Great strategy for landlords

The New Tenancy Law Could Mean bump in equity for Landlords

OK, it’s a little off topic, but I think the metaphor works: Professional race-car drivers are all about maintaining momentum – not slowing down.

They know the particular track they’re on. They know every turn, every braking zone, every acceleration point, and every passing zone.

They practise hard and they have a plan, and team, that will give them their best chance at winning the race.

But, the most important ability they possess is the ability, in spite of changes in track conditions and rules, to adjust instantaneously to stay out front.  

Landlords and rental property owners have something in common with race-car drivers.

Having a strategy, executing it on time, knowing when to put on the brakes or accelerate, and having a stellar team are all keys to successful property investing.

But, when conditions change, can you adjust and keep on winning?

Time to Accelerate and Grow Your Investment

If you are currently a landlord or own rental property, then it’s likely you’ve heard about the recent changes to our tenancy law. The bottom line is that the changes make fixed-term tenancy agreements a thing of the past.

This is, of course, a form of rent control intended to take away a landlord’s option of raising their rents to match market value when the market value of their unit(s) has increased during tenancy.

Essentially, what this means is that all tenancy agreements will become month to month at the end of their term.  So now, moving forward, in order for a landlord to retake control of their unit, they must choose one of two options: 

• move into the unit themselves
• renovate the unit.

The first, while it is an option, is highly unlikely. And option two sounds costly and time consuming.

But let’s take a closer look.

Renovation Can Equal Better Cash Flow and More

We talked above about how both race-car drivers and property owners must be good at taking advantage of changes in conditions in order to stay out front.

Let’s examine the renovation option and see how property improvements can, and should, be viewed as an investment opportunity — even a win/win.

Let’s break down the numbers and figure out if this really is better than accepting below market value rents while waiting, sometimes for a long period of time, for a tenant to move on.

For our example, let’s assume this is an older rental unit, say 30 plus years old, and that it’s been some time since the last cosmetic overhaul.

The rents are appropriately low due to the age and condition. It’s a 1,000 square foot, two-bedroom, one bath apartment that is rented at $1,200 per month.

Our renovation plan: Find a cost-effective handyman, replace the tired flooring, paint, and install all new hardware and fixtures.

When it's done, the unit will look and feel completely refreshed and will be “renter desirable."

The Budget

• Flooring — $5/sq.ft = $5,000
• Paint — $2/sq.ft = $2,000
• Baseboards = $1,000
• Fixtures (lights, door knobs, faucets, etc.) = $2,000
• Total @ $10,000

The ROI

With your $10,000 investment, you are now able to re-rent the unit at market value. And, with its fresh new look, it will now rent toward the top of the two-bedroom apartment price range – more than likely at around $1,700 per month.

That’s a $500 per month improvement in cash flow. Not bad.

The example renovation can be completed in a month. And with the inclusion of the free month’s rent, required when ending a tenancy for this purpose, you are out two months income or $2,400 based on the old rent figure.

But stay with me here.

With a new tenant at $1,700 per month, it will take five months to recoup your lost revenue (5 x $500 = $2,500). Once paid back, the additional $6,000 per year in rent equates to a 60 per cent ROI on the $10,000 investment in the property.

That’s an amazing return for sure, but it’s only the tip of the proverbial iceberg. What you now have is what we in the business call forced appreciation.

This means that you have increased the value of your investment considerably. So, how much did our $10,000 increase our example project’s property value?

More Good News: GRMs

One way that rental and investments properties are valued is by using what’s called a gross rent multiplier or GRM. If you’ve read my articles in the past, you’ve heard me talk about rent multipliers.

The GRM will vary from market to market. It will go up in boom times and down in bust times. It might be as low as 10 in bear markets and as high as 20 in bull markets.

Currently, in Kelowna, we aim for a GRM of 15 on cash-flow property. What this means is that an investor would be willing to pay a multiple of 15 on the gross annual rent.

Let’s apply this valuation method to our example:

When rented at $1,200 per month, our property produced an annual revenue of $14,400. Using a GRM of 15, the price an investor would pay for this revenue would be $216,000.

When rented at $1,700 per month, our refreshed property is producing a annual revenue of $20,400.

Using a GRM of 15 the price an investor would pay has increased to $306,000 – a $90,000 increase over the value of the old/original property.

New laws bring new opportunities

The B.C. government is proposing several changes in order to protect tenants from landlords who might use renovation as an excuse to evict tenants — while having no intention on doing any renovations at all.

Follow the rules and you’ll have no problems.

In fact, part of the new law allows the tenant first right of refusal, at the new rental price, when the renovations are complete and the unit is available again. So, you just may have a built in “instant” tenant — no advertising required.

Impact on Your Net Worth and Future Investments

My strategy clearly shows how you can proactively use the new Tenancy Law as an opportunity to affect a major, positive difference in what an investor would pay for your property(s) — although once you are enjoying the significant additional cash flow, you may never sell.

And, when the bump in equity finds itself onto your net worth statement you can leverage it for future investments.

Is that a win/win or a win/win/win?

Either way, it’s a great strategy and a smart way to move forward.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.