Real Estate

Real Estate Arbitrage

I alluded to this idea months back, but Telly didn’t like it, so I dropped it (whenever possible I like to do what Mike or Telly tell me). Recently its come up with a couple of friends, so I felt it was worth revisiting.

A friend is planning to move to another area, but she has a rent controlled apartment that she rents for $100-$150 below market price. One thing I suggested she consider is hanging on to the apartment and subletting it to someone for closer to market rent. This would let her keep the place (in case she comes back to the area) and make a little cash at the same time.  EDIT:  A COMMENTER POINTED OUT TO ME THAT THIS IS ILLEGAL IN ONTARIO (look under section 3a) – Its probably worth checking your local laws before doing this.

Another friend rents a professional office but only uses it 4 days a week. As part of her lease, she’s allowed to sublet days. Renting out 3 days from the office would almost pay the monthly rent.

These aren’t really arbitrage situations, since they aren’t risk-free. They ARE situations where you can increase your risk a bit (if anything happens with the subtenant you’re going to be in the middle of it) in exchange for some cold hard cash each month. The nicest thing about the situation is that your income and expense are very clear (and as long as you’re able to promptly get a tenant and they don’t cause you any problems, its cash flow positive). In one sense, you’re buying living (or working) space in bulk and reselling it.

I’ve toyed with the idea of renting a 3 bedroom apartment in Waterloo, taking the smallest room and renting out the other two individually. If you get $450 / room and could rent a 3 bedroom apartment for $1,150, you’d be living quite cheap ($250 / month for your share of the rent). Again, you’re in the middle of it when one of your roommates puts his head through the wall: Welcome to the life of a landlord!

Living with other people isn’t always a joy, but being the person on the lease would give you total control over WHO you were living with.

16 replies on “Real Estate Arbitrage”

I’m not up on real estate law, but it would be an obvious loophole in rent controls if it were legal to sublet above the rent-controlled price. Do you have any information on whether your idea is legal?

“A friend is planning to move to another area, but she has a rent controlled apartment that she rents for $100-$150 below market price. One thing I suggested she consider is hanging on to the apartment and subletting it to someone for closer to market rent.”

That’s not actually legal (in Ontario). You can’t sublet for more than you pay.

cf. under “illegal additional charges”

Not sure if this will post twice, since I hit submit but my comment seems to have been eaten… perhaps if I leave out the link.

Subletting for more than you pay in rent is illegal in Ontario.

Michael James: No idea (she’d have to research it in her local area). I’m pretty sure subletting is legal in most regions with rent control (i.e. that it isn’t part of rent control that subletting is forbidden), but I could be wrong.

Potato: Is it? Do you have a link to info about the law?

I just went through the subletting portion of the Residential Tenancies Act and couldn’t find anything limiting the amount that can be charged for rent.

If anyone finds something I missed or can point me to a law elsewhere, I’d appreciate it 🙂

I’ll try again with the link:

Down towards the bottom “Illegal Additional Charges”.

“(3) Unless otherwise prescribed, no tenant and no person acting on behalf of the tenant shall, directly or indirectly,

(a) sublet a rental unit for a rent that is payable by one or more subtenants and that is greater than the rent that is lawfully charged by the landlord for the rental unit;”

Also, what sort of “rent control” is it? You can’t sublet a publicly subsidized unit, even for less than you pay (again, my knowledge is only for Ontario).

$100/month doesn’t seem worth the potential risk and hassle for your friend to sublet her place, unless she is sure she’s coming back soon.

The other idea (finding a house and getting roommates, and charging them more rent) is much more doable. You’d have to be careful you didn’t wind up losing money on the deal if you had to cover an empty room for any amount of time!

I know someone in the SF area who has been in his apt for 10 years – it’s well below market rate now, but he charges himself the least and charges new roommates much closer to the market rate. It seems fair to me that he should benefit from his 10 years’ tenancy more than the newcomer.

It might be worth subletting just to have the option to come back later, as long as she didn’t make any money on it. Including links seems to throw my comments out (or possibly in the moderation queue — Mike might come on later and this page will be nothing but comments from me!)

Anyway, if you go to ontariotenants dot ca
then on the left is a link for residential tenancies act, then on there look for “illegal additional charges”.

Potato: thanks for the link! Sorry about the comments (the system threw one of my comments in our spam bin too!). Links should USUALLY be ok in comments…

You’re right 3a) seems to forbid one part of what I’m suggesting.

Comments are sent to spam if they contain 2 or more links. I changed it to 3 or more links – hopefully that helps.

I wouldn’t condone doing anything illegal, but if you were to sublet the apartment for a few extra dollars, I think the odds of getting caught are pretty close to zero. Kind of like speeding by a couple of kilometres per hour…

Yikes! One of these days listening to me is going to get you into trouble. Although not this time. 😉

Actually, your (personal) plan isn’t a bad one and not illegal if you’re upfront about it with the landlord although I’m not sure how much of a discount it would provide.

We recently rented out our 5 bedroom house to a group of students. The rent charged was either $1600 split between the 5 of them, or $1500 if we received one cheque. They chose to give us 5 cheques and pay $1600. Why? Because no one wanted to be responsible for collecting rent from the others. As a landlord, I can’t say I blame them. 🙂

One thing you might want to talk to your landlord about is if they would be interested in cutting you a deal if you agreed to take care of property maintenance (i.e. mowing the lawn, shovelling the snow). If you’re cheaper than a maintenance service, they may likely be interested in striking a deal and could result in a discount of ~$25-50 / mth. We’ve done this in the past.

telly: yeah, that’d be a bit too much like work for my tastes ;-). I definitely would be up front with the landlord (at least that I would be getting roommates, I probably wouldn’t concern then with the details of how much rent I was planning to charge).

If one of the students had been more entrepreneurial, he may have found the group was willing to pay more (e.g. they’re clearly willing to pay $1600/5 not to be personally responsible, how much more would they be willing to pay for wireless internet, a cleaning service every two weeks, cable tv, etc). One student might have been able to put together a “package deal” that would have let him take care of the details and get a bit of a rent discount in exchange.

Good point Cheap, but unfortunately, we’re already the ones footing the bill for wireless internet, satellite dish and VOIP.

It’s a renters (and buyers!) market in Windsor these days. 🙁

I know…that’s what I was telling you!

Actually, one of the rooms actually goes for $280 believe it or not! Oh, and we pay the utilities too!

Before home owners caught on to how much money student rentals were making we used to be able to collect $350 / room with nothing included. Now they’ve all moved out and virtually all housing near the U is student housing now. Thanks to a great deal and cheap RE, we’re still cash flow positive on both properties, though not anywhere close to the $1000 net/mth per house we were making a couple years back.

Markets can change quickly. Now kids won’t sleep in the basement. 😉

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