Wednesday, December 12, 2018

The Current Rent Control System is Most Unfair to Condo Landlords

Most Toronto condos being rented out today are running cash flow negative.  This means that with a 20% down payment (which is typical), after the landlord has covered costs of the mortgage, taxes, common area fees, insurance and unit maintenance, they are losing money each month.

Now those are the regular, recurring charges that apply to all landlords.  But there are many more costs that may be incurred.  For instance, what happens if the unit sits empty?  That vacancy period has to be factored into the equation.  What about damage and depreciation?  And if a condominium has a special assessment, that puts the owner further under water.  Add to that unpaid rent that is generally unrecoverable post-eviction, and you can start to see where this is going.

Rent control in Ontario covers all units except those not first occupied prior to November 16th, 2018, so basically every condo is covered by the Residential Tenancies Act and its system of rent control.  In 2018 and 2019, the only rent increase a landlord can take is 1.8%.  And even if the tenant AGREES to pay more than the provincial allowance, that agreement is void.  Remember also that the 1.8% increase that landlords can charge annually is only legal if the landlord gave the tenant the proper N1 form with the proper timing, and served properly.

It's easy to imagine a landlord in a condo having maintenance fees (common area fees) that go up 5% annually, with a tenant who stays in the unit for 3 years.  That's a 15% increase in common area costs over three years.  Perhaps the mortgage was renewed during that period, now at a higher rate.  Rent during that period will have gone up a maximum of 5.4% (assuming a guideline amount of 1.8% annually).  Using this common example, there is no way that the landlord, who might have been covering costs plus $300 per month at the commencement of the tenancy, is covering costs by year three.  They are actually taking money out of their pocket each month.

What if the tenant stays longer?  What if they stay for 20 years?  The worst bet is a large, 3 bedroom condo for families.  The tenants may stay forever!  The only unit I would dare to rent as an investor is a 450 square foot unit where the tenants will move onward and upward after a couple of years as their income increases.

Under Ontario's system of rent control, when the unit is empty you and the new tenant can negotiate any rent that makes sense.  But once the tenancy ends (thank God it ends because you can finally raise the rent to market), there is often a month's vacancy, plus cost of pest control, painting etc.

So what's a landlord to do when they want to get out of the business?  I had a client this morning with that same problem.  They rented the unit out in 2013 to a nice woman at a very low rent.  Prior to April of 2017, they were able to raise the rent by ANY percentage annually because the law permitted this for condos built after November of 1991.  But thanks to Kathleen Wynne, this exemption ended in April of last year.  But the landlord and tenant had agreed to bring it up to market rent gradually, perhaps $100 per year for a few years.  And then the law changed, and the landlord was stuck with a maximum of 1.8% in each of 2017 and 2018.  And stuck with a VERY low rent.

So the landlord is now losing money each month on the investment.  What are their options?

Selling the unit is almost impossible, because they can't stage the unit, can't make sure it shows well, can't do renovations on the unit etc.  The landlord has to sell it tenanted.  That will probably cost them $50,000 off the optimal price.

They can't evict the tenant, because there are no grounds to evict.  The tenant is paying rent, not doing damage, not committing illegal acts etc.  So unless the landlord is moving in, which is unlikely, the tenant gets to stay.  For how long?  Forever!  In Ontario, tenancies continue forever until lawfully terminated in accordance with the Residential Tenancies Act.  And absent the landlord or purchaser moving in (or demolition), a landlord needs evidence of serious conduct issues in order to evict.

In this example, the landlord might have this tenant in the unit until the tenant, a young woman, dies of old age.  The landlord would be negative thousands of dollars each month.  This creates a forced fire-sale by the landlord to stop the bleeding.

And for those who think that you can just say your mother or child is moving in and serve the tenant an N12 notice, think again.  While it's too complicated to go into here, you will likely not succeed, and could be subject to an order for abatement of rent and fines of up to $25,000 if you try it.

Landlords in condos cannot use the RTA's above guideline application rules for capital expenditures to ask the Board to allow an increase over the provincial guideline.  Pooled expenses in a condo, or special assessments, do not fit into the statutory system where a landlord in a home could apply to raise the rent if they put on a new roof, installed a new furnace etc.

And if the landlord is paying for utilities, unlikely in modern condos that have suite metering, the landlord can't raise the rent to account for soaring hydro costs.  Prior to 2017, landlords, including those in condos could use the Above Guideline Application, the L5, asking for permission to raise the rent by more than the guideline due to extraordinary increases in utility costs.  However, Kathleen Wynne took away that option in 2007, saying simply that landlords should be careful to purchase energy-efficient appliances.

So when you are are considering a condo as an investment, think twice.  Under the RTA as it stands today, frankly I don't recommend that anyone purchase ANY investment property.  Without legislative changes, the risks are too great.  But in condos, with the inability to control costs, and the inability to recover extraordinary costs by the L5 application, it is a recipe for certain income loss.  No wonder people are going with short-term rentals such as Airbnb and VRBO.  That's the only way to go in Toronto.  It's more work, but it's the only way to make money and get a return on your investment.

Doug Ford...where are you ?  Why isn't your common sense government amending the RTA in order to encourage investment in the secondary rental market, opening up tens of thousands of units.

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