If Rental Apartment Ownership and Development is Such a Lucrative Business, Why Are We So Short of Apartments?

The Tyee published an opinion piece on October 12, 2023 entitled “The Lucrative Business of Owning Rental Buildings”.  We ask the question, if rental apartment ownership and development is such a lucrative business, why are we so short of apartments?  Let’s delve into the author’s “economic analysis.”

The fact is, the author’s economic analysis is absent of financing costs, inflation, and rising operating/maintenance costs, thus missing more than 50% of the financial picture! This is a rather significant oversight.

The rates of return noted in the article for various properties in Vancouver/Metro Van (ranging from 2.2% to 3.6%) are hardly earth-shattering, compare poorly to many other sectors and, are incorrect. The author calculated rates of return before financing costs. If the analysis were done properly, the rates of return would be negligible at best, and negative for a significant cohort of rental buildings.

The author compares these returns to securities which is an apples-to-oranges comparison.  Rental housing has a very long-term investment horizon. A more appropriate comparison would be to the bond markets where an investor can access extremely low risk investments with returns north of 7%, after tax.  This is why we see landlords exiting the sector—they’re seeing the light.  Why assume all the risk for negligible or negative rates of return?  Why endure all the hassle managing tenant relationships?  Even a good ol’ bank GIC will have a better rate of return.  Furthermore, landlords are increasingly tired of self-interested advocates continuously pitting tenants against landlords.  The operating environment has unnecessarily become much too toxic and something has to give. Until both sides can come together to find a productive way forward, we will continue to see landlords exiting the sector and renters suffering the consequences. It’s in the government’s court to create the give.

The author does acknowledge capital repairs and increasing operating costs (Note: the Additional Rent Increase process under the RTA is a tool for fractional recovery of the cost of capital repairs for the health & safety of residents), but there is no acknowledgment of how they impact finances.

The author asserts that most landlords make a profit.  What is the basis for such a statement? Does it mean they made a single dollar, or that they earned say a 3.5% return on the cost of the building (less than inflation), or that their return on equity after tax exceeded the cost of inflation. Unless it is the latter, unlikely for an exponentially growing number of properties, the landlord lost money.

Let’s look at the scenario of buying an existing building.  If a landlord is buying a building at a 3 – 4% capitalization rate, financing 50% of the purchase price at 5-6%, and inflation is say 5%, then it is totally erroneous and actually disingenuous to suggest they are making money. The truth is they are losing money hand over fist and the building/business will require a lot of work and some luck to turn it around.

Finally, the constant reversion to more regressive rent controls as the ultimate solution is largely delusion.  Rent controls are a blunt and ineffective tool that ultimately drives rent prices higher because they discourage continued investment in existing rental stock causing it to age-out faster AND, suppresses the creation of new supply.  Rent controls do not work for either renters or landlords.

We need to get serious about addressing the disastrous state of the rental housing ecosystem in BC by transitioning out of rent controls.  Why are they universal?  We have numerous government programs that are means tested.  That’s what we should be doing with all rental housing.  We have tens of thousands of unoccupied units in the secondary market that could be deployed virtually overnight if we eliminated rent controls for new units entering the market.  And for renters who truly need the supports, let’s implement more robust portable housing benefits.  They deserve the support.

Once again, we ask the question: If rental apartment ownership and development is such a lucrative business, why are we so short of apartments?