Multiple-property owners are facing rising interest rates, especially in Toronto’s condo market

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Since 2017 so-called multiple-property owners have been the largest group of buyers of Ontario real estate, but a new report analyzing the holdings of this cohort suggests they may become far less active as interest rates continue to rise.

In the spring Teranet, the private company that runs Ontario’s land registry system, reported that between 2017 and 2021 multiple-property owners purchased 22 per cent of all residential properties (detached houses, condominium units, semis, townhouses, etc.). The trend continued to accelerate in 2022, with more than 25 per cent of all residential properties in Ontario being purchased by multiple owners. In its third-quarter market insights report Teranet coloured in those figures by showing 53 per cent of them own only two properties. Those with three properties numbered 18 per cent, those with four were just 8 per cent.

However, the second largest cohort of multiple-property owners are the 21 per cent who own five or more residential properties. This cohort has grown in recent years and they behave differently from other owners in a number of ways that appear to describe some of the features real estate investing defined by the popular acronym BRRR: Buy, rent, renovate and refinance.

“COVID made investing in real estate sexy, where before it was a dormant asset class,” said Jack Bernstein, a BRRR investor who amassed a portfolio of more than two dozen rental properties in Ontario by his late 20s. “On Tiktok and Instagram people were showing their journey and for the first-time for that Millennial group rates went low enough for people to get their foot in the door. … It kinda became cool to do.” Mr. Bernstein, who owns Bernstone Capital, also offers coaching to budding investors and has worked with everyone from moms in their 50s who owned no property to early-twenties professionals curious to give it a try. “I’ve had so many calls with younger people, 18, 19, 20, they are saving money and they know someone who did it [bought a rental property]. … It’s the new goal, instead of having an expensive toy, it’s the new flex,” he said.

But Teranet’s numbers also show a trend fuelled by cheap debt could leave some of those newcomers exposed to interest rates that are expected to continue rising in the coming months if not years.

About 70 per cent of those who own five or more properties use more than one lender, sometimes that means more than one of Canada’s “big five” banks but also so-called B lenders (credit unions, mortgage investment companies, and the like) for borrowing services. B-lenders are referred to as such mainly because their rates for borrowing tend to be higher and Teranet shows more of those with only two, three, or four properties have switched to multiple lenders since 2020.

Teranet says that since 2011 about 30 per cent of multiple property owners refinanced a property they purchased within a year: sometimes to buy another, sometimes for other reasons. But refinancing as a share of the market has risen steadily since 2019, and is being led by those with more than five properties who refinance about 34 per cent of the time, more than twice as often as those who own just two properties (17 per cent).

“The whole business of real estate relies on huge amounts of debt,” said Mr. Bernstein, who has slowed his own borrowing and focused on only the highest margin deals as rates have risen. “I have all variable mortgages, and luckily when I bought these properties I analyzed it and stress tested it, they are still above water.” Nevertheless, he’s looking for ways to add extra revenue to his existing properties by adding everything from billboards to storage sheds that he rents to tenants.

Where he foresees trouble is among those BRRR investors who were over-reliant on cheap debt: “There is a huge portion of people who borrow the construction costs and the down payment,” he said. Rising mortgage costs are one thing, but many also have unsecured lines of credit, private loans or promissory notes that add to their risk if carrying costs eat away at revenues they earn from renting.

“There’s a good chunk of investors that might get wiped out on this. … There’s losers already happening, I’ve seen it personally, people in my network are folding businesses,” he said.

The smallest category of multiple owners is also the most prolific: corporations that hold properties make up about four per cent of residential properties in Ontario, but 74 per cent of these corporations own 10 or more properties.

Teranet didn’t provide raw numbers of homes owned by multiple owners, but by comparing its percentages to census figures a sense of the scale emerges. The 2021 census data shows 1,253,238 private dwellings in Toronto and Teranet reports 29 per cent are owned by those who own multiple properties, which adds up to more than 363,000 residences. Fully 14.3 per cent of Toronto residential properties are owned by corporate entities, accounting for about 179,000 homes in the city. These figures exclude larger multifamily rental buildings.

Toronto is also in a category all its own when it comes to condos. Teranet reports that across the province only 28 per cent of multiple-owned properties are condo units, but in Toronto they make up 59 per cent of all multiple-owned homes. Oddly, only about 17 per cent of condo unit owners also own a home in the GTA. For what it’s worth, Mr. Bernstein claims most BRRR investors avoid condo purchasing, because those properties tend to appreciate slower than ground-related housing and there’s less room for renovations and upgrades.

Still, largest share of corporate-owned homes goes to the 15.3 per cent in the Middlesex region, which encompasses the student-housing hotbed of London. Census data suggests more than 28,500 of the region’s 186,409 private homes could be corporate owned. The next highest is Ottawa-Carleton with 10 per cent, followed by Peel Region with 5.9 per cent.