Landlords: Heartless suits, squeezing every penny out of their tenants. Rich, money-driven fiends who drive fancy cars and spend their days golfing – or worse – yachting! They enjoy their unearned wealth on the backs of hard-working people who actually work for a living while pumping up an already inflated housing bubble. It’s the tenants who pay rent and keep the Dom Pérignon flowing. The only problem? Most landlords are nothing like this.
Maybe you’ve read stories in the news of truly negligent or malicious landlords. These stories get shared widely, and for good reason. They serve as a warning to tenants and landlords that that kind of behavior is unacceptable. But these landlords are the exception, not the rule.
It’s become fashionable to hate landlords, but much of that anger is based on a myth: That landlords are all evil corporations. Don’t get me wrong, there are bad corporate actors out there. And there are huge property management companies making healthy profits, which isn’t my focus here. I’m no apologist for the faceless conglomerate. My aim here is to debunk that overplayed myth and focus on the truth: Most landlords are just regular people. As a broker, I’ve met many landlords and I’ve helped many of my clients become landlords themselves. Believe me, they are normal people, like you and me, just trying to make ends meet.
The Everyday Real Estate Investor
Most landlords are folks who have a basement apartment for rent in their own house or own a condo to build some equity in an appreciating asset. For many people, real estate is a better investment than an RRSP. Think of a young couple who just bought their first house and rent out the basement to tenant to help pay the mortgage. Think of the older blue-collar man who uses his home repair skills to maintain an income property to help him retire early. Are these people evil? Hardly. So, if most landlords are just normal, middle-class people, why the hate?
Feeling The Pressure
When rents increase faster than wages and when there is a low supply of housing, people feel the economic strain. It’s natural for some people to look for someone to blame, but scapegoating and the truth don’t have a good history. Most of this anger comes out of economic pressure because rents are increasing faster than wages, especially in my city: Toronto.
“But wait,” you might say, “landlords are the ones charging rent. It’s their fault rents are increasing!”
To which I say, it’s no one’s fault. We created this situation collectively.
Simply put, the overall supply of housing in the city is not meeting the growth in demand. At the same time, landlords face many obstacles and costs. Units with rent control can only increase rent on their tenants at a rate tied to the consumer price index, usually ~2%, so covering those costs is less flexible. In Toronto, where real estate prices are high compared to the rest of the country, it’s not uncommon for landlords to simply break even, and in some cases, actually be cash flow negative.
For some perspective, here are typical costs for a landlord.
- Mortgage and interest
- Insurance (which is more expensive if there are tenants)
- Property taxes
- Maintenance & Repairs
- Legal, Accounting and Real Estate Service(s)
And these don’t include the time and effort of doing the work of administering and maintaining the property.
And then there is risk. Here are just a few broad categories of risk landlords face:
- Tenant risk: The landlord risks their tenant causing damage to the property. Or there is a risk the tenant will stop paying rent. Eviction is its own painful process.
- Regulatory risk: The landlord risks new taxes or rent controls with government policy changes.
- Economic risk: What if there’s a market correction – or worse – a market crash? Or even the opposite, the economy does well and that increases mortgage rates? Downturns and upturns can affect a landlord’s ability to stay afloat financially.
No one can perfectly forecast the future, so what if a landlord does lose out? Typically, they’re forced to sell. And most likely, the new buyer isn’t interested in becoming a landlord. So, what happens? The tenant is evicted and we’ve just decreased the supply of housing inventory. The evicted tenant will now have to search the real estate listings and find another place and compete with other prospective tenants, raising the rent other landlords can charge.
That said, investing can be highly rewarding, which is why so many people do it. But I’m here to point out the main reasons rents have kept increasing over time. Landlords aren’t evil. They’re actors in a sector of the economy that are behaving in reaction to elements embedded within the system. It’s not evil, it’s rational. And it’s up to us, as a society, if we want to change it.
Do Your Part: Become a Landlord
Short of changing municipal policy or shaping the macro-economic situation, if you as an individual want to fight the stereotype of the evil landlord and help increase the housing supply in your city, then the best thing you can do is become a landlord yourself. If you do things right, you’ll not only help others find a place to live, you can also build your own wealth for the future or you and your family.
I’ve helped clients of all different backgrounds make the leap. Here are the two easiest ways you can get started in the landlord business.
Buying a unit before its built will mean you’re paying today’s prices for an asset that will otherwise go on sale in two to three years. And as you may already know, housing costs have typically increased in price over time. You’re helping the builder now and you’re helping yourself later. Once you’ve taken ownership, you can find a tenant and build equity in the unit.
As I mentioned above, opening a unit in the basement of your home, or finding a home with a turn-key basement unit are very common in Toronto. Most people like this because it means you can afford a bigger place or one that’s in a better neighborhood for them because the tenant will pay a portion of the mortgage.
I’ve helped people successfully invest in the Toronto market and become landlords with basement apartments and condo pre-construction many times. It’s not the only way, but it’s the most common way everyday people become “evil.” What are they doing? They’re providing housing for other people, they’re maintaining a valuable asset and they’re making some money at the same time. Now tell me, does that sound evil to you?