Shamon Kureshi trail blazes the high end investment property market and maps out a simple step by step guide to build wealth with huge cash flow in the under supplied sector.
Special to HopeStreet.ca
The term “Corporate Rental” has come to hold a number of different meanings in recent years, and a quick search on a rental listing website will provide no shortage of differing opinions. One can find corporate room rentals, corporate basement rentals, corporate penthouse condos, corporate suburban home rentals, and everything in between. How does a Vancouver landlord make an informed decision about entering the executive, corporate rental sector with such a wide array of potential rentals out there? This post will discuss the corporate rental sector, why investors should consider this lucrative market, how much it costs to get into this area, and where to begin.
What is a Corporate Rental?
An corporate rental is a high end rental home claiming significantly more than average market rents, having an attractive visual appearance, potentially furnished, and potentially fully serviced. A well done executive/corporate rental makes the visitor think they are in a show home or developer’s show suite in a prestigious new development. As the name suggests, when properly executed, an executive rental will attract a person or persons who hold a professional title or office that processes or controls other persons. These executives can be in charge of projects too; thus they have to relocate from project location to project location. Executive Rentals often cater to contract workers or consultants who place a huge value on convenience, and a comfortable place that feels more like home than any hotel.
To a busy executive, time is of the essence and a well stocked, clean, modern unit is a great alternative and better choice than buying a property for the short term or renting an empty space that desperately needs expensive and time consuming finishing touches. An executive rental can be short term; most executive level properties are available on a monthly, or weekly basis with escalating rates as term length diminishes. This creates a huge profit potential for prudent executive level landlords. The upside to a landlord is virtually endless in this sector; typical rental rates can be three times that of conventional property, yet much lower than the cost of staying in a sterile, cookie cutter hotel room. Landlords benefit from increased rental income, while renters benefit from savings over hotel rates and a more homey residence.
Why Should I Invest in an Executive Rental Property?
Executive rental property attracts excellent tenants, will be significantly more profitable than conventional investments, and is a great way to add value to a property upon divesture. Ask any seasoned real estate investor; excellent tenants are extremely difficult to come across and are worth their weight in gold once found. It is a well-known fact that choosing the right tenants is the single most important step in the landlording process. A bad tenant can cost landlords their sanity, their profits, and is the number one cited reason for Landlords leaving the business. Executive tenants rarely cause the landlords any grief; many such tenants are homeowners themselves and understand the land lording business from both sides. Executive tenants spend long hours working and are not home enough to cause any significant damage or wear and tear on the property – in some cases, stainless steel gas stoves in our penthouse rentals have gone months on end without even getting a single use! While the executive takes up residence in the rental property, it has been our experience that he or she rarely pays the rent directly, instead the rental fees are paid by a parent company. A company will have numerous
considerations when renting a property for an executive, cost of the rent being only one small consideration out of a significant number of others. Selling a property that holds an executive rental contract can be a very lucrative process. Commercial real estate investors will often arrive at the value of a property by engaging what is known as the ‘Income Approach’. As the name suggests, a property’s value can be easily calculated as a function of its rental income. The formula looks like this:
v = i/c or
Value of Your Executive Rental = Net Yearly Income ÷ Capitalization Rate
Where value means the obvious sum of money any given property shall sell for on the open market, income means the net yearly rental amounts paid by renters, and capitalization rate means the ratio of income to value. This cap rate can be assigned by the investor or provided by a real estate or mortgage broker with knowledge of a local market and is usually standard rate in any given market. When a landlord can drastically increase the income of a property through transforming it into a profitable executive rental, the value shall increase proportionally. [Insert #1]
What Kinds of Returns can I Expect?
A strong argument can be made for executive rentals on account of a landlord’s return on investment. This cash flow can be significantly higher than an identical property rented through conventional means, and to a single, non-corporate individual or family. While some additional expenses are unavoidable such as furnishings, kitchenware, and even housekeeping – executive renters will pay going rates that provide a significant return on investment. Lets compare the rental rates and returns in the following real life case study:
Steve was a high school teacher in a major center in Canada where he lives with his family. After some good equity growth and a nice raise in his pay, Steve decides to invest in a rental property and selects a brand new 2-bedroom condo in a fashionable development located in the city center. Steve deals with the developer’s sales center directly and is able to buy the property easily for $300,000 he quickly rents the property out to a mature and responsible student who studies at a down town campus. Monthly rent = $1,500 per month, strata fees and taxes of $500 per month are included in the rent making for net monthly rental income of $1000. This creates a CAP rate of 4%. Market Cap rates for the area are in the 8% range however. After some good advice from a friend, Steve does not renew the lease with his tenant. When the unit comes vacant, he makes the following further acquisitions; stylish new furniture including bed, sofa, television, and workstation for den = $15,000. He then provides the finishing touches that include artwork, linens, and kitchenware to his unit to create a personality for the space, and a striking WOW factor = $5,000. Steve happens to be colorblind so a family friend helps with selecting these items and the fun interior design project in exchange for a nice bottle of red. Soon, the unit is rented to an executive in a nearby office tower where a large multinational corporation houses its head offices. Market rent = $3995, inclusive of strata fees, taxes, Wi-Fi / cable, and weekly housekeeping expenses of $750 per month making for net monthly rental income of $3,245. Imagine how the Value of the property has increased according to the income approach to valuing the property with the formula we discussed previously. [insert #2] Investors who are astutely aware of returns would look at the detailed numbers and conclude an extremely high value for the property.
