Since September 1, 2017, the Fair Housing Plan rent control has been the law of the land.
Ontario Fair Housing Plan
What’s in the Ontario Fair Housing plan that every real estate investor needs to know:
1. Rent control is applicable for ALL rental units; built before and after November 1991. Rent increases are announced once a year by the provincial government.
2. Real estate investors can not ask the tenant to move out then turnaround and re-list the investment property at a higher price within 12 months of the tenant moving out. The real estate investor can be penalized up to $25,000.
There were 14 other points in the Ontario Housing Plan, however the above 2 are the most important to real estate investors. Due to the new rent control risks, some developers have pulled out of the purpose built rentals development which is further restricting supply of rental housing.
4 Ways Real Estate Investors Can Mitigate Rent Control Risks
1. Buy Small....Very Small
As more tenants will stay put longer in their units, 1 way to mitigate rent control risks is buying a small investment condo (ie, small or junior 1 bedroom). Young professionals are transient as their lifestyle and employment needs change in the early years. They are more like to move to another rental unit due to job changes, relationship status changes or family formation. Once a tenant moves out, the real estate investor can reset the rents back to current market conditions allowing them to improve cash flow. Conclusion: Buy small....very small condos to mitigate rent control risks
2. Transient Neighbourhoods
Buy in neighbourhoods where young professionals are attracted to, eg. King West. There is strong demand for 1 bedroom condos in the area due to the lifestyle King West provides to the young professional and proximity to the downtown core jobs. Conclusion: Look for geographic areas that attract younger professionals to mitigate rent control risks
3. Amenities & Density
Buy into building with basic amenities to keep the condo fees low since real estate investors pay for condo fees and it’s not something passed on to the tenant. Also, buying into buildings with high density (many condo units) will help keep condo fees low since there are more units to share the cost. The 2 most expensive items the condo board pays for are: 24 hour concierge and swimming pool. Conclusion: be selective on which buildings to buy into to mitigate rent control risks
4. Tenants Pay For Utilities
Buying a duplex, triplex or a fourplex is another investment option for real estate investors with deeper pockets and an appetite for a different type of an investment. Structuring lease agreements upfront for tenants to pay for utilities (water, sewers, heat and hydro) is critical in improving cash flow. The real estate investor pays for the mortgage, property tax and property insurance. Conclusion: structure leases upfront for tenants to pay for utilities to mitigate rent control risks
Bonus tip: Issue rent increase (N1 Form) on annual basis. Real estate investors need to provide 90 days written notice from the end of the month for the rent increase to take effect. Setup a reminder to issue the N1 form the last week of September for the higher rent to be in place for January 1st of the following year.
Yes the new rent control has made it more challenging for real estate investors, however savvy investors adjust and adapt to the new market conditions. Investing in real estate is a great way to generate long term wealth.
Looking to invest in real estate, here are a few guides I have put together to get you started: