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Unintended Consequences of Rental Licensing

by Andrew C. MacDonald on June 2, 2011

Brick WallSince a 2007 amendment to the Ontario Municipal Act, cities such as Hamilton, London, Missisauga, Oshawa, and Waterloo have all introduced some form of rental licensing. Some have already done so successfully, and others are still in the process. As someone who invests in KWC, this concerns me, but regardless of where you live or invest it should concern you too. This type of legislation is contagious and can quickly spread to your area.

Rental licensing acts as a barrier to investment in areas where it is introduced, and usually brings some unintended consequences that are opposite of what the city intended.

What Rental Licensing Involves

As an investor in Canada’s Technology Triangle, I follow the KWC area closely so I am most familiar with the proposed changes in Waterloo, but here are some of the changes that can come along with rental licensing.

  • Applications – The introduction of rental licensing inevitably comes with an application process. In Waterloo the proposed fees are between $392 and $791 plus another $71 for a preliminary consultation fee. London uses a $25 application fee, but regardless of the fee level this is wasted money if the application is declined for any reason.
  • Annual Fees – The cash grab does not stop at the application process. Rental licensing usually comes with an annual fee. In the case of Waterloo, the proposed annual renewal fee ranges from $214 to $431. London is again more reasonable with a $25 annual renewal fee, but this cost still cuts into cash flow.
  • New Limitations – On top of the extra cost, rental licensing may cut into your revenue line with new limitations. Waterloo has proposed a 3 bedroom limit for almost all low-rise rental units. Rules will vary by municipality, but they never seem to introduce any new freedoms for landlords.
  • Uncertainty – The enforcement of rental licensing introduces an element of uncertainty since nobody knows how strictly various rules will be enforced. Waterloo’s proposed system would allow by-law officers to enter for inspection at any reasonable time with notice to the tenants but not the owner. They would then have the power to deny, suspend or revoke a license.

Full details of the proposed Waterloo Rental Licensing By-Law can be found here. In this instance, a landlord could be required to provide (at his or her own expense) each of the following as part of the application process:

  • Floor plans
  • Local emergency contact if owner does not reside in city
  • Proof of $2 million in liability insurance
  • If corporate owned, info for all directors, officers and shareholders who hold more than 30% ownership, articles of incorporation, current  by-laws of corporation, corporation’s most recent annual tax return are required
  • Address and legal description of rental unit
  • Applicant’s contact info
  • Registered owner’s contact info
  • Copies of written tenancy agreements for every tenant
  • Copy of transfer/deed ownership
  • Owner must attest to the fact that the unit proposed to be licensed complies with the City’s Zoning By-Laws, Property Standards By-Law, Lot Maintenance By-Law, Noise and Nuisance By-Law, Snow and Ice By-Law, and Fence By-Law as well as the Provincial Fire Code, Building Code Act, Electrical Safety Code and Health Protection and Promotion Act
  • Inspection certificate that confirms HVAC system is working properly
  • Property maintenance plan identifying location of garbage and recycling containers, snow storage area(s), and who is responsible for maintaining each
  • Parking plan
  • Signed statement that applicant/owner are aware of all relevant local, provincial, and federal legislation including the Ontario Human Rights Code
  • Criminal background check for all owners, directors, etc. (required annually)

This type of intense regulation adds work, time and cost for real estate investors and homeowners which will only steer them to other cities that offer a more friendly environment for Landlords.

3 Unintended Consequences of Rental Licensing

All of this bureaucracy and additional cost to Landlords ends up creating some unintended consequences which are contrary to the impact these cities intend on.

  1. Limited rental supply and increased rent – The additional fees and restrictions associated with rental licensing cause the rental supply to shrink as Landlords pull out of their investments. Demand doesn’t change, so this reduced supply means the remaining rentals will command a higher rent. This has a negative effect for all renters, particularly student renters.
  2. Poor quality rental supply – Although supply and demand dictates higher rents, a portion of these rents will go to covering the incremental costs associated with rental licensing. Restrictions such as the number of bedrooms may end up reducing the revenue lines for some investors. With inadequate cash flow it is tougher for landlords to take good care of their properties and the quality of rental supply suffers.
  3. Squeezing investment out – Canada’s Technology Triangle has so much going for it, but the threat of rental licensing in the City of Waterloo has many investors holding off on new purchases. This type of regulation reduces incentive for investors to put their money to work in a given region and they’ll begin to look elsewhere for profitable investments. For a growing city like Waterloo, investment should be encouraged rather than punished.

Why You Should Care

If you don’t invest in a city with rental licensing you may wonder why you should care. Simple, this sort of regulation is contagious. Once a precedent for rental licensing is set in one city, it can quickly catch on in others. I’m sure Cambridge and Kitchener are waiting to see what happens in Waterloo, and several other cities are doing the same. Rental licensing can have a negative impact on your cash flow and the value of your properties, so regardless of where you live or invest, this impacts us all.

What You Can Do

The most important thing you can do is get involved. This can be done at a local level, and in each city where rental licensing is proposed there are groups that step up to fight on behalf of landlords, tenants and all those affected by the changes.

Join the fight against rental licensing in the City of Waterloo by visiting SaveWaterloo.ca to learn more, sign their petition, and view other resources. You can also write the city staff in areas considering rental licensing to make your opinions known. Finally, spread the word among other landlords, tenants and home owners and explain why rental licensing is bad for us all.

Creative Commons License photo credit: shaire productions

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{ 3 comments… read them below or add one }

wes_coast June 2, 2011 at 10:51 am

While I agree that government regulation is never the best solution this obviously has been tabled in response to the landlords out there that don’t follow existing law and industry best practices. Perhaps if the government felt the need to increase the professional standards of landlords, they could have introduced a licensing course for would be landlords and not licensing the individual premises. A bad landlord will have many issues across many properties while professional landlord will have little to no issues across many properties. The common thread is the person not the property. There could be greater inclusion of professional association as a method of increasing the professional standards for landlords. Perhaps a legal requirement that landlords are members in good standing with a certified association . If they are not, they would then be required to outsource all direct property management duties to someone that is and their own role reduced strictly to ownership on paper. Point is there are far more progressive methods up protecting the public from the small percentage of bad landlords and blanket legislation that punishes good landlords and tenants alike is not the answer. Post 2008 recession we need the type of legislators that can think outside the box and move us all forward.

Andrew C. MacDonald June 2, 2011 at 11:43 am

I am a fan of letting the free market take care of things. In my view regulation is seldom the answer, especially not when it comes with this much red tape and additional cost.

Your idea of a certified association OR a property manager who is a part of one is a better idea to curb problems stemming from absentee (or other problematic) landlords, but any type of regulation becomes a hassle for those it regulates. Good landlords may seek more profitable investments elsewhere while the bad landlords continue to skirt around the regulations. Generally speaking if you’re a terrible landlord, and keep your property in poor shape you won’t attract great tenants, won’t be very profitable, and will eventually be squeezed out of the market. I’d prefer to let nature run its course than see all of the good landlords penalized for the wrongdoings of a few bad apples.

Are there that many terrible landlords in Waterloo that all of this is really warranted?

Jen July 26, 2011 at 9:31 pm

I was wondering if someone would be able to tell me the regulations in Hamilton Ontario regarding Rental Licensing.

Thank you!

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