Would my Property Qualify as an Executive Rental?
In general, all executive rental properties will share similar characteristics and to evaluate the merits and desirability of a property, the following ideas can be applied. Location. The old adage is very true in the executive rental business. An executive rental in the wrong neighborhood will fail. Period. Executive tenants will value the location of a property as a high priority, even more so than the quality and appeal of this actual house or condo. Executive rentals that are located in the inner city will have an inherent built in demand. Property located in the actual city core will have an even greater demand and are more likely to attract long-term corporate leases. Hospitals are another excellent source of executive renters, so property located within walking distance to a Hospital are prime candidates for Executive rentals. Doctors, nurses,
visiting researchers, and medical school residents are excellent occupants for your executive rental property. While hospitals themselves will rarely pick up the bill for your tenants; private healthcare funding, government programs, and corporate research grants are generous sources of rental revenue for your medical executive tenants. Universities are a great nearby amenity for your executive rental. A distinction must be made between a university and a college, or trade school however. While each of these institutions will have a huge built in supply of students in need of rental housing; Universities are most likely to provide you with mature, executive level renters. These persons can be postgraduate or doctoral students, research chairs, Professors, or senior level administrators. Younger students such as those whose studies are provided at a trade school, technical college, or students in programs lasting a less than 4 years will be to young and not likely to afford the increased rates that your executive rental will command. Clean and well-kept neighborhoods are a must for your executive rental. A simple walk through a prospective neighborhood should provide all the information needed. Do the neighboring homes show pride of ownership? Are the lawns manicured and well landscaped? Are other executives likely to be living in the neighboring homes or units? If you are not instantly attracted to the neighborhood, then an executive renter will not be interested either. Executive tenants have limited time to spend shopping for a new home so the first sight of a problem area and they will stop wasting their time viewing your unit and continue looking for their now home elsewhere.
Marketing Tips for Your Executive Rental Property.
The most important piece of advise that can be conveyed in relation to attracting executive renters has nothing to do with marketing or advertising. You absolutely must have a great product in the first place. There is no way to pull the wool over a prospective renter’s eyes and trying to do so will set a negative tone for your future relationship. A landlord is better served by spending their marketing budget bringing their executive rental property to an immaculate level of cleanliness, style, convenience, and function. Effective rental marketing for an executive property is very different from out dated conventional methods of finding tenants for investment property. Forget everything that you think you know about rental marketing. Many landlords have missed out on reaping the great rewards of this sector of the market because they were not able to attract suitable renters in a timely manor. Do not post outdoor signs advertising your property for rent. These tend to alienate executives who will not want it known that their home in an executive rental space, additionally for rent signs in Executive neighborhoods tend to garner a lot of attention of the negative type from neighborhood kids, partiers, etc. Website based advertising is a great option because executives will constantly be checking email, web apps, work related computing, etc. Simply posting a listing on a rental website is not sufficient to truly convey the value of your executive rental. Be sure to fully describe exactly what is included in the rent (there are no industry standards), describe the neighborhood amenities, and be sure to use the words “Executive Rental” as much as possible. This will ensure that the search engines pick up your listing. Search engines are a great way to market your property and to drive attention to your listing. While search engine marketing is a highly complex industry in its own right, some key tips to ensure that your listing shows up in a search engine’s results page are to type very descriptive text that contains words and phrases that are likely to be typed into searches by prospective
renters. An example of this could be, “Executive Rentals Calgary” or, “Gas Town Executive Rental”, or “Rosedale – Toronto Executive Rental”. Most of the largest search engines will also offer users the ability to post classified ads for a fee. These ads will show up on the search page when results are displayed. The user has the option of selecting which searches will reveal the ad and the cost can be as little as $5. Groundwork will gain you the most benefit. A landlord with an executive rental can save hundreds in marketing costs by connecting with a suitable business contact and placing a high paying executive tenant in their property over night. Relocation agencies, property management firms, and human resource personnel are great groups to start with. A quick phone call to ask a simple question like, “Do you require any executive rentals?” is a great way to get started, and to make some friends in the industry that will prove to be invaluable.
Shamon Kureshi is the President & CEO at Hope Street Management Corporation - a firm whose goal is to provide the best Property Management Vancouver has to offer. The firm provides rental homes to thousands or executive families and individuals.