How to offset rate hikes in Ontario, on a fixed rental rate?

Question

Hey!I have a tenant in Toronto, ON that locked in a rental rate in the early stages of the pandemic. However, now with the mortgage rate hikes, I am losing $700/mo on this property. We don't have rent control here so I am not able to arbitrarily raise the rent. How do I reconcile this? Any help is much appreciated,Thanks!Anthony

Chris Baxter · Answer

@Bill Brandt unlike the USA, most Canadian provinces have rent control with prescribed rates of increase. @Anthony Panepinto, I believe you meant to say that Ontario has rent control (it does) and you are now providing subsidized housing to your tenants as a result. There is nothing to reconcile... your expenses exceed your income and you are therefore cashflow negative. You can sell the property, offer cash for the tenant to move out, or move-in yourself to displace the tenant

Jamie Blair · Answer

Ouff that’s rough. @Chris Baxter and @Nick Vazquez said is perfectly though. One other option is to have a frank conversation with the tenant. You can describe that you’re loosing money on the investment and it simply doesn’t make sense, if the tenant really loves the places and wants to stay, they may voluntarily sign a new lease. (You can’t force a rent increase, but you can mutually agree to one) I recently visited a single family home for sale and the tenants had initiated that because they had been in the home for years and really didn’t want to be displaced. The new lease made the property attractive to investors and I think they ended up getting to stay after the sale.

Nick Vazquez · Answer

Yes that is all good advice! The only thing I'd add is I'm pretty sure the tenant's lease has to be month-to-month or, if it's long term, be close to expiry for the new buyer to move in - meaning you can't legally kick the tenant out just because a buyer wants to move in if the tenant is in the middle of their year long lease. You would have to wait till the year long lease is close to being done and give the tenant 2 months notice for the new buyer to effectively kick them out and move in. I may be wrong about that though (don't have time to go check that now) but I'm pretty sure that's what the rules were last time I checked.

Nick Vazquez · Answer

Hey @Anthony Panepinto,Even though you do have a few options, they aren't all that great and it will depend on what your long term goals are.Depending on their lease terms, you CAN raise the rent but there is a limit to how much you can raise rents in Ontario. It will not be nearly enough to cover the $700 of negative cashflow. So you will still be losing money, but if you are ok with that and you're going for an appreciation play then that is option 1.If you want the tenants out so you can get market rent, unfortunately your options are quite limited in Ontario. The only way to do that is to either pay the tenant to leave or move into the property yourself for a year or do significant renovations to the property where the tenant won't be able to live there (but they have a right to come back at the same rental rate when the renos are done). Obviously the last option is not the best one - you should try to pay the tenant to find another place or move into the property yourself (or a close family member moves in). And if you just want to get rid of this problem, then selling the place and putting that equity elsewhere is probably the best bet. Which will be rough if you have a tenant paying under market rent with a long term lease as that will be less desirable. Hope this info helps, which route you take just depends on your goals!

Nick Vazquez · Answer

@Kevin McGuire Very true lol, that would not be wise!

Kevin McGuire · Answer

@Nick Vazquez yes I think you’re right about it needing to be month to month, I just assumed that was already the case (that the original poster didn’t extend a lease where they were so under water from the start)

Jamie Blair · Answer

Good point! Yes that’s my understanding as well.

Kevin McGuire · Answer

What @Chris Baxter and @Nick Vazquez correctly captures the rules.@Jamie Blair raises a good point: if it's a SFH and you sell it, the buyer may be purchasing for their own residence in which case they can evict the tenant. The tenant may be willing to pay more rent to avoid this possibility, since they'd have to move AND they'll end up paying market rent anyways. Maybe you can offer them a rent which makes you cashflow neutral but still a bit below market and they avoid a move, arguably a good deal for the tenant versus the alternative. The tenant and landlord can always agree to a rent increase different than the Ontario provided cap. I think there's a special form for that.

Benjamin De Villena · Answer

Hi Anthony,How long is your tenant's lease term? A quick way to reconcile would be to sell the property and the buyer would inherit the tenant assuming the tenant has a long-term lease. This would be an alternative solution to keeping your property.Unfortunately, Toronto has really strong tenant rights, and trying to increase rents or evicting them will be next to impossible.Negative cash flow is always a tough thing to stomach but in the long-run the appreciation on your property will be well worth it.Cheers,Ben

Bill B. · Answer

Did they lock in a 3 year lease? raise rent when the lease expires.You say you don’t have rent control so you can’t raise rent? Not having rent control means you can raise rent. Are you losing $700/mo or just cashflow negative $700? (How much principle are you paying off?)With higher interest rates (yuck on non-fixed rate mortgages BtW) can you pay off some of the principle so you’re at least making money after principle paydown?