/resourcelist/272787.pdf

    cheers,
    John

    • Very interesting. I had never considered the possibility of foreclosure and the legal issues surrounding that. Great point.

      • f00kie says:

        I am about to enter an agreement in which I prepay rent for 12 months for a substantial discount. What are the things I should ask of the landlord such that I minimize my risk of being burned?

      • Hi Fookie

        I hope you scored a very large discount. Good for you if you did. I’m not a legal expert but I would certainly want some things written into the lease agreement pertaining to the owner not being able to sell, or if he/she does, to return your remianing rent, etc. The idea of registering the lease on the title is good advice too.

        Good luck!

  3. Jay Currie says:

    fookie, I am not at all an expert but my bet is that you would want to register the lease on title – if that is possible.

  4. Potato says:

    Just a comment on the prepaying of rent: for many landlords, that should raise some red flags, as a common fraud scheme is to have a potential tenant offer to pay rent up front (esp. “for their daughter going to university”) then request some portion of it back in cash (e.g., “for my daughter’s moving expenses and school books”) before the landlord discovers the first cheque was fraudulent.

  5. Pingback: Asset bubbles according to Jeremy Grantham: Applications to the Canadian real estate market | Financial Insights

  6. Rocker Guy says:

    FYI, in British Columbia, if you sign a lease agreement for a rental property that binds you to a term longer than one month, the owner cannot kick you out of the rental during the term so long as you continue paying the rent reliably. If you pre-pay the year in advance AND secure a lease, then even if they sell the house while you live their, the new owner will have to assume the lease, allowing you to continue living uninterrupted.

    I strongly recommend BC renters to secure the longest possible lease to reduce the risk of being evicted through creative means, such as the landlord evicting you because they plan to move in (they almost never actually move in). Also, if they want to sell the house during your lease, and the new owner wants you to move out, you basically have the home owner by the short and curlies – they have to pay you off to make you move, because you have no obligation to leave. I have read residential tenancy dispute resolution decisions where a tenant with a lease was paid $30,000 to move out because of a prospective sale of the property — they got the money even though the sale fell through on a technicality. Ouch!

  7. blueorbit says:

    Thanks for this insightful and brilliant thread. Seeing what is happening here on Maui – we know what is coming to Vancouver. We sold all our RE and rent – a penthouse, two year lease, and got a huge discount.
    Never buying RE again.

    Superb work here.

    Cheers.

  8. DancinPete says:

    “We are in a very secure 2 year lease with a written agreement by the owner not to sell the home for the duration of rental period”

    Hi Ben, any chance you could post the actual wording used to prevent the owners from selling out from under you.

  9. Pingback: Should everyone rent? When does it make sense to buy? A closer look at the price/rent ratio… | Financial Insights

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