Are real estate investors good or bad for B.C.’s housing market?

Madhukar Sharma has known for years that he’s not going to climb the ladder to the financial heaven he wants if all he does is stick to collecting his admittedly very nice computer-science-engineer salary from his Silicon Valley boss.

“You cannot make millions through your active career. It’s only through investments that you can do that,” says Sharma, a basketball-player-sized 30-year-old in the standard-issue uniform of his generation—jeans, snazzy white runners and a hoodie—as he goes over his life plans in precise detail at a coffee shop not far from where he now rents in New Westminster.

Sharma first moved to Halifax from India in 2019 to do a master’s degree in engineering, and then bought his first pre-sale condo (in South Surrey) when he moved to Vancouver in 2021. He bought his second in Burquitlam two years later and plans to move into the first one when it’s ready within the next few months, then he’ll rent out the extra condo (and future acquisitions) when they are completed, doing the tenant selection and management himself. Using all the analytical skills that he’s been trained in, he studied locations for school ratings, transit accessibility, builder reputation, attractive layouts and more. He bargained to get some freebies thrown in—a package that included free air conditioning, a washer and dryer and extra parking in one; a $6,000 cash discount in the other. Within 20 years, he hopes to have five paid-off properties.

But for now, he’s roosting on his two eggs, prepared to do no more than break even on whatever he rents out because the real money is not in rent, it’s in the Lower Mainland’s house prices that seem to go up no matter what disasters erupt.

“In Vancouver, real estate is more about capital appreciation,” Sharma says in his precise I’ve studied this and here is my conclusion way.

In today’s polarized world, people like Sharma—along with anyone else who invests in residential real estate—run the risk of being vilified. Many investors won’t even admit to close friends that they have a rented-out condo or small portfolio of townhouses and multiplexes, let alone to reporters.

The stories that appear with stunning regularity about bad actors at various rungs in the investor ladder don’t help to create a flattering picture. Mom-and-pop landlords who seem to have barely a nodding acquaintance with tenancy law getting into squabbles with their renters over extra children or pets or appliance repairs. Owners of apartments from the West End to Chilliwack who contrive to evict reasonable tenants, claiming that non-existent relatives need to move in so they can boost rents. Bigger operators who rack up stunning numbers of disputes at the province’s residential tenancy branch in what seems like some kind of civil war with the people paying off their mortgages.

In spite of that, the underground enthusiasm for real-estate investing continues to percolate in B.C. Sharma’s life plan is emblematic of the way that people around the world—people who are far from being a bunch of characters on Succession but rich enough to have money to invest beyond a main house and retirement savings—have added residential real estate to the ways they try to grow what money they have. In other eras, it might have been different schemes: inventing something; running a small hobby business on the side ­(lawn-mowing, car repair); writing romance novels; throwing big money on the stock market or tulips or casino chips.

Now, residential real estate has come to seem like one of the safer bets for those looking to break free of the bonds of stagnant middle-to-upper-class incomes and get beyond maximum contributions to their RRSPs. Unlike the stock market, real estate is very tangible. And unlike running a small side business that may or may not have a product that the public is clamouring for (car windshield wipers, maybe; Trump Steaks, no), the housing market very obviously has a seemingly never-ending lineup of desperate and crazed consumers. Vacancy rates remain stuck near zero. Housing prices continue to go up, creating a bigger and bigger pool of higher-income renters every year.

As well, the financial and legal system has evolved to include small-time investors. In the 1940s, when Canada’s renters—then more than 50 percent of the population compared to today’s 33 percent—needed a place to live, they rented either apartments that were wholly owned by someone wealthy enough to buy an entire building or single-family houses that, again, had likely been bought by someone with a fair amount of capital for that era.

“The barriers to entry have been reduced,” says Bob Dugan, chief economist for Canada Mortgage and Housing Corporation. “When condos came in, it lessened the amount of skin you needed to put in. The REITs (real estate investment trusts) are like that too—they provide more access.”

But that new reliance on small investors and their capital can lead to its own set of problems. Amateur landlords who don’t know what they’re doing. Investors who are primarily interested in studios and one-bedrooms as they try to get into the market as inexpensively as possible, which skews the overall stock of new construction that way. A pool of rental homes that is unstable, because individual owners can decide to sell or move in themselves at any time if they get sick of the challenges of dealing with tenants—a sentiment that is being expressed with increasing frequency by current small landlords. Inexperienced investors who rush in too quickly when things look good and panic when they look bad, creating huge wobbles in the overall market. That’s what’s happening in B.C. these days, as those small investors have noticeably disappeared from the pre-sale condo market, leading to a major slowdown in new projects and overall housing supply.

In spite of these challenges, the gates that have opened to small-time investment continue to attract hundreds of thousands of average BCers and Canadians with professional-level incomes. People like Sharma. Or many others, each with a slightly different pathway in. Take Vancouver city councillor Lisa Dominato, who ended up with an “investment” property in Victoria after she and her husband moved to Vancouver in 2012 and had a hard time selling their old house. They decided to rent it to families to help provide housing in their old Fairfield neighbourhood.

Or someone like Haig Armen, assistant dean of interaction design at Emily Carr University of Art and Design. He’s found himself with a one-bedroom condo in Vancouver’s Kitsilano neighbourhood as one of the legacies of the small apartment empire that his father, an architect originally from ­Armenia, built up during his working years in Ottawa.

“He bought a bunch of apartment buildings and fixed them up,” remembers Armen. “I saw it as a really viable passive income, something you can do and continue on with your main career.” He hasn’t been as aggressive as his father at investing, but he is very content with his plus-one holding. He manages the tenant selection and apartment maintenance himself, rather than paying one of the many property management firms that have sprung up around Vancouver.

Even the City of Vancouver seems to be in on the stampede. It bought a just-completed apartment building at 41st and Main recently for somewhat above market rate, with a plan to rent it out.

People might not believe it of us risk-averse Canadians compared to those wild and crazy Americans (who love real estate investing so much that they toppled their own housing market in 2008 by betting too much in a shaky system), but people in this country appear to be more seduced by real estate investing than even the