Tuesday, 24 December 2013

Invest in Property: Becoming a Landlord

Is buying real estate--such as a condominium, or a duplex, or other small multi-unit building a smart and clever way to invest?  What is it like to be a landlord?  Is the hype true when you hear the refrain that you should let your tenant pay the mortgage?

I have been practicing landlord and tenant law in Ontario for about 17 years now.  I have seen all manner of odd situations and even after all of this time I regularly come across scenarios that you couldn't even conceive to make up.  Being a landlord is a "people" business and where you have people you have unpredictable behaviour.

I thought about writing an article like this as I have so often heard the views and opinions of people who are in the "Landlord" business.  The landlords I've interacted with run the gamut from the person who inherits a house and decides to rent it out, to the condo buyer turned landlord, to the landlord of smaller single, double triple units, to the corporations or partnerships that own and manage large buildings and literally thousands of units.

This article today, concerns itself with only some of the issues facing a new landlord or someone who is considering buying a residential unit and renting it out. Is this a clever way to invest, save for retirement, and to become a real estate tycoon?  If you have your heart set on this kind of investment you may want to stop reading now and put on the rose coloured glasses.  For the reasons discussed below, my personal and entirely unscientific view is that real estate investing for the purpose of renting out residential property is an incredibly risky venture that more often than not leads to sleepless nights and a significant amount of regret.

My bias against becoming a landlord flows from my experience in dealing with landlord and tenant disputes.  While I'm sure that there are "good" landlord and tenant relationships they are something that for obvious reasons don't cross my desk.  That being said, I am fairly certain that even if you are lucky and have good tenants, all of that good fortune can evaporate with one bad rental and one bad tenant.

The biggest regrets seem to come from new landlords who start out with only one, two, or three rental units.  These landlords, especially when they start out, have a business plan that at its core relies on rental income to cover estimated expenses in operating the rental unit.  Typical costs for operating a rental property are the same costs as running a home in the same kind of unit with the additional expenses associated with renting.  Specific costs incurred to rent to tenants include rental commissions, legal fees for document preparation (leases, termination notices, etc,), background check fees (police, credit check), heightened maintenance costs as tenant's do not do their own maintenance, property management fees (unless you do it all yourself and you attribute no value to your time), condominium fees (if it's a condo), banking fees, accounting fees, book-keeping fees (maintain accurate rent ledgers, and expense ledgers for the accountant), utilities, government application fees, and soon licensing fees to have the privilege of being a landlord.

All of these expenses will at some point become part of the monthly carrying cost of the rental property.  From the revenue (i.e. the rent), you need to cover these costs and in addition pay the mortgage.  In my experience, when you start doing the math for the vast majority of rental properties, you will find that the market will bear a certain maximum rent and that rent will be entirely consumed by the expenses and mortgage payments---if everything goes perfectly and to plan.

Unfortunately, I have seen too many examples where the plan to have the tenant pay the mortgage doesn't quite work out that way and the would be landlord ends up having to cover the costs from his/her own pocket.  How does this happen?  The simple fact is that not all rental units are created equally and not all tenants are good tenants.  It can, in fact, be extremely difficult to find a good tenant.  You may own a chic new condo in a wonderful hip and upcoming "green" neighbourhood but if you don't have parking for the prospective tenant's Prius your unit is standing empty.  While it stands empty you will be covering expenses yourself.

Having an empty apartment for rent causes many new landlords to do silly things.  Seeing mounting expenses and no revenue, these landlords will fail to perform the necessary due diligence to ensure that the tenant is decent and credit worthy.  The desperation to generate revenue leads to a tenancy, perhaps even with a discounted rent, that will cause endless stress and even more expense through non-payment of rent, damage, legal fees, and turn-over expenses when the troublesome tenant is finally evicted.

Alternatively, there are some new landlords who suffer from "idealism" and who believe that a relationship built on trust, good will and mutual respect will result in a long standing relationship where the tenant is like a partner in this endeavour.  These new landlords often have an unfortunate naiveté with respect to people.  They take nice looking and sounding people at face value.  They empathize with the prospective tenant's hardships and accept the tenant's stories about why they were previously evicted, or how the tenant is trying really hard to get back to work and only needs a chance, or how the tenant is escaping domestic violence or overcoming an addiction, etc. etc..  The desire to help these prospective tenants is perhaps an admirable quality as a human being but it is a brutal flaw when running a property rental business. 

