Your Tenant Secretly Wants to Buy Your Home
“What’s going on with the rental market? There is nothing to rent. Everything is either leased or has 3 offers . . . or super expensive!!!”
“Went in with $150 over asking with extra months up front. Married couple. What more do you want? They had 10 offers on the place.”
“The listing agent informed me that we were the highest offer but the landlord decided to go with another one.”
That’s a snippet of what we’ve been hearing lately. In short, the Toronto rental market is insane. The Toronto Star recently ran a story about average rent in Toronto passing the $2,000/month mark, an 11% increase year-over-year. But the average rent of a condo in Toronto has been above $2,000/month since July 2016, so it’s not really the price that’s the problem. It’s that supply is being pinched and demand is rising. This being the case, tenants are looking at other possible options and one of them is doing whatever it takes to pay their own mortgage and build equity instead of paying rent.
Our Market Report Index shows the average rental PSF in July 2016 at $2.89. For an average 700 sqft condo, that’s $2023/month. Don’t believe that? You can review rental prices right back to 2008, when average rent was $1600/month. Boy, those were the days.
While the primary cause behind the high stakes rental market does appear to be rental supply, blindly building more condos is not the best answer. Building more is one way to fix the problem, sure, but there are other issues that could be approached first, or at least at the same time.
The unexpected backfiring of rent control
The new Ontario rent control measures were rolled out with the best of intentions: ensure rental housing remains affordable for average income Torontonians within fixed yearly rent increases. Sounds great . . . for renters. Not so great for landlords.
The unfortunate reality of rent control is that landlords hate it with the fire of a thousand suns! Well, some of them do. Rent control means tighter financial pressure, higher risk, and less profit as a rental property investor. Rent control puts landlords into defence mode, making their lease applications much more difficult to pass for tenants. In short, it pinches supply.
Potential renters have to go over and above. It’s not enough to meet the basic rental requirements right now. But even renters who are going above and beyond–offering over asking price and extra months up front—are still having difficulty securing a lease agreement. There is always a bigger basket of mini-muffins.
Faced with lower revenue opportunity, landlords are looking to grab that cash up front in two ways. Either they raise the unit’s flat rental price above market value, or they fish through applications to find a tenant who is offering to pay more than the asking rate.
Here’s a look at current rental prices for an average 700 sqft condo across the city:*
Short term rentals add to the insanity
Back in the fall of 2016, short-term rentals like Airbnb became the focus of Toronto’s housing crisis craze, with the City of Toronto debating a ban on such services. The issue led to an Ontario court ruling that allowed condo boards to ban home-sharing services, but the restriction remained building by building. Over the winter, short-term rentals fell out of the media spotlight. Nevertheless, they have continued to impact the rental market in a serious way.
In many cases, it’s more profitable for a landlord to rent out a unit on short terms. With the high level of travel and tourism that Toronto enjoys, it’s almost a no brainer. Unfortunately, home-sharing services like Airbnb eat into the market of long-term rental units.
While it’s more profitable, it’s also less secure. Landlords must be ready to cover months in which a unit sits empty. For some, obviously, the risk is over-shadowed by the reward. As of June 2017, there were around 11,000 short-term rental units available in Toronto through Airbnb, according to the CBC. Contrast that with the 1,199 currently active MLS condo rental listings*, and you get a striking sense of the problem. The City of Toronto has put forward recommendations for short-term rental legislation, including a “one host, one home” policy that restricts hosts from renting out a unit they do not personally live in.
Could the insane rental market bring back buyers?
If the rental market persistently stays a problem pushing up rental prices it might lead to people eventually choosing to buy again, which could restore the market to the levels of activity we saw earlier this year. Add to this that current condo owners are in an ideal position right now if they want to get into a nice little house with a backyard. While listings are down, competition is down too, and condos remain a hot commodity. Now could be a good time to make the move, especially if renters start looking to buy.
Currently, the average rent for a condo in Toronto is roughly $2,350/month, depending on your neighbourhood and building. The average price to buy a condo in Toronto is roughly $540,000. For a buyer, after affording a 10-20% down payment, the monthly carrying costs for an average condo would come in around $2,350 as well, assuming average maintenance fees of about $0.55 per sqft. Of course, buying is out of the question without the down payment, and for most renters is not even worth talking about. But for anyone who CAN pull those funds together, the monthly carrying costs are nearly neck and neck right now, if not favouring a homeowner’s investment. Condo investors are benefitting as landlords but their tenants (in this hot rental market) might be secretly planning to buy their own condos units as they start to weight their options (cost of renting vs cost of ownership).
If you’re interested in understanding your options in terms of financing and how far your current funds can take you, then contact us to get the conversation started (www.starionrealty.com | www.starioncondos.com | firstname.lastname@example.org | 905-678-8620)