Back in November, 2019, we wrote about the “new” Airbnb rules that were put in place back then in Toronto and three implications of the rules.

The situation has continued to change in the city and we thought it was time we did an updated article on how exactly short-term rentals (and hence Airbnb, VRBO or any other similar platform) function in Toronto.

Let’s review.

First off, what’s short-term?

A short-term rental is classified by the City of Toronto as less than 28 days.  If a homeowner is renting out for longer than a consecutive 28 day period, then none of the rules we describe below apply.  If, however, there is a single rental that is less than 28 days, the city’s short-term rental rules come into play.

The City’s Stance

The City of Toronto’s official guide to short-term rentals can be found on their website here.

That is the most comprehensive site for all the details, the process, forms and so forth, but let’s review some key points here along with our take on each.

• People renting their homes or rooms within their homes for less than 28 days need to register with the City and collect and remit a 4% Municipal Accommodation Tax (MAT) on the rentals. Payments are due on a quarterly basis and if you’re using Airbnb or another rental company, they can collect it on behalf of the owner.  There is HST on top of the MAT if you’re registered for an HST number, which you need to do if you think you’ll earn more than $30K per year in short-term rental income.  That works out to $85 per day in rental income so if you are renting out your property in the city (or part of it) on a regular basis, it certainly seems likely you’d exceed that $30K a year number.
• You are only allowed to short-term rent your principal residence. That’s right, if you own an income property and have another property which is your principal residence, the city says no short-term rentals for you.  If you own multiple properties that you want to rent out on a short-term basis, the city says that is impossible, as you can only have one principal residence, and that is the only one you can rent out.
• If it is your principal residence, you can do short-term rentals regardless of whether it’s a house, apartment or condo. That’s in the eyes of the city, but remember that many, many condo buildings in the city have their own restrictions prohibiting owners from doing short-term rentals.  You could have a condo and it could be your principal residence, but you still might not be able to do short-term rentals.  Make sure you check with your property management company or the condo corporation’s rules and regulations or by-laws to see what’s permitted.
• The maximum you can rent out your home (or rooms in your home) on a short-term basis is 180 nights per year. This makes sense given it has to be your principal residence, and if you are spending more than half your time living somewhere else, it doesn’t much seem like the property you’re renting out is in fact your principal residence.
• If you have a secondary suite such as a basement apartment, or a laneway suite, you can do short-term rentals, but again only as long as the suite is your principal residence. To be clear, if you live in a house, you can’t short-term rent out your basement unit or laneway suite, at least not legally in the eyes of the city.  The same logic applies to bigger multi-unit homes like duplex, triplex and so forth.  Owners can only short-term rent their principal residence (i.e. the unit or portion of the property they occupy) and not the other units in the building.

Airbnb’s Interpretation

Given the somewhat complex nature of the rules around short-term rentals in Toronto, it’s no surprise that Airbnb has written up their own guide.  You can find it here.

While most of what is said by Airbnb is just a slightly more user-friendly (or host focused) version of what the city says on their site, they do highlight a few other aspects that aren’t as clear on the city’s site.

• While the city is primarily focused on owners wishing to rent out their properties on a short-term basis, there is also the ability for tenants to do it. The same rules apply, wherein the tenant has to have the home as their principal residence, and tenants also need to make sure that they are in compliance with their lease agreement and the Residential Tenancies Act.
• The 180 nights per year maximum for short-term rentals is clarified by Airbnb to not apply if you’re not renting your entire home. If you have bedrooms in your home you’re renting (up to a maximum of three bedrooms) you can rent them out on a short-term basis for as many nights in a year as you want.

Our Thoughts

The decision to restrict short-term rentals to principal residences only is clearly an attempt to prevent the creation of a completely separate hotelling situation in the city.  It is a compromise model that allows snowbirds and other homeowners who spend some (but not more than half the year) away from their home, to put their homes onto the short-term rental market.

It’s unclear how stringent the city is in their enforcement of these rules.  There are some media stories about the city issuing takedown notices for short-term rental listings that exceed the 180 days per year limit, but the shadowy side of investors claiming the home is the principal residence may not yet be targeted.  Operating without a short-term operator license can result in a fine of $1,000 and up to $100,000 if the operator is convicted in court, but that would only be for individuals who don’t use the Airbnb or another site who require the license to be in place.

If you’re considering buying a property in Toronto for the purposes of renting it out on either a short or long-term basis, it pays to work with agents who understand the rules.  If that sounds appealing, don’t hesitate to get in touch with us so that we can help you make a wise investment.

If you’ve been considering investing in commercial real estate, it’s important to know that there are some significant differences between a residential income property and a commercial income property.

We’ve previously written about how to identify a good residential income property and it is high time we talked about commercial income properties.  Here’s our three cardinal rules on how to make sure it’s a wise investment.

Thou Shalt Have Deep Pockets

While commercial real estate can be more expensive than residential real estate, this rule is actually referring to vacancy rates.

With residential real estate, if you are having trouble finding a tenant, you can lower the price until you find someone to rent the home.  After all, when a tenant is looking for a residential property where they can live, it is really just a question of how well the place fits their needs and budget.  If it really fits their budget or is under it, they might consider revising what they “need” in the home.

