March 15th 2022
In the last issue of our Market Trends newsletter under The Money Machine, we looked at four forces at work that could derail your plans to build an investment portfolio. And we talked about ways you could protect yourself from that happening.
Today, continuing on that theme, I’d like to talk about some actions you should be taking to ensure that you will be a Landlord/Investor for the long haul and how you can make your life a little easier along the way. These actions come from my personal experiences both in right things I have done and also from 
mistakes I’ve made along the way.
#1 Strive for Market Rent
Here in Ontario, we are under Rent Control. Not the rent control we once had whereby the legal rents were locked in forever, even when tenants came and went, but rent control, nonetheless. As long as a tenant resides in your rental unit you are limited to Government-mandated rent increases, once a year and generally very modest indeed.
My philosophy, which I came to discover was a mistake, was rather than disturb a good tenant by raising their rent annually, I’d simply wait until they moved out to increase the rent to market levels since under our current rent control system you can now do that. But I learned there are two problems with this approach.
(i) It is customary for landlords to charge both first and last months' rent before a tenant is given the keys and allowed to move in. The first because it is due upfront before a tenancy commences, and the last is security to ensure you are getting at least one month’s notice. What you may not realize is that under the Residential Tenancies Act, landlords are required to pay interest to the tenant on that last month’s rent they are holding. The rate of interest is set to correspond with the annual allowable increase. So, by raising the rent each year, the rent the tenant pays is growing at the same rate as the interest you are obligated to pay. That means when they do eventually vacate, the last months' rent they paid you initially will have grown to equal the rent you are currently charging and you will not give them any additional interest. (ii) With long-term tenants, there is an ever-widening gap between what they are paying in rent and what they should be paying. The reason for that is that market rent goes up every year at least at the rate of cost of living. Often more so. Especially these last few years when real estate prices have increased so rapidly. And even if you take advantage of the legal rent increase every year, you are still falling behind market rent or even the cost of living, but even a marginal increase helps.
What happens over time, is that the rent the long-term tenant is paying gets less and less, in relative terms. And the cheaper it gets, the less likely they are to ever move. If I can share my personal experience for a minute. When Ontario changed rent controls to allow you to adjust to market rent when a tenant vacated, I stopped the annual raising of rent, figuring rather than disturb a good tenant with an increase notice, I’d just wait till they moved out. The problem is some of them didn’t move, and now 18-20 years later they still haven’t. So here I am with tenants who are literally paying less than one-half market rent, and they are never going to move. I’ve even had tenants buy a house, rent it out at market rent and stay put in my unit because they were farther ahead to do so.
So don’t make that mistake. Of course, long-term tenants will never end up paying what they should and what new tenants will, but by taking advantage of regular annual increases, you’ll cushion the impact somewhat.
Be sure to watch the Money Machine article next issue when we look at action #2 – Paying Down the Principal.
Wayne Quirk, Author, “THE MONEY MACHINE”, wayneq@remax-gc.com