The utility company probably won’t let you pay the bill late every month without it adversely affecting your credit rating, so you will often be forced to pay the tenant’s portion of the bill while waiting for the tenant to remit payment. Do you really want to deal with this kind of work and uncertainty each and every month?
Some tenants might file a claim against you in court or arbitration demanding that they be allowed to avoid paying the portion of the utility bill that they agreed to pay in the lease.
The residential tenancy laws of most provinces contain provisions that protect tenants from having to pay for utilities that they don’t use. If your tenant believes that you overuse utilities, he or she could file a claim against you on the basis that the utility split arrangement forces him or her to subsidize your utility usage. There is often good cause for this kind of protection. If you subsequently installed a Jacuzzi tub or several window air conditioners for your own use and the bill increases by $100 per month, since the tenant pays 50 percent of all utilities, the tenant is being unfairly forced to pay for a service he or she doesn’t use.
Even if the claim against you is unsuccessful, what about the time and energy spent defending yourself? What about the negative feelings? You do not want to be on bad terms with people who live under your own roof!
How could you avoid all these problems? Calculate an estimate of utility usage by the secondary suite for the year and roll the average monthly cost into the rent. In other words, if you plan to rent the suite for $700 and estimate that your tenant will pay $75 per month for utilities on average, offer the suite at $775 with heat and electricity included. This way your prospective tenants will know up front where they stand with utilities.
This method is not without disadvantages. Because the tenant will not see the utility bill each month, there is a risk he or she will use utilities excessively or carelessly.
Try reducing this risk by taking pre-emptive measures, such as serving a notice reminding the tenant that the rent includes a reasonable use of utilities, but that substantial overuse could result in a rent increase. See sample letter on the downloadable forms kit that came with this book. Also, your lease agreement should have a clause prohibiting the tenant from installing any other major appliances or “energy eaters” such as second fridges without the express permission of the landlord.
Overwhelmed? You Don’t Need to Be!
Realistically assess the design weaknesses of your particular rental suite. Then take preventive, practical steps such as those suggested above. You will find disputes to be few and far between, your tenants will stay longer, and your time and energy will be saved for better things!
Chapter 3
HOW TO DETERMINE RENTAL VALUE
In this chapter, you will learn to:
• Determine the market value of your rental unit by examining the rent and features of competing rental properties and comparing them to your own. Do not base rent on the size of your mortgage payment!
• Compare your property to more than five others to get a sense of the market value.
• Consider permitting pets and smokers, but screen applicants carefully. Restrictions make it harder to find a good tenant.
• Offer a rental incentive in a weak rental market such as a rent reduction, move-in allowance, or one or a half month’s rent free.
• Rent the space unfurnished: Furnished suites are much more labour intensive, and often not worth the potential additional revenue.
Inexperienced landlords often base their rent on the size of their mortgage payment or other personal circumstances. This may appear reasonable, but it isn’t. Landlords must rent at prevailing market rates, whether the rent covers their mortgage or not.
Determine the market value of your rental unit by examining the rent and features of competing properties and comparing them to your own. Appraisers call this the “direct comparison” approach.
Buy newspapers and review online classified websites to see what kind of property is currently available. Rental property typically falls into four broad classes: Secondary suites, self-contained apartments, townhomes, and detached homes. The level of desirability and value follows that order as well. A two bedroom, 1,000 square foot secondary suite won’t normally rent for as much as a two bedroom, 1,000 square foot high rise apartment in the same neighbourhood. Restrict your analysis to rental property in the same class as your own whenever possible.
After looking at the ads in a few newspapers and online classified websites, you will notice a range of rental values for similar property. At this point, you may feel comfortable selecting a value within this range and seeing how it goes.
However, if it remains unclear, examine the features of competing rentals in greater detail. Create a comparison table. In Table 1, we are comparing our recently renovated two bedroom apartment of above average size that is approximately 20-25 years old to five other two bedroom apartments in the neighbourhood.
TABLE 1: NEIGHBOURHOOD COMPARISON
In practice, you should compare your property to more than five other properties. This way, the chance of error is minimized. You might also add more features to the table to compare.
Note that the only difference between #2 and #3 is that one has a view, while the other does not. This suggests that a tenant in this area is willing to pay $50 more for a view property. Since the only difference between our property and #1 is that our property has a view while #1 does not, market value for our property may be $1000. The only way to find out for sure is to place an ad to see how prospective tenants respond.
Determining correct rental value is a serious matter. Time and money are at stake. In certain weak rental markets, you’ll find ren-ters to be amazingly sensitive about rental value. Overpricing by as little as 5 percent will result in a lack of demand.
Clearly, it is not possible to get such detailed information about comparable property from classified ads alone. Try calling other landlords with questions about their properties. Be courteous and respectful, and you will find that most landlords will be happy to help other landlords survey the market. If the landlord you call isn’t willing to help, don’t be discouraged — try someone else.
How Do Pet or Smoking Restrictions Affect Rental Value?
Reducing the pool of prospective tenants by placing restrictions on pets or smoking will make it harder to find a good tenant. These restrictions may force you to lower your rent to get a tenant quickly, even if you believe you are asking a reasonable market value rent. Consider permitting pets and smokers, but screen prospects carefully. You will find a gold mine of tenants who are responsible and who will treat your property with care.
Does your rental have a balcony or patio? Ask the applicants if they’re willing to smoke outdoors only. If they are, make it an essential term of the rental agreement. If your tenant has a good credit rating to protect, he or she will comply with this rule because he or she knows
