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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

June 1, 2018 | Rentiers

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

When Peter and Cynthia sold the working farm west of Toronto to Tom, their kid and heir, they needed a place to stay while they planned the next move. Enter friend Peter, whose duplex in town was half empty. So P&C signed a one-year lease, and everyone got happy.

Nine months later Pete took a job in Calgary, listed and sold the place. The new owner, he told the tenants, planned to convert to a SFD. Soon P&C received the new, obligatory Ontario document, called “Notice to End your Tenancy Because the Landlord, a Purchaser or a Family Member Requires the Rental Unit N12.” Sprawled across that notice in reverse type is this dramatic message: “This is a legal notice that could lead to you being evicted from your home.”

The tenants had other plans, even though their lease had but 90 days left. They wanted to stay, and decided to oppose. If Peter (the original landlord) had wanted them out at the end of their lease he would be obligated to either (a) find them equivalent accommodation or (b) pay them a cash settlement equal to one month’s rent. (This is now the law in Ontario.) The new owner was exempt from that – but only if he could prove he or an immediate relative was physically moving into the rental unit. The tenants figured a renovation didn’t qualify, and hired a lawyer. They won – a payment equal to four months of rent in return for not proceeding to provincial arbitration.

P&C therefore lived for 12 months and only paid for eight. The new owner had to cough up more than $10,000, plus pay his lawyer. And another adventure in landlording ended badly.

Meanwhile in BC, the NDP government is drafting serious changes to its Residential Tenancy Act and under consideration is a suite of changes championed by a pro-renter lobby in Vancouver. Included is a four-year rent freeze, the elimination of security deposits, allowing tenants a longer legislated grace period for missed rent payments and a prohibition on evicting any tenant for any reason without a dispute resolution hearing.

Meanwhile in Ontario universal rent controls are now in place, covering every unit – even new condos – and it’s mandatory that a standardized provincial rental agreement  be used. That form prevents the LL from writing in ridiculous things like “no cannabis can be grown in the bathroom and iguanas over 32 pounds are not permitted.” If the landlord does not use this form, a tenant may demand that the lease be altered and has the legal ability to withhold a month’s rent. Seriously. And the NDP is not even in power yet.

The politics of renting is growing extreme. The vacancy rate in Van nears zero, and sits at just 1% in the GTA. Now that debt-snorfling Canadians have made their real estate unaffordable and a huge swath of the population will never own, political parties know where many votes lie. Just over 63% of people living in YVR own real estate, and in the GTA it’s 66%. Renters are fertile ground, and appear to be struggling just like over-leveraged homeowners.

In Toronto, for example, a recent report on affordable housing found 47% of renter households fork over more than 30% of their income to landlords. To handle that, it’s estimated an hourly wage of $24 is required (Ontario’s current minimum is $14). The average one-bedder condo (often just 500 or 600 feet) rents for $1,800 – and condos are provide most of the rental stock, since the construction of traditional apartment buildings has plunged.

Meanwhile, of course, the average condo in the GTA sells for $601,000 and in Van the benchmark price is over $701,000. So, after carrying costs (downpayment, mortgage, insurance, property taxes, monthly fees) how does an owner make any money leasing a condo out?

They don’t. Being a landlord these days earns you not only hate and disrespect, but can also deliver losses. As the politics of renting becomes more prominent in the big cities, the situation will only grow more dire.

Consider the facts.

Rents may be too much for renters, but they are too low for owners. Four in ten landlords in Toronto who bought in the last few years are experiencing negative cash flow. In essence, renters are being subsidized.

Ownership costs are escalating. Property tax rates edge up every year, as do insurance premiums – set to rise further with the legalization of potentially-dangerous home grow ops. Condo fees are completely out of the control of unit owners, and the next time a mortgage renews, it will be at a higher rate. By the way, as an owner pray you never get a special assessment for new windows, parking garage restoration or replacement elevators.

Rent controls are likely to become more pervasive, restrictive, all-encompassing and economically debilitating. The government doesn’t care if mortgage rates go from 2.5% to 5% or the condo board loses a lawsuit and increases fees. Rents stay stuck.

In fact, pro-renter government policies will be the norm. Ontario’s new law that tenants have to be paid cash just to leave when their lease runs out is a perfect example. Getting rid of a tenant now is a major challenge. In the future, it may be next to impossible – at least without the spending of great time and significant money.

Remember, of course, that rent is considered income. Landlords have to add their positive cash flow (if there is any) to all other income and pay tax on 100% of it. Investors making money on financial portfolios in the form of capital gains gets a 50% tax break – and don’t have to fix any toilets.

If you want to be quietly loved, buy ETFs. If you’d rather have a bureaucrat up the wazoo, get a tenant.

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June 1st, 2018

Posted In: The Greater Fool

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