Steep mortgage rates are ratcheting up the pressure on Canadian landlords, especially young investors who are facing the harsh side of the interest rate cycle for the first time.
A report released Thursday by Royal LePage shows higher payments are even pushing some housing investors to consider selling off their properties. But for 32-year-old Karim Najjar, that decision is about more than just writing off the loss on an investment.
Najjar moved to Ottawa from Edmonton in 2017 and jumped into the housing market a year after he arrived.
His timing into the market was good, Najjar recalls, as home prices soared in his first few years of ownership. He sold his first property with enough of a profit to put deposits down on a number of new builds, looking to expand his portfolio.
Najjar’s portfolio now includes four properties, three in Ottawa and one in Quebec. But after the Bank of Canada rapidly hiked its benchmark interest rate over the past year, the business case for some of his properties has changed rapidly.
“Some of the properties that I own have variable mortgages. And what that means is as the interest rate goes up, I’m taking a hit to an extent where … I’m paying out of my own pocket to cover the difference,” he tells Global News.
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A townhouse he owns in the Barrhaven suburb of Ottawa has seen his payments, including mortgages and property taxes, balloon to the point where he’s taking a loss every month on the investment.
Najjar could raise the rent on the home — properties built after 2018 in Ontario aren’t subject to the same rent controls as other units — or he could sell and offload it from his balance sheet.
But the idea of pushing out the young family that lives in the home doesn’t sit well with Najjar, who is formerly the president of his neighbourhood community association.
“The thought that, yes, you are able to sell it because you’re not making money makes me feel guilty or bad because I don’t want this family to be relocated to another property now that this is their home,” he tells Global News.
Najjar, who works as a consultant for mainly public sector clients, says he has “absolutely” had to make cuts from his own lifestyle to keep up with the higher interest rates, including working through vacation.
The young landlord says he can probably keep up with the higher payments for the next year, but with a mortgage rate above six per cent, another hike from the Bank of Canada would be untenable. Meanwhile, another property on his books with a very low fixed-rate mortgage taken out during the pandemic is up for renewal in 2025.
Najjar says he’s deciding whether he wants to hold on for interest rates to potentially drop and repair his cash flow, or make hard decisions about keeping his properties or selling them.
Nearly a third of investors considering a sale
The Royal LePage findings released Thursday show Najjar is not alone in reassessing the business case for his investment properties.
The results of a Leger survey commissioned by the brokerage show nearly a third (31 per cent) of investors are considering selling one or more of their properties amid higher interest rates.
The survey, which polled 1,003 investors out of a wider swath of more than 10,000 Canadians in early March, also suggests that younger owners have been especially keen on investment properties, even as many young people find the housing market difficult to break into.
Canadian landlords aged 18 to 34 were the demographic most likely to own more than one property (44 per cent) compared with the 35-54 (29 per cent) and 55-plus (25 per cent) cohorts, according to Royal LePage.
A third of young investors in that age range also said they do not own their principal residence, despite owning investment properties.
Phil Soper, Royal Lepage’s CEO, tells Global News it’s not surprising that younger Canadians seem especially keen on the investor path, after many saw their parents do well in Canada’s housing market as they grew up.
He adds that the past few years have seen traditional investment avenues such as the stock market take a hit. At the same time, Canadians have heard about the country’s tight housing supply and rising immigration levels keeping demand for homes steady.
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Najjar, for instance, says he was drawn to owning property in Ottawa thanks to its stability as a government town and G7 capital where he expects healthy demand to continue to drive property values higher in the long term. He also tells Global News he prefers tangible assets for his investments rather than the “up-and-down” nature of the stock market.
The Royal LePage survey found that 26 per cent of those polled say they plan to purchase an investment property in the next five years.
While Soper says those numbers are a bit “aspirational,” it nonetheless points to continued confidence in housing as a solid place to grow their wealth or save for retirement, as an alternative or supplement to a registered retirement savings plan.
“People are looking at the real estate market and saying, that might be a better place for my investment today,” he says.
Landlords have to consider sales or raising rents
While those outside the market might be keen to join, the youth who might’ve been keen to jump in are now most likely to be having second thoughts, per Royal LePage’s survey.
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More than half (54 per cent) of those aged 18-34 with multiple properties are now considering a sale amid higher interest rates, the survey showed.
Soper notes that the investor market is more likely to see churn than the primary residence segment when rates rise. Many people get into the market and decide they don’t like being a landlord, he says, or find they “overestimated” the returns and upkeep costs that come with owning property as an investment.
Victor Tran, a mortgage expert with the comparator site Rates.ca, says the decision to offload an investment property also comes with a few more calculations than exiting the residential market.
While both situations will have penalties to consider when breaking the mortgage, a property that’s not your principal residence is also subject to a capital gains tax, which can significantly affect your overall return, Tran notes.
“That will also impact their bottom line as well,” he says.
Soper says he expects interest in the investment market will continue to trend higher from this point with a conditional pause in the Bank of Canada’s policy rate, rents still on the rise and home values appearing to stabilize after the past year’s correction.
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But he cautions would-be investors that while things might look rosy today, becoming a landlord is a business decision and should come with plans for dry years when mortgage rates rise or vacancies pick back up.
“For new investors, it is really critical that they realize this is not the kind of emotional decision that often drives principal residences, your home, your nest decisions. This is a business decision and you need to build a business case,” Soper says.
“One shouldn’t go into this with their eyes half-open.”
While his business case has evolved, Najjar says he was never blinded by the prospect that owning property would be easy money.
“It’s risky, right? But I always say, there are consequences. And it’s a decision I made to buy that property,” he tells Global News.
Najjar says he believes there are “better days ahead” for real estate investments, but he does have to gauge his “risk appetite” in deciding whether to hold onto units in his portfolio.
What worries him is the wider impact of investors like himself grappling with whether to increase rents as their mortgages come up for renewal, and the knock-on effects for families in his community.
“I think the effects of what’s happening, we haven’t seen it 100 per cent yet because people still have fixed mortgages for the next few years,” he says.
“I find that with the way things are going, the increased cost will be passed on to tenants and it’s getting out of hand.”