Ending Rent Control – Who does it help?
Can you imagine Coke being happy that new government policy helps out rival Pepsi but does affect them?
How about if Ford can raise their car prices by 10% this year, but GM is limited to rises under 2%, even if the market demands allow the company to charge more?
How about a bank who offers a far better fee structure to new clients than they do for their longtime existing customers?
So, forgive me for not getting too excited about the provincial governments’ decision to end rent control for any new build construction unit that is first occupied after December 2018. This essentially allows any new build construction to operate under a different set of rules than those of us that have been providing safe, affordable housing in this province for years.
None of our expenses are limited, yet government intervention limits the rent that we can charge.
There is criticism to landlords who employ the famous “renovictions”, where they evict a tenant in order to fix it up, then rent it out to another tenant for much more money. But, instead of criticizing the “loophole”, let’s review the reason why this is a necessary solution for so many beleaguered landlords. They WANT to be rental housing providers, but the economics often don’t make sense in many markets under the current rents. Plus, the fact that there is absolutely no way to catch up on rent, because of limits to how much you can raise the rents each year.
How is this going to affect investors?
It is a good first step to encourage new properties to enter the housing market, however, in order to really get ahead in the number of available units, policies need to be created to encourage existing landlords to hold onto their properties and not end the tenancy and sell it for a personal dwelling unit.
In the past couple of months, I have had FOUR clients of mine that own single-family homes that now make more sense to sell and take the profits from years own ownership, rather than rent it out for minimal or now, negative cash flow.
Fighting the changes or work within them.
Finally, for those of us that are willing to fight through the bureaucracy, deal with the challenges, and take on the risk, but are determined to provide quality rental units at affordable rates, there are now limits by many lenders in terms of the number of properties they can add into their portfolio.
Now investors can have too many properties.
I know of multiple people who have the funds to buy a property and want to make that purchase.
They have successfully created many properties and offer quality, safe and affordable housing. They have a strong net worth, great credit score, have never missed a mortgage payment, but no primary lender will offer them a mortgage because they simply have too many homes in their portfolio.
Run your properties like a business!
The people with the most success in being a rental home provider, and the funds and desire to continue to move forward. They run this business LIKE A BUSINESS. They are the type of people the government would love to work with to add more rental units. The policy created restricts the number of units the client can buy, even if that lender has no mortgages with that very lender.
It’s not cut and dry…
If the Federal and Provincial governments truly want to grow the number of available units, they should consider the following policy changes that will encourage more new rental buildings and encourage landlords to keep the units they have.
Change the amount landlords can raise rents to current tenants.
Landlords need to be able to raise rents 2-3% ABOVE the inflationary numbers. With average inflation typically around 2% annually, this would mean, landlords can do a rental increase of about 5%. Landlords are not obligated to raise the rents at this level but should be given the right to, especially is the market allows it.
Encourage frequent buyers to step up and add more rentals in their portfolio.
Reduce or eliminate stress testing, when the property has 20% or more paid into it AND generates enough rental income to cover the mortgage, taxes and insurance.
Eliminate arbitrary restrictions on the number of rentals for one landlord.
If the buyer qualifies, give them a mortgage.
Use actual rents when calculating their ability to qualify for future mortgages.
Some lenders use just 50% of the rental income, then refuse future mortgages because existing properties are cash flow negative. If the lenders used all of the property’s income, then the profitability would reflect actual results. (Imagine if the lender only took 50% of a manufacturing company or other business, then refused future mortgages. That is what they do in the rental industry).
My final thought…
I am the first to tell you that there are many landlords who aren’t running this business like a business. They likely shouldn’t qualify for more properties, as the risk to a lender is greater. But if a landlord does everything right, and follows all of the rules. They are the type of landlord, the governments want. Then why restrict them from building that business?