For a commercial tenant, the space needs to work for their business.  Cheaper rent is irrelevant if it doesn’t fit their requirements.  Think about it from the perspective of the commercial tenant:

• If you run a store that relies on being visible and having decent traffic pass by via foot and car, then you can’t rent a 2nd floor space in an industrial plaza.  Well, you can, but the landlord will have to rent it out again in a few months when you go out of business.
• If you need a restaurant location with a full kitchen, roof venting and space for up to 50 customers, the office space on the 12th floor of tower isn’t suitable, no matter how cheap the price per sf.
• If you operate a daycare, then finding a place that’s practically free to rent doesn’t matter if the space doesn’t (and can’t) meet the government regulations for childcare spaces.

It is for this reason that investors in commercial real estate need to be in a situation where the property becoming vacant in between tenants is not a dire situation.  It is not unusual for commercial properties to see vacancy for months while they try to attract a tenant whose business fits the space.  In some cases, we’ve seen vacancies of over a year.  With high commercial property taxes and no rental income, you need to have reserve funds in place for such situations.  If you require regular, consistent monthly income in order to cashflow the property, commercial investing may not be for you.

We recommend that investors have a reserve fund equal to one year’s expenses for the ownership and maintenance of each commercial property.  You may not need it, but if you don’t have it when you do, you’ll be in a very tough spot.

Stick To What You Know

In residential real estate, we’re all experts by default.  We all need to have a home to live in and we all understand the experience of living in a home.

In commercial real estate, it can be disastrous to end up buying a property where the end user is in a business you know nothing about.

• A vacant restaurant property can look like a great bargain but turn out to be impossible to rent to any savvy restauranteur due to problems with the layout, design, features and so forth.
• A low-priced industrial property with a stable history of great rental rates can be just about to hit a regulatory milestone where tenants can no longer operate in such facilities.
• A just vacated medical clinic might look like an easy place to rent out quickly, only the vacancy took place due to zoning violations and the building requires significant renovation for those business operations for which it is zoned.

Such problematic properties often appear to be great investments but result in high tenant turnover, rent payment issues and long vacancy periods before the whole cycle begins anew.  If you don’t understand – at a deep level – the industry in which the tenants for the space operate, then you won’t notice the issues with the property.

We recommend that investors educate themselves thoroughly in the industry in which prospective tenants for the investment property work within – otherwise it is very easy to buy into a problem property.

Hire Professionals

The final area where commercial income properties differ significantly from residential investments is the specialized knowledge necessary to successfully conclude the transaction.  While there are many different calibres of residential Realtors and lawyers, the fundamental nature of residential real estate is less complex than commercial real estate.  In essence, we lump a wide range of properties and businesses under the term commercial, whereas residential is simply residences.

When you buy a residential income property and when you rent it to a tenant to live in, the processes are pretty straightforward and routine.  Most home purchases are very similar and while different housing types (freehold vs condominiums for example) have different aspects, they follow a defined and common path.  On the rental side, the paperwork is set out quite clearly, regardless of whether you use a Realtor (OREA’s Agreement to Lease) or go out on your own (the Ontario Standard Lease).

Purchasing a commercial property invariably involves unique considerations and an experienced lawyer is necessary to make sure the property is suitable for the described end use.  Zoning, environmental assessments, taxes – commercial property has a whole host of other considerations that need to be reviewed by an experienced lawyer.

Similarly, the real estate agent you use to buy a commercial investment property needs to be well versed in both purchasing and renting out such spaces.  While it is crucial to have a good understanding of the industry yourself, you need to align yourself with an agent who can put themselves fully in the shoes of prospective tenants to advise you on whether the space will be appealing to those businesses.

On the leasing side, commercial properties are again much more complex than renting out an income property for residential occupancy.  With residential income properties, you look for a good credit score, good income and a stable history.  With commercial income properties, you’re looking at more variables in the lease itself (graduated rental rates, base rent plus additional rent, signage and so on) as well as more challenges in predicting whether the tenant will be a good one or not.

When you’re a landlord signing a tenant to a commercial lease, you have to go beyond the basics to assess whether you believe that the business can succeed operating out of your property.  The term “covenant” is often used as a short form for the strength of the tenant and the overall lease agreement.

A large, corporate client might have a very strong covenant where their word (the actual covenant in this case) to live up to the terms of the lease is considered reliable.  A smaller tenant who is starting a new business and doesn’t have the track record to show would be considered to have a weak covenant.  Basically, it is uncertain whether they can in fact live up to the terms of the lease, including paying rent and following through on their other obligations.

We recommend that you make sure to work with experienced lawyers and real estate agents who regularly do commercial transactions.  While all lawyers and Realtors can handle residential and commercial transactions, it’s wise to involve professionals who do handle them regularly and who know the right questions to ask.

Commercial investment properties are complex and requires that the Realtors involved understand how businesses operate so they can assist their client in deciding if their property is the right fit for a particular tenant and their business.

If you follow our three rules and are well capitalized, invest in properties suitable for industries you understand and hire experienced partners, commercial real estate can be very lucrative.  If it sounds like it might be a fit for you and you want to talk further, don’t hesitate to get in touch with us!