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10 Reasons to Become a Landlord and 40 Reasons not to – Part Two

By Christopher Seepe

Multi-Residential Housing is not a Passive Income

In Part One we discussed the 10 good reason you may want to consider becoming a landlord. Now here are some reason you may not want to.

Many investors don’t realize the financial and legislated responsibilities landlords must accept, especially in Ontario, arguably the most heavily regulated rental housing market in the world. No one reason will discourage you from becoming a rental housing baron or baroness, but just a few small mistakes could turn your dreams into a nightmare.

1. If you’re not a people-person, hire an amiable but firm property manager or stay out of this business. Otherwise, you’ll alienate your tenants and cause no end of misery for yourself.

2. If you’re not a master of cash flow, again, stay out. You must plan ahead for everything from property taxes and insurance to major repairs. Maintenance costs come in big chunks. You may have nothing for a time and then suddenly get hit with a roof, boiler, or other major repair.

3. You’ll have vacancy. You don’t always achieve full rental income from your property. Lenders average vacancy at 3% to 5%. And, the less units you have, the greater the financial impact.

4. Bad legislation and inappropriate tax rules have created thin profit margins, especially for smaller operators, forcing them into nominal programs, thus eroding property quality, lowering tenant quality of life, and producing very little new rental housing stock.

5. Government and mainstream lenders have made it increasingly difficult to purchase rental housing, despite shrinking rental housing inventory and low vacancy rates.

6. Know the law or become a potential victim of it. If legal technicalities drive you crazy, stay away from rental housing. Among other things, you need a solid rental agreement and you must understand it completely.

7. You may inherit the previous landlord’s problems. You have legal recourse for undisclosed latent defects, stigmatisms, etc. but you may still end up financing the remedies until you can collect.

8. Be prepared for unpleasant life experiences like dealing with the passing away of a tenant, (by natural or unnatural causes), or dealing with tenants conducting illegal activities.

9. If the police or fire department kicks in a door or otherwise damages your property in the commission of their job, you pay for the repairs.

10. Tenants may call you at all hours of the night, sometimes for repairs, other times for emergencies, and still other times for domestic disputes.

11. You may have to be a mediator between neighbours who don’t get along.

12. Government eliminated security deposits that would otherwise discourage tenants who disrespect or even trash your property, and you’ll have a hard time collecting the cost of damages from tenants who have moved away.

13. Bad government policies and procedures created a new kind of sophisticated parasitic “professional tenant” whose goal is to continuously bilk landlords out of their rent.

14. You must visit your rental properties often. One landlord never checked up on his renters. The property was seized by police because it was used as a grow-op. The landlord did not get back possession because he was expected to have knowledge of this kind of obvious use and to report it.

15. Ontario government has put a 2.5% cap on annual rent increases. Landlords are already prevented from passing on many types of legitimate operational and capital costs. Getting no profit is a recipe for potential systemic industry failure, especially among less sophisticated and/or small operators who are not masters of their cash flow.

16. LTB has imposed harsh rules on landlords for applications where any error requires the landlord to start the application over.

17. Ontario has the longest eviction proceedings process in Canada.

18. The Ontario Landlord & Tenant Board (LTB) spends $28 million per year of taxpayer and landlord money, mostly on staff salaries, who spend two-thirds of their time processing landlord applications for tenants who refuse to pay their rent. Nine out of ten complaints are from landlords. According to the Federation of Rental-housing Providers of Ontario, a rent collection dispute costs the landlord about $5,200.

19. According to the Advocacy Centre for Tenants Ontario

  • There were 39,070 fewer private rented units reported in the 2006 Census than in 2001.
  • Between 1995 and 2005, there were 13,061 fewer rental units in 21 Ontario municipalities
  • Rental Housing Tribunal received 509,827 eviction applications from landlords between 1998 and 2006. 84% were for non-payment of rent.

20. Be prepared for tenants who care about nothing except themselves, who look for every opportunity to make a quick buck at your expense, or who blame others for whatever is upsetting them.

