Rising rates give plex owners a hard time
Rising interest rates, rising property taxes, inflation … The room for maneuver continues to shrink for owners of rental accommodation, who could pass on part of the bill to tenants.
Sign of building for sale in Montreal.
In the last year, Simon Choucroun has invested all his savings to get into real estate. Starting from scratch, he now owns 24 rental units in Mauricie.
After a few prolific months, satisfaction gave way to concern for this young investor. Because if, originally, its financial arrangement allowed it to profit from the rental of apartments, the trend has since reversed due to the rise in interest rates.
< p class="e-p">To build his housing stock, Simon Choucroun took out seven mortgages, all at variable rates.
After reaping profits ranging from 5% to 10% depending on the building, he now has to deal with a loss in the four figures every month. This career computer scientist has since been drawing on his salary to plug the holes.
At the beginning, we have ambitions, we are not afraid, there is a small increase or two, we keep buying, he explains. Then we slow down.
Especially since the sources of concern are multiple. Because in addition to mortgage rates, his insurance has increased by $1,000 per year and he will have to deal with a sharp increase in municipal taxes.
Simon Choucroun feels all the more stuck that he can't really raise rents. Its tenants generally have modest incomes and, in any case, increases are limited by the Administrative Housing Tribunal (TAL).
“The rates have gone up so much, it's starting to freak me out. Right now it's like riding a roller coaster, I can't wait to get off. »
— Simon Choucroun, real estate investor
For Simon Choucroun, there is no question of selling for the moment, the strategy is rather to grit your teeth while waiting for the storm pass.
To limit damage, it is making various adjustments to its business model. He, for example, intends to subdivide apartments to increase his income and to pay for snow removal to limit his expenses.
But other owners of apartments have decided to throw in the towel. One of them told us that he is in the process of selling the thirty or so homes he owns in Montreal.
The transaction is in progress and he prefers remain discreet about your identity to put the odds on your side.
Rising mortgage rates are the main cause, but not the only one. He says he is stuck between the increase in property taxes and the limits imposed by the TAL to increase rents.
We have received several testimonies from owners demoralized by the increase in charges, which record monthly losses and are reluctant to sell their property to stop the bleeding.
In addition, buyers do not jostle at the gate. The market is increasingly calm, far from the climate of effervescence observed during the pandemic.
According to the Land Registry of Quebec, throughout the territory, the number of sales recorded in September 2022 decreased by 19.6% compared to September 2021.
Rental homeowners are having a hard time right now, confirms the Corporation of Real Estate Owners of Quebec ( CORPIQ).
Its Director of Public Affairs and Government Relations, Marc-André Plante, says that more and more owners are forced to draw on their personal income to balance the management of their housing stock.
He observes that the phenomenon has been gaining momentum for three months and affects more small investors with less than five rental units, often one or two.
CORPIQ conducted a survey of its members over the summer. Result: 60% of participants say they have opted for a variable rate. Also, 80% of participants say they have taken out a mortgage that exceeds half the value of the property.
Two figures that show the great vulnerability of homeowners in the face of to the rise in current mortgage rates, Marc-André Plante analysis.
His organization has never received so many testimonials from discouraged members, he says, and many of them want to reduce their investments in the short and medium term.
According to CORPIQ, inflation, the increase in taxes and the rise in mortgage rates will lead to a significant increase in rents in the coming year. But the phenomenon will not affect everyone in the same way.
It is for tenants of new housing that the bill is likely to be particularly high. Clause F allows the landlord to readjust the rent as he pleases, without limits, within five years of the construction of the dwelling.
A fundamental rule, according to Marc-André Plante, because , otherwise, many investors would be bankrupt as the various charges have increased since the start of the pandemic. This also makes it possible to give guarantees to investors who want to bet on the creation of new housing.
New tenants should also be called upon to absorb the increase in charges. The law allows landlords to readjust rents to the reality of the market each time there is a change of occupant.
Tenants who renew their leases should not be affected by the increase mortgage rates, since the latter are not included in the criteria authorized by the TAL to set rents.
On the other hand, the increase in municipal taxes should hit everyone hard. Landlords have the option of passing the entire bill on to tenants, which is usually the case.
In Montreal, for example, a new scale will come into effect on January 1 for the next three fiscal years, i.e. 2023, 2024 and 2025. It will be based on the value of the properties which have increased on average by 32.4% compared to the value of the previous property rolls.
In several municipalities, the bill may be steep. CORPIQ is expecting the largest rent increase authorized by the TAL for thirty years.
Marc-André Plante anticipates an increase of 3 to 4%, while 'It's usually around 2%.
Many homeowners expect another interest rate hike. At the start of 2002, the Bank of Canada's key interest rate was at a historic low of 0.25%. After six successive increases, it was set at 3.75% in October.