Unit 420

In five months or so Mr. Socks will make weed legal. This has a whole lot of landlords freaking out. If you believe the hyperbole our new dope culture could make finding a rental harder and a whole lot less pleasant. For the people who own the property, it carries (they say) the potential for disaster.

First, some economics.

Once you strip away the routine appreciation of real estate – which rising interest rates and B20 are doing a fine job of – it’s a tough go being a rentier in a major town like Van or TO. The property of choice, of course, is a condo. But thanks to high prices and universal rent controls most amateur landlords (the only kind who buy single condos) are in negative cash flow. With more expensive mortgages now, plus escalating condo fees and property tax, making money every month is elusive. Usually impossible. Rental math is appalling – which is why capital appreciation is the only justification for ‘investing’ in an apartment.

By the way, there are two key ways of determining if a property’s worth buying as a rental – the cap rate and the ROI. To calculate a cap rate subtract all the expenses involved in owning a place (financing, taxes, fees, the cost of fishing iguanas out of the toilet) from the gross rent received. Divide the net income by the purchase price. To be in the game that should be something between 4% and 10% – hard to find these days.

The ROI (return on investment) is a more real-world formula, since most people buy properties with leverage instead of cash. So deduct all annual expenses (mortgage payment, fees, taxes, vacancy allowance, maintenance, insurance etc.) from the annual rent and divide that by the actual cash invested (including fees and taxes). To be accurate you should calculate the opportunity cost of your investment and add it to expenses – since this money could be generating a return if invested in financial assets. A common (and flawed) justification for being a landlord is then deducting the mortgage principal being paid from expenses (including only the interest). But, of course, this is just reducing debt.

Granted, buying a small apartment building in a secondary market can be a fantastic cash flow-generator, with a boffo cap rate and sweet ROI. But that’s not what most people do. They snap up a pre-sale condo in an urban slab, eventually renting it to a moister who the week before was having his shorts laundered by mom. These days, even with rents at levels far above those of five years ago, it’s impossible to make money without constant increases in property values.

Well, back to weed. Big issue.

The current Socks/Mills agenda is to legalize marijuana consumption for the purpose of getting high (as opposed to healing), allowing people to light up in their homes at will, plus producing their own stuff (four plants under cultivation). So while it is illegal to have a still and make alcohol, it will be fine to turn your apartment laundry room into a grow-op, with 400-watt light bulbs, sketchy xcords, plastic housing and a commercial humidifier.

Lots of landlords are starting to contemplate what this means. Conceivably a 50-storey condo building in downtown Toronto could contain a hundred or more units with enough plants under cultivation to waste everyone in Kelowna. How about the smell of all those people toking up on a Thursday night? If you’ve spent much time around potheads, you know the aroma. There are apartment-dwellers already complaining mightily that it seeps through walls, under doors and into drywall. Sure, cigarettes are wicked, too. But legalizing weed is expected to increase the volume of smoke because, you know, it’s good for you. Mr. S says so.

Landlord BC, a lobby group of property owners, is fighting: “We’re hammering away at this pretty tirelessly.” Landlords in Ontario are equally aghast, but the province is shrugging the concern off. No wonder. The local Libs are planning to roll out spiffy moister-friendly weed shops across the province and just announced Shopify will be its online sales platform provider. As the gravy train of revenue from land transfer tax fades away, the government is hoping MJ cash floods in to replace it. Nobody’s too proud anymore to be a drug pusher.

So amateur landlords are left to fend for themselves, hoping they might get a no-weed, no-smoke, no-grow clause in their leases – if that is not disallowed under provincial law. But whatever they do, they remain powerless to control what happens in the unit next door, one thin wall away.

So, forget the cap rate. Worry about the pot rate.

Uh-huh. And this just in. If “the next steps to equality” are what I think they are, this blog may be investing in a grow tent.

Minister Morneau Sets Budget 2018 Date for February 27, 2018

February 13, 2018 – Ottawa, Ontario – Department of Finance Canada

The Government of Canada is taking the next steps in transforming the economy so that it works for the middle class by ensuring everyone has the opportunity to succeed.
Today, Minister Morneau announced in the House of Commons that the Government will table its federal budget on February 27, 2018.

Through Budget 2018, the Government will take the next steps towards equality, and a more competitive, diverse and inclusive Canada, where everyone can have a real and fair chance at success. In doing so, it will reward curiosity and foster the kind of creativity that will allow us to innovate and maintain our competitive edge in the fast-paced and increasingly global economy. The budget will build on the Government’s plan to invest in people, communities and the economy. Thanks to the hard work, ingenuity and creativity of Canadians, Canada has created nearly 600,000 jobs since November 2015, and the unemployment rate is near its lowest level in 40 years.