Landlord Lesson #7 -Understanding Rent Control

Rent Control – love it or hate it, as an investor, you must understand rent control because how much rent you can charge for your investment property becomes your lifeline for how much cash flow you can produce and how much profits you’ll make. Depending on who you speak to regarding rent control, it can either be a blessing or a disaster. My honest opinion on rent control is that it has temporarily frozen the rental market and spiked the prices up ~20% since its inception. It was so bad that it had to be lifted. However, we are still feeling the ripple effects of some of the properties that haven’t had their rent control lifted yet.

How It All Started – The full story of rent control in Ontario dates back to 1991. There are 3 pivotal dates that come up often in the context of rent control, and they are:

  • November 1, 1991 (referred to as 1991 in this Insight Article);
  • April 20, 2017 (referred to as as 2017); and
  • November 15, 2018 (referred to as 2018).

Prior to 1991, rent control was applicable across the board in Ontario. It wasn’t that much of an issue as Toronto was really not deemed as a world-class city (just yet anyways). What we didn’t know was that it was eventually going to become a world-class city over the next few decades. We had very little skyscrapers and condos in the late 1980’s. Shortly post-1991, rent control was lifted on all apartments that were constructed after the 1991 date. At that point though, there was really no construction of condos in the downtown core because buying a detached house was still $500,000. So the removal of rent control in 1991 didn’t really affect the market too much.

In the early 2000’s, the condo market started blossoming and condos were being built – CityPlace was developing, Bay Street Condos were being built, Yonge Street commercial space was being rezoned. This was just the beginning of the condo boom.

When the supply became very problematic and prices were increasing at 10% per month, the Liberal government introduced the Fair Housing Initiative in 2017 to re-introduce rent control on all properties. BAM! Just like that rental rates became stagnate and rental inventory just fell off a cliff. Anyone who had a vacant rental property immediately increased their rental rates. This was ironic because I truly believe the intentions of rent control were to help tenants, but ultimately, it ended up doing the opposite. There is speculation that this was all caused by a CBC report about one landlord doubling the rent on their tenants.

The Fair Housing Initiative also put a major damper on the demand for freehold properties, and so, the second condo boom started. No inventory, prices increased and no rental supply… this was a recipe for disaster. Then came the Conservatives after being elected – they vanquished rent control again but with a caveat: Rent control still applies to all buildings completed before 2018. This left us exactly where we are now – all properties finished prior to 2018 are subject to rent control and all properties finished after 2018 are not subject to rent control.

Investor Impacts – So why and how does all of this matter to you an investor? Basically, if you own a property that is completed after 2018, you can freely increase rent over the allowable limit of 1.8% on all renewals. Just don’t be ridiculous.

If you own a property that was completed prior to 2018, then you can only increase the rent by a maximum amount of 1.8% (2019 rate) on renewals. It’s actually quite low given what the inflation rate is. However, if your tenant decides to leave, you can increase the rent above the rent control limit.

So this leaves us with a lot of tenants who have existing under-market rental rates from leases prior to 2018. These people will never move (if they don’t have to move for other reasons) because their rent cannot be increased past the maximum allowable limit of 1.8%.

Common Situations – Here are some common situations that come up with the rent control legislation:

  • You are only allowed to increase the rent after your 1-year term by 1.8%.
  • If you do not sign a new lease, the tenant goes to a month-to-month tenancy and you cannot evict them.
  • During the month-to-month tenancy, you can still increase rental rates by 1.8% if you provide them with an N1 form.
READ: Why You Should Always Increase Your Rent
  • New legal basement suites completed after 2018 are not subject to rent control

I have some clients with existing properties who are waiting until the day their tenants move out, so that they can increase their rent. Some tenants with leases circa 2011 are still paying about $1,500 per month for a nice large 1-bedroom unit in downtown Toronto. Imagine that! How amazing is it for these people who have low grandfathered rental rates when the average 1-bedroom units are going for $2,300 per month on the market. Investors – if you are in this situation, the honest truth is that there isn’t much you can do, unfortunately.

The Wrap – I’ve had people inquire about their options to buy their first home knowing that that they are living in a rent-controlled property with rental rates increasing very minimally each year. If that is the situation you’re in, then you should 100% buy an investment property and continue living in your rent-controlled property. This is a form of what others refer to as “house-hacking”. By undertaking this approach, you can essentially create enough cash flow from your new investment property to cover your below-market rent. If you are interested in doing something with this approach, make sure you reach out to me at Zhen@PrimePropertiesTO.com. We’ll set you up nicely for some house-hacking!

Until Next Time, Happy Real Estate-ing,

Zhen

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