21. Hoarders who violate the rights of their landlord and neighbours, and can create notable health and safety issues are nevertheless protected from eviction by the Human Rights Code.

22. Some municipalities have abused their power by taking the right to add a non-paying tenant’s utility bill to the landlord’s property tax. This is like holding police accountable for the crimes of the criminals they don’t catch.

23. Capital Gains tax and Recoverable Capital Cost Allowance (depreciation) discourage longtime landlords from selling their property(s) to new investors, who statistically spend the most on building renovations.

24. Landlords cannot compile a list of bad tenants. In case resolutions, the LTB makes a landlord’s name public but the tenant’s name is hidden; an odd interpretation of privacy legislation.

25. The landlord is charged for a Fire Code violation committed by a tenant.

26. Statistically, tenants who have their utility bill included in their rent consume substantially more energy than those tenants who pay their own utility bills.

27. Government requires landlords to provide new tenants with one year of utility consumption history for a rental unit. Privacy Act prevents landlords from obtaining this information from utility companies if the previous tenant paid their own bill.

28. Government requires landlords to accommodate mentally-challenged tenants to the point of a landlord’s “undue hardship,” at the landlord’s cost. Few landlords have the schooling to handle the irrationality of a mentally-challenged tenant. I am not aware of any courses or classes to help landlords meet this huge responsibility. As president of the Landlord’s Association of Durham, I made a “Public Education Request” to the Ontario Human Rights Commission in April 2012. They declined.

29. Government expects landlords to foot the bill for damage and foul odours caused by pets. While there are legal recourses, the practical application of those recourses is onerous and often fruitless.

30. Your toughest challenges could come from the most unlikely places—your customers, all levels of government, and all political parties. The latter two pander to the large base of tenants, passing tenant-biased legislation in exchange for “easy votes”, to the detriment of all landlords.

31. Landlords carry the stigmatic stereotype of the “rich landlord.” Uninformed people believe that landlords “can afford” to carry the ever-increasing financial burden heaped upon them by oppressive housing legislation. One mayor of a large Ontario city said that he has to find the money from somewhere and landlords can afford it.

32. You must know the Fire Code. Some updates can create unexpected capital costs such as installing bullhorns in every unit.

33. Finding reliable and honest trades people who perform acceptable quality work at a fair price AND have people skills that respect your good tenant relations can be a real challenge.

34. Municipal property taxes can take 15% to 20% of your rental income.

35. Some municipalities have cut back on the services they provide, such as garbage removal, but your property taxes continue to rise.

36. Government requires that the rent of a tenant switching from a single bulk meter to an individual meter be reduced by the amount of energy consumed over the previous twelve months. Therefore, the most energy-abusive tenants receive the greatest rent decreases while energy-conscious tenants are penalized.

37. Government limits landlords from passing on certain costs, and those costs that are permitted can’t be more than 3% of the rental income above the rent increase guideline per year for a maximum of three years. This limits what a landlord can spend on improvements.

38. Landlords are punished by the LTB process for working with a temporarily financially-distressed tenant. The LTB eviction process only begins when the landlord files an application, so the long LTB eviction process forces landlords to file as soon as the tenant fails to pay the rent.

39. Mainstream lenders will not finance rooming house-like properties, regardless of function, client base, or proven income stream.

40. Being a residential landlord is definitely not a passive income investment.

Treat your investment like a business, your tenants like valued customers, know your rights and those of your tenants, maintain tight control on your cash flow, count the pennies, act promptly in everything you do, surround yourself with high quality industry professionals, and you’ll experience the success you’ve dreamed was possible, especially if you can expand your holdings. There are definite advantages in this business from economies of scale.

Christopher Seepe is President and Broker of Record at Aztech Realty Inc., Brokerage and maintains www.multiresidentialexpert.com , a website dedicated to providing expert advice and sharing his personal investment and ownership experiences to those investing, or looking to invest, in multi-unit residential, income generating properties in southern Ontario, Canada. You can contact him directly at cseepe@aztechrealty.com

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