The Lucrative Business of Owning Rental Buildings

Rental building

The opinion piece titled “The Lucrative Business of Owning Rental Buildings” published by The Tyee on October 12, 2023, raises pertinent questions about the rental housing market. The author’s economic analysis, however, lacks a comprehensive view, omitting essential factors like financing costs, inflation, and rising operating/maintenance expenses, painting an incomplete financial picture.

The article’s presented rates of return for properties in Vancouver/Metro Van, calculated before financing costs, are underwhelming and inaccurate. Proper analysis would reveal negligible or negative returns for a significant portion of rental buildings. Comparing these returns to securities is misleading; a more fitting comparison lies in the bond markets, where low-risk investments yield returns exceeding 7% after taxes. Landlords are understandably reevaluating their investments, considering the high risks and the complexities of managing tenant relationships. Even traditional investments like bank GICs offer better returns, prompting landlords to exit the sector.

Acknowledging capital repairs and rising costs, including the Additional Rent Increase process under the RTA, is crucial. The assertion that most landlords make a profit lacks substantiation. Merely breaking even does not equate to profit, especially considering the complex financial landscape of rental property ownership.

Considering the scenario of buying an existing building, the claim of profitability is misguided. With a 3-4% capitalization rate, coupled with financing costs and inflation, landlords often operate at a loss, requiring substantial effort and luck to turn the situation around.

Relying solely on rent controls as a solution is shortsighted. These controls, while well-intentioned, inadvertently drive up rent prices and hinder investment, accelerating the aging-out of existing rental stock and impeding the creation of new supply. A more nuanced approach is needed, such as means-tested government programs and robust portable housing benefits tailored to those in need.

In essence, the rental housing crisis demands a holistic reevaluation of existing policies. Transitioning away from universal rent controls, utilizing means testing, and promoting investment could alleviate the shortage and provide equitable solutions for both landlords and renters. The fundamental question remains: if rental apartment ownership is so lucrative, why do we face a shortage of apartments? Addressing this requires comprehensive, thoughtful reforms.

Source: LandloardBC

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