By Michel Limoges, chartered real estate broker with the Ayotte team

The Bank of Canada is forecasting an inflation rate of around 8% for the next few months. Naturally, this will have an impact on real estate in general, and the rental sector in particular. However, owners of income properties have ways of limiting the negative effects of the current inflationary wave on their assets.

A real estate market with few certainties

You only have to scan the credible business news media to see how varied and contradictory are the opinions on how long inflation will last, how much will happen if it continues, and when it may end. The same applies to projections on the effects of inflation and rising interest rates on rental property. Thus, for some experts, the current risks are worrying for the commercial sector, while American real estate giant Blackstone believes, on the contrary, that the latter is rich in opportunities in Canada. As for multi-unit buildings, American experts believe that their owners will benefit in the long term from successive interest rate hikes, an opinion that is not at all unanimous in Canada. There are few certainties, apart from the following. The higher interest rates and inflation :

1) the more downward pressure there will be on the number of transactions and possibly on property prices. It’s obvious, and it applies to rental real estate too. 2) the more landlords raise their rents, as CORPIQ predicts. CORPIQ has stated that interest rate hikes will “have a direct impact on the ability of rental property owners to invest in the upkeep of their rental housing stock and, above all, to stimulate the construction of new units in a context of real estate market imbalance in several regional cities in Quebec”.

 “. What’s more, and this is the third certainty, in a context of skyrocketing construction costs – we’re talking about +22% across the country compared with last year – buying a building that’s already built is easier to control than investing in a property to be built.

Solutions based on prudence, flexibility and partnership

In addition to raising rents, you have several options for limiting the effects of inflation on your real estate portfolio. That said, you’ll find that it’s best to plan ahead before a strong inflationary wave hits. Of course, such a period encourages you to trim the fat and adopt a plan to rationalize spending, all without compromising rental quality. For example, you may want to postpone certain hiring, renovation and expansion projects, or divide up or convert certain units.

Such steps must be part of what employment law firm Osler calls a resilient business plan, i.e. one that can easily be modified. In real estate, only the building is immovable; the ability to do things better or differently must be highly flexible! Osler also stresses the importance of building a reserve fund in  this article : ” To deal with volatility, you essentially need to build flexibility, both financial and real, into your business plan.

Finally, in times of inflation, it’s more important than ever to cultivate your business relationships, especially your suppliers, so you don’t have to change them.  For example, if you’ve been doing business with the same snow removal resources for 20 years, you may be able to avoid a price increase for their services by talking to them, whereas a new supplier will charge you a higher price that takes inflation into account. That said, there are signs that the sustained rise in interest rates is beginning to slow inflation. We can therefore hope that inflation will soon be curbed. Rates will then stop rising, stabilize and come back down. Would you like to know more about buying or selling rental properties in times of inflation and rising interest rates? We’ll be happy to advise you and make your project a success. Contact us today.