It happened again. Another potentially fantastic rental property was listed. I couldn’t wait to tell my waiting buyers. The apartment was exactly what my buyers wanted. It was nearly perfect except for one fatal flaw: the numbers. Rental income was shockingly low. The asking price though, was quite high. The classic landlord blunder had happened again: rents had not been increased over time, and now there was no way the rental income would support a mortgage for the asking price. The numbers didn’t work.
Here’s the thing. In Manitoba, rent can only be increased in minuscule amounts. In 2013, the allowable increase was 1% – not even close to keeping up with inflation. If a landlord skips even one year, they’re behind by that much forever, unable to catch up unless the tenants move out.
Missing rent increases for 5, 10 or 20 years leaves income numbers in the dust, unable to catch up. One unit I saw recently had rents of $480 on suites that typically go for $7-800.
What does rent have to do with property value? Even eager buyers will see these discrepancies in the numbers, and return wallet to pocket. It can take a lot of effort and trouble to try to dramatically increase rental rates. Buyers will not be willing to pay full price to buy a problem property. And it is a problem. Maybe not for the seller, who paid off the mortgage a long time ago and is just happy to have income from the property, (though they are missing out on thousands of additional dollars this way!). But it is a problem for the person who must now support a mortgage with low rents. The list price needs to reflect that.
There are good reasons for keeping rent low. I know of several landlords who do this to help people who could not otherwise afford a home. I highly respect and admire their sacrificial kindness. Most times though, I think the landlord simply would rather avoid the discomfort of asking for more money from their tenants every year. It’s easier and ‘nicer’ to just let it be.
But, when it’s time to sell these apartment buildings and fourplexes, the low rent becomes a deterrent to buyers. It hobbles the property value and the REALTOR’S ability to sell. If you absolutely must keep rents low, put a plan in place for the day you do want to sell. Know the rules, and plan ahead to avoid paying a higher price for your kindness than you intended.