Toronto Real Estate and the new Rental Control Rules
Since Ontario announced the Fair Housing Plan, individuals including developers and even politicians have said the province is attacking the landlords. These individuals are under the impression that the new controls will force the landlords to rent at a future loss. However, rent controls are designed to preserve cap rates, while preventing predatory increases against tenants!
WHAT IS A CAP RATE?
A cap rate is the percentage of net operating income (NOI) that a landlord makes, compared to the cost of the rental. What is the NOI, you ask? The NOI is the amount of annual rent the landlord charges, less expenses. Basically, a cap rate is the percentage of profit you'll make annually, compared to the price you paid for the rental unit.
ONTARIO FAIR HOUSING PLAN, AND EXPAND RENT CONTROL
The new Ontario Fair Housing Plan extends rent controls to almost all rental units. This means that if you bought a condo, and decided to rent it out, you're probably bound by rent control guidelines. The maximum amount the rent can be raised is limited to the Consumer Price Index (CPI) for that province. For example, this year, your rent can only be raised by 1.8% in Ontario, as outlined in the Rent Increase Guidelines.
ABOVE GUIDELINE INCREASES
The Landlord tenant tribunal have confirmed that landlords may qualify for an above guideline increase. If the landlord faces a sudden rise of expenses, they can apply to have the province accomodate the new costs, even above the guidelines. They just need to prove that the costs are necessary and not frivolous. They can make valid increases. They just cannot raise rent whenever they want.
RENT CONTROL TACKLES QUICKLY RISING PRICES
Rent controls do not impact cap rates, they control rising home prices. If you can apply for an above guideline increase, you'll likely maintain your cap rate. The only people that are impacted, are new investment property buyers. These people cannot offer 18% more than the previous buyer, and pass on the new cap rate to the existing tenant.
Buying an existing rental property means you are now buying the cap rate, as is, for the most part. This limits the price increase on the unit, because no one would buy a property with a bad cap rate. Killing the ability to raise rents by as much as a landlord would like, kills rapid price increases. This is especially true for secondary units in the condo apartment segment. If you entered your career as a landlord with a decent cap rate, you should expect it to hold up fairly well. If you enter with a terrible cap rate, expect that to last the lifetime of that property.