Payback period of Cash for Keys offer

[Jamie Blair]

I met with an investor in Montreal on the weekend of he was describing how he uses cash-for-keys to incentivize his current tenants to return their lease to him when they move out, instead of passing it on to someone else to the same price (an extremely common practice in Quebec). And once he has the unit back in his hands, he can reset the rent to market rate. He was describing that the highest he's ever offered was 25k, and was turned down. My question for you guys, do you have a typical rule of thumb for a payback period on this "investment"?   Ie. If I have a 1-bedroom unit that's currently renting for $600, but market rate is $1100, if I offer the tenant up to 5-10k, the payback period is 10-20months. I plan on holding the property as a long term investment, so increasing monthly cashflow makes sense......or is there another way I should be thinking about this? 

(I plan to ask this investor this question next time I see him, but not sure when that will be!) 

[Frederic Babeux]

Landlords in Quebec have to disclose the previous rent and you can be forced to give it to them.

It is very difficult to raise rents year over year in Québec, there is a formula provided by the housing tribunal that you have to use in order to justify your rent increase. You're lucky if the increase matches inflation.

That is one of the main reasons I do not want to buy locally, the law is really in favor of the tenants.

But to get back to your question, the payback period depends on your plans for the property. If you want to sell, the amount you can offer is much higher due to the fact that a higher NOI will increase the property value by a lot.

For example, if you manage to increase the rent by 500$/mo (that's a realistic thing here in Quebec due to the fact that we still have some leases @ 700$/mo when the market supports 1200-1500/mo. Now let's say that you get 6k in NOI at a 3.5% cap rate in Montreal, that is an extra 170k in value!! I'd have no problem offering 25k+ if I wanted to sell.

If you want to keep holding, it's also similar because your NOI will drive your refinancing...

Hope that clarifies it for you!