I have seen far too often how the naive or compassionate landlord rents to the wrong tenant or doesn't pursue legal remedies in a timely manner for non-payment of rent because they wanted to give the tenant a chance to get a new job, get their tax refund, get their spousal support, child support, loan from parent, etc. etc. etc..  Certainly, for the financial independent new landlord who is getting into the business for fun or for something to do then being generous is within their prerogative.  However, if the reason for charging rent is that you actually need it to pay expenses and the mortgage and perhaps to generate some income, then the inclination to be compassionate can become very expensive indeed.

THE RISK

The next thing worth thinking about is the over-all risk that you, as a new residential landlord, are taking in buying a unit to rent out.  Think of the capital that you are required to pay to acquire the property.  The down payment and the acquisition costs (legal, land transfer taxes, downpayment etc.) are significant expenditures that are tied up in the property.  Imagine for a moment the down payment that you've made--likely 25% of the purchase price.  How much could you earn with that money in a different kind of investment?  Does your business plan show you earning at least the same rate of return on your capital that you could earn in a high interest savings account (around 1%)?  If not, why not?  Shouldn't your capital be earning you something if it is deployed in an investment?  

Perhaps you are thinking that the return on your invested capital is the increase in value of the rental property over time and that you will get your return when you sell the property.  Perhaps that is true, but in the mean time you make very little to no money and you are sitting on a fairly expensive and risky asset.

What is so risky?  When you are a new landlord with a single, duplex or triplex rental unit your success is directly proportional to the good fortune and ability of your only tenant (or 2 or 3 tenants) to continue to earn income so that they can pay your rent.  Having a single tenant or very few tenants can be analogized to having all of your eggs in one basket.  And to finish the analogy,  if that basket breaks, or falls, everything is broken.

The risk then is a lack of diversity in the investment.  The investment is a significant commitment of hundreds of thousands of dollars to acquire the property and the assumption of a significant responsibility to maintain the property in accordance with law and to deal with the tenant in accordance with the Residential Tenancies Act which has a bias towards maintaining tenancies (security of tenure) even at the expense of a landlord's interest.   Time and again you will hear landlords asking an adjudicator at the Landlord and Tenant Board for help to get rid of a tenant because the tenant isn't paying the rent and the mortgage is going into arrears and the whole situation is ruining the landlord.  Instead of getting the help they need, the Landlord then in astonishment sees the Board concerning itself with granting relief to the tenant with payment plans, delayed evictions, or other remedies that function to preserve the tenancy.  When these landlords object, you will from time to time hear an adjudicator speak candidly to the landlord and say that "if you can't afford to be a landlord get out of the business".

WHAT IS GOOD ABOUT BEING A LANDLORD

For the small, new landlord, with only a unit or two, I do believe that it is an extremely risky enterprise.  The risk is only taken out of the equation by getting bigger and having many units and lots of tenants.  In those circumstances, the risk of one or two tenants doing you excessive damage are ameliorated.  

Aside from that, I do think that a benefit of buying a property and renting it out is that it functions like a forced savings plan.  Much like a buying a house, the mandatory nature of the mortgage payment means that one way or another you will make the payment and hence build equity in the property.  That equity is a savings plan that most people are unlikely to accumulate without the forced nature of the mortgage expense (i.e. pay it or lose the property to the bank).

For now, those are my two cents on this topic.  I'd be interested to hear different viewpoints in the comments and I'll publish the interesting ones.

Michael K. E. Thiele
Ottawa Lawyer
www.ottawalawyers.com


Tuesday, 17 December 2013

What if Children are the Problem?! The noises of children.

Those pesky kids!  How much does a neighbour have to put up with in relation to noisy children in another tenants unit?  Is the sound of a baby's cry grounds for eviction? Is the distinctive thump of a toddler's walk unbearable?  What about fighting siblings, shouts and screams?  What about all of those noises that children make, at inopportune times?  Are these sounds that neighbours must learn to tolerate?

The fact is that under the provisions of the Residential Tenancies Act a tenant can be evicted for the actions and noises of children as the children are occupants and hence the tenants are responsible for the noises that they make.   That being said, are children held to the same noise making (or silence) standard as other adult tenants or occupants?  The answer to this question is both yes, and no.

The Landlord and Tenant Board has held that the "ordinary" noise caused by the normal activities of children is not a basis for eviction.  The problem with this statement, of course, is that "ordinary" and "normal" are subjective  and what might be normal and ordinary to one person is utterly outrageous to another.   So, some examples of "ordinary" and "normal" may be in order.  The Board has held that a tenant's children using a swing set for chin-ups, riding a dirt bike, and using some obscenities was not grounds for termination.  Nor was it held to be substantial interference for teenage children to be hanging out in a lobby and spending time.  In an even more extreme example, a tenant's adult son who harassed and intimidated other tenants did not result in the eviction of the tenant so long as the behaviour was rectified and apologies given.

Over the years I have had some extreme examples of misconduct by children that did not result in the eviction of the tenants.  In one case, a pre-teen got in a fight with another child in the park.  The parent of the child who was hurt at the park came to the apartment to speak with the child's parents who happened to not be home.  The child answered the door and in doing so pointed and threatened the person with a lighter that looked like a handgun.  The police responded rather forcefully and the weapon was seized.  The family was not evicted as the family was a good family, the parents responded with all the discipline that is deemed appropriate today, they apologized to the person who was threatened and their history within the building was shown to be unremarkable.   The Board maintained the tenancy on the condition that no illegal act occur for the following year.

Another example is that of a child who gained access to the roof of a tall apartment building and at the instigation of a friend joined him in throwing rocks from the roof (16 stories up).  One rock hit a person who was slightly injured.  Again, in this case the tenancy was maintained as the parent disciplined the child appropriately and was doing all that she good to control the behaviour.  The tenancy was again preserved conditionally.

The examples above should not lead to the conclusion that it is impossible to evict a tenant for the actions of their children.  In fact, tenants are regularly evicted for the actions of their children and the context of those actions is quite important.  In a case from several years ago an adjudicator in hearing a case involving the actions of children stated as follows:

Taken in isolation, each singular incident or classes of complaints testified to by the landlord and her witnesses might not suffice.  But taken cumulatively, they unfortunatley establish that the tenant's children are by their loud and abusive language, by their fights and rowdiness, by their littering, by their damage to property are [sic] beyond what the landlord and other tenants are by law compelled to endure before the remedy of eviction is granted."

So when it comes to children and their behaviour, I think it is fair to say that context is everything.  One off incidents in an otherwise unremarkable tenancy, where parents are clearly disciplining their children and doing what they can, are regarded sympathetically by the Landlord and Tenant Board and tenancies will be preserved where the conduct can be controlled.    The opposite also seems to be the case, that where children are wild and parents are wilfully blind to the aggravation caused by the behaviour, then the tenancy will indeed be terminated.

Saturday, 7 December 2013

Carbon Monoxide Detectors: New Law & Better Protection For Tenants



Carbon Monoxide is a silent and deadly killer.  Odourless, colourless, it can kill entire families overnight.  Where does carbon monoxide in homes typically come from?  From fuel burning appliances such as a gas furnace, ovens, or stoves.  It can enter the home from the garage from running vehicles, from blocked chimneys (think nests) or from other appliances due to failure.  See the illustration for more sources.  Given that the gas is silent, colourless, and odourless, it is very dangerous, particularly to people who are sleeping in the home.

Perhaps you are aware, or have heard of deaths in Ontario caused by carbon monoxide poisoning.  Most notorious is the story of Hawkins and Gignac.  Ms. Hawkins was an OPP officer and she and her husband and two children died in an accidental exposure to carbon monoxide in their own home.  This was a normal family, living normally, and tragically, they died.

In response to the tragedy (five years ago) and the risk that accidental carbon monoxide exposure presents to all Ontarians, the Ontario government, along with the unanimous approval of all the opposition parties, has now passed Bill 77,  the Hawkins Gignac Act 2013.  So what does this law require?  In short, it requires that carbon monoxide detectors be installed in residential buildings which includes buildings in which rental units are located.

Given the context of this article in a blog on Ontario Landlord and Tenant Law, I'm trying to make the point to tenants that they have the legal right to demand a carbon monoxide detector and to landlords that they have an obligation to provide tenants with a carbon monoxide detector.  The failure to provide these devices will be a contravention of law and charges and fines can be forthcoming for failure to comply and it will be a basis of liability in a civil context (i.e. you can get sued and be ordered to pay money) if someone is injured as a result of carbon monoxide exposure that would not have happened but for the failure to provide the carbon monoxide detector.

Are the requirements of this law exactly the same as providing a smoke detector in a unit?  The short answer is an unequivocal "no".  The law requires that carbon monoxide detectors be hardwired into the electrical system, that there be no disconnect switch,  and that if one detector is triggered that all of the detectors in premises also go off at the same time.  It appears, from my reading of the law, that buying a carbon monoxide detector from any of the big box stores and plugging it into the wall is NOT going to discharge the obligation imposed under the law.  That being said, does every apartment in a rental complex require the installation of a carbon monoxide detector--hardwired into the electrical system.  It seems that if the rental unit has an appliance that can generate carbon monoxide then the answer is yes.  If the rental unit does not have an appliance that can generate carbon monoxide but it has a storage garage then "yes" as well if the residential unit is adjacent to the "storage garage" (query what "adjacent" means).  "Storage garage" is a defined term under the Building Code Act and it is what we commonly understand to be a residential garage in which cars can be stored and in which no repair or maintenance of vehicles is undertaken and in which no provision is made for that capability.

Whether or not the law requires a carbon monoxide detector to be installed in the context of your home or your apartment building, will require a careful consideration of the lay out of the building, the lay out of the rental units, and a consideration of the sources of carbon monoxide as well as the appliances that can generate the gas.

Perhaps you've click on the link to the legislation above to look for the RULES & SPECIFICS on where, how, and when a carbon monoxide detector needs to be installed.  Of course you're disappointed because the law simply says the Fire Protection and Prevention Act is amended and now the power to regulate carbon monoxide exists and of course there is a new Carbon Monoxide Awareness week.

I haven't quite figured out the logic of it, but the regulation that the Fire Protection and Prevention Act contemplates for the requirement of Carbon Monoxide detectors does not seem to be promulgated under the Fire Protection and Prevention Act.  Instead, those regulations seem to be under the Ontario Building Code, which in some was I don't understand must make sense.

The Rules for the installation, requirement for, location, and method of installation are set out in a Regulation.  That regulation appears to be Regulation 332/12 to the Ontario Building Code and it is not in force until January 1, 2014.  As I go through the regulation, it deals with carbon monoxide detectors as follows:


6.2.12.  Carbon Monoxide Alarms

6.2.12.1.  Application
   (1)  This Subsection applies to every building that,
    (a)  contains a residential occupancy, and
   (b)  contains a fuel-burning appliance or a storage garage.

6.2.12.2.  Location of Carbon Monoxide Alarms

   (1)  Where a fuel-burning appliance is installed in a suite of residential occupancy, a carbon monoxide alarm shall be installed adjacent to each sleeping area in the suite.
   (2)  Where a fuel-burning appliance is installed in a service room that is not in a suite of residential occupancy, a carbon monoxide alarm shall be installed,
    (a)  adjacent to each sleeping area in every suite of residential occupancy that is adjacent to the service room, and
   (b)  in the service room.
   (3)  Where a storage garage is located in a building containing a residential occupancy, a carbon monoxide alarm shall be installed adjacent to each sleeping area in every suite of residential occupancy that is adjacent to the storage garage.

6.2.12.3.  Installation and Conformance to Standards

   (1)  The carbon monoxide alarms required by Article 6.2.12.2. shall,
    (a)  except as permitted in Sentence (2), be permanently connected to an electrical circuit and shall have no disconnect switch between the overcurrent device and the carbon monoxide alarm,
   (b)  be wired so that its activation will activate all carbon monoxide alarms within the suite, where located within a suite of residential occupancy,
    (c)  be equipped with an alarm that is audible within bedrooms when the intervening doors are closed, where located in a suite of residential occupancy, and
   (d)  conform to,
           (i)  CAN/CSA-6.19, “Residential Carbon Monoxide Alarming Devices”, or
          (ii)  UL 2034, “Single and Multiple Station Carbon Monoxide Alarms”.

   (2)  Where the building is not supplied with electrical power, carbon monoxide alarms are permitted to be battery operated.

There are additional sections that deal with Carbon Monoxide detectors--for example section 3.3.5.4 Repair and Storage Garages, so please don't assume that I have comprehensively dealt with carbon monoxide detection in this Article.  If you're reading this and looking for a more comprehensive review of all things carbon monoxide in the law of Ontario, consider doing a search through the statutes and regulations through the e-law site which you can access from this LINK.

SUMMARY  OF WHAT'S COMING (JANUARY 1, 2014)

The law requires that buildings that contain fuel burning appliances and/or storage garages are equipped with carbon monoxide detectors that are hard-wired into the buildings electrical systems.  Only buildings without electrical service will, that would otherwise require hard-wired detectors will be permitted battery operated detectors.  The location of carbon monoxide detectors is regulated and how they interact with each other is also regulated.  It seems that the interconnectivity between the detectors (when one goes off they all go off) means that the only practical way of complying with the law in units with many sleeping areas is the installation of hardwired alarm systems or the purchase of sophisticated carbon monoxide detectors that can speak to each other wirelessly.

Michael K. E. Thiele
Ottawa Lawyer

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About Michael Thiele

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Ottawa lawyer and partner at Quinn Thiele Mineault Grodzki LLP.  Graduate of Queen's University in Kingston, Ontario.  Called to the bar in Ontario in 1997.  Undergraduate degree at Colby College, Waterville Maine, U.S.A.