As interest rates rise, small-time landlords look to sell off homes

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Higher interest rates that have kept first-time homebuyers from entering the local housing market have now started to force mom-and-pop investors in London to sell their properties as their mortgage costs go up.

A trend already seen in more expensive markets in Canada, the number of small investors offloading and selling their properties appears to be also growing in London, especially during the past year, as the rents landlords are charging are no longer enough to cover mortgage costs that are rising upon renewal.

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Before the COVID-19 pandemic, the London housing market became one of the most attractive markets for investors of all sizes as home prices were lower in the region compared to communities closer to the Greater Toronto Area.

Low interest rates and home prices at the time, which had yet to peak during the housing craze amid the pandemic, made the prospects of investment even more promising.

But that quickly changed as the Bank of Canada began raising interest rates in 2022 as a way to fight rampant inflation.

“For people who chose to go with a variable mortgage rate, there are many of those people who are deciding to get out because their mortgage payments have often doubled,” said Jeremy Odland, a broker with Royal LePage Triland Realty.

“So, they’re having to cover those extra costs each month out of their own pocket because obviously they can’t raise rents by that much.”

Odland himself said he’s worked to sell 10 properties from investors for whom the “math no longer makes sense,” with a handful of other clients considering a similar move. And while the Bank of Canada has already cut its key lending rate twice, some people up for mortgage renewals are still opting to sell, Odland said.

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“Most of these people who are getting out are not the large-scale investors who are buying duplexes, triplexes or small apartment buildings,” he said. “Those types of people are generally riding out the storm . . . but it’s more so your small-scale investor who maybe bought one or two condos or a small house.

“Those are more the people that we’re seeing get out because they don’t have enough capital to be able to cover those cash flows.”

One of such investors, who The Free Press agreed not to name so he could share his experience, said he got into real estate with the hope of keeping the properties he bought as part of his family’s retirement plan.

In total, the investor, who said runs a business and hence has no pension plan, bought four properties starting in 2019. He said he was renting them all out, using the money to cover the mortgages and other expenses and basically breaking even.

“I made the decision not to do the annual rent raises that are legal . . . because I was paying off my mortgage at that time, my tenants were fine and paying, and I just thought, you know, ‘Everybody’s happy, so let’s just keep rolling,’” he said.

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Once interest rates began to go up, he found himself having to use his own money to cover the extra costs. “I wasn’t in a position to increase my rent by five per cent because you can’t do that.”

When he started having issues with some of his tenants and saw the Ontario Landlord and Tenant Board, which settles disputes between landlords and tenants, took months to settle his disputes, he decided to start selling.

“When my wife and I decided to try this because we had never done it before, we thought we would buy these and hold on to them for 25 years until it’s time for us to retire,” the investor said, adding that since last fall he’s sold three of his four properties and is working to sell the last one.

Even as far back as last year’s spring, investors were already indicating higher interest rates would be an issue for them. A survey from Royal LePage at the time, for instance, cited one-third of investors across Canada were considering selling one or more of their investment properties.

Now, the issue of investors selling their properties may also have an impact on the local rental market, which is already grappling with record-low vacancy rates, said Kahlan Nottal, a manager with Forest City Property Management.

Nottal said his company manages about 125 properties across the city. In the past year alone, he’s seen about nine such properties listed for sale because owners can’t afford their mortgage payments.

“With the housing shortage, this just creates a whole other problem, because what used to be a rental is now a homeowner, and they’re not using it to rent,” he said. “So the people that need to rent have nowhere to go.”

jjuha@postmedia.com

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