Renting Well Blog

My Two Cents On Sizing Up A Rental Property Before Purchase….

I’m a strong advocate of approaching property investment as a business first, and as an investment second (a close second) — especially if you’re planning on managing a rental property on your own. These two perspectives are directly associated as far as I’m concerned, but I’ll get further into my point.

Whether you’re renovating a basement suite to have a tenant cover a portion of your  mortgage, or whether you’re looking at a nifty multi unit, understanding what you’re getting into on a management level is a valuable step towards total preparedness in your quest to being an outstanding landlord. If you do a full course of due dilligence, you’re making what is probably going to be a smart move long term — however — just looking at physical condition and expense reports is a very one sided approach in the decision to borrow hundreds of thousands of dollars. You wouldn’t ONLY do that if you were buying an accounting practice right? Or a bakery? Even if you’re using a property manager it’s no different than being an owner of a retail store that you just happen to have a paid fulltime manager working in.

I like to call the examination of some of these finer points — the important details. Assuming something will run on it’s own  — cash flow positive, and with tenants as happy as kittens just because you bought — is nuts.

  1. Has the landlord been diligent with applying rental increases? You’d be surprised how many landlords are not. You buy a place that someone has been living in for 10 years, with zero increases in rent, and you’re walking into what can be a very difficult situation if you have expectations to get market value.
  2. How rentable is the property? Historically, how has the current owner fared with renting the units? Is the unit in an end of the city that attracts potential tenants naturally or is it somewhere that’s going to require a little more effort? Location matters, and knowing the chances of getting the new tenants you require when units become available helps with determining the amount of time you’ll spend in marketing vacancies or potentially even sitting on them. Also, finding out how the existing owner marketed available units is a good thing to know. Some landlords are old school, and they sit on  an empty unit for longer than they should.
  3. Meet the tenants if at all possible. This isn’t easy admittedly in the midst of negotiating on the sale of a property, but if you can swing it, do it. Are they happy? What kind of relationship has the current landlord had with the tenants? Knowing that there’s been a venomous relationship with the existing owner is reason enough to get the whole story – and to determine if there’s anything relationship wise that can be salvaged and what you’re prepared to deal with. I personally love sharing the story of when I bought my first rental property, and the seller characterized the main floor tenant as having “a good job and being quiet”. After the sale, I met him for the first time, and he cynically let me know how much he disliked the last landlord, and that there were about 20 different things the previous owner hadn’t delivered on with respect to repairs and maintenance. He called the previous owner “the king of unkept promises”. After 6 months of dealing with him, it became clear the previous owner was a huge flake.
  4. Are the leases legal? Are they month to month? What kind of history have they had with the existing owner or property manager and vice versa? What utilities are they obligated too? What incidents have popped up during their stay? Who’s easy to deal with and who’s not? Get as many details as you can.
  5. Meet your neighbours. I’m not referring to the presentation of a freshly baked apple pie situation with a formal intro. Take the initiative and try to find out what your neighbours are like. Are they difficult? Are they reasonable? Do they have a bad relationship with the existing owner or were there any disputes or conflicts that existed? You’d be surprised how much this can affect you – especially if there are any shared components to a property – like a lane way or common area.

Gauging how well the “business” of the property has been managed is essential in my view, and gives you a much fuller view of what you’re jumping into. Owning an income property is already a lot of work and the time spent goes by fast. Getting a sense of any relationship or management health is equally important as knowing that the rent roll and the expenses are accurate.

Author: Chris Saracino

Chris is a co-founder of Renting Well and heads up our marketing and communication efforts. He's also the landlord of two buildings and 8 units in Ottawa, Ontario.

Comments

  1. Hi Vinod,

    Thanks for your comment. Just an FYI – We don’t sell rental properties. Renting Well is a tool for small landlords. If you need some advice in your search though, I’d be glad to provide some.

  2. I’m curious to know if you know of any way to get a seller to assist in the process of securing rental agreements with current tenants for projected rates versus actual? Our location is seeing favorable signs with lower vacancies and highter rents but many sellers are those who you mention in your article and they have not diligent in implementing regular rental increases to reflect market rates. All other aspects of viable rental properties check out but I fear vacancies for having to implement hikes as high as 20% to make the transactions viable. There must be ways to negotiate with the seller to assist in the process of new rental agreements – yes? Any suggestions and/or feedback to help me figure this out are greatly appreciated.

  3. Hi Debbie,

    Thanks for your comment. What province are you in?

    I think I understand your question, but in the event that I don’t – please let me know.

    In short – it sounds like you’re interested in purchasing a building or units, are seeing a lowering vacancy rate and an improvement in the area, but are dealing with a lower than market average rent roll, with a landlord who hasn’t increased the rents. This is often typical in emerging neighbourhoods. Is this the case? You’re looking to see if you can get the existing owner to assist with increasing the rents prior to the sale?

    Let me know if I have a handle on this here, so I can better answer your question.

    Thanks,

    Chris

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