Rent Controls…Every Landlords Nightmare

 If you have been around long enough in this business, you have done business in a time of rent controls. The issue of rent control is a political hot button, hit in hard times, and as my father always said to me…’There are more tenant voters, than landlord voters.’ I’ve had the pleasure of trying to turn around a declining building in the climate of  strict rent controls, (read much less than real inflation) and work hard to create enough cash flow to slowly upgrade a building to bring in ‘better tenants‘. It’s a bit like trying to raise a sinking boat really. The price of heating fuel, electricity, and insurance, go up quickly in times of inflation, along with property taxes.  Even city services such as water/sewer services can escalate. Your rents go up slower than your costs, and eventually you hit the sweet spot of no profits. Many landlords just stop doing the repairs they should, to keep some profitability, but it doesn’t take long before this becomes a terminal state of decline, with the associated difficulty of getting the best tenant.When most landlords hit this spot, they often start looking at a sale to escape out of this bind. Builders at this time usually stop building rental buildings, as a climate is created where there is limited return on investment. This often creates a situation whereby rental supply tightens, tenants demand even more protection, and owners end up facing even more rental controls or reductions on rental increases. The end result is the value of your property declines in this situation.

When property values are going through the roof, then no one cares about a negative cash flow and owners simply ride the property appreciation train for as long as they can afford to do so, before they cash out or issue tenancy deposit claims. But when property values have stalled or declined, and rent controls gear up, its time to think hard about your choices. Avoid getting into a building with low rents, as in a time of increasing rent controls  your window of profitability is very small. If your rents are average or above, you can have time to plan your strategy of survival.

The only thing that can save some landlords are the legal ways of increasing rent, more than just the allowable standard increase. In some regions this may be to amortize the cost of renovations, although often this is just until the costs are recouped and then the rent goes back.  Some regions allow the rent to increase between tenants after someone moves out, which is a better situation. While some regions have other legal loopholes for amortizing costs, often that fixes the rent higher than what is was. Landlords should realize however the general trend for rent control ‘increases’ has been decreasing. In Ontario for example, rental increases went from around 8% in the late 80′s, reflecting the higher interests rates of the time, to between 2 and 3 % recently.

If you get caught in that hard place of little or no profitability, think of alternative ways of increasing rent income, such as subdividing large apartments into two smaller ones if possible, or charging for additional services that you arrange to supply, whether internet, phone, or other utility, or other service. But the easiest thing is to not get caught in the first place. Always crunch out your numbers before you buy a property, to know if your venture is sustainable over changes in your operating environment of rent controls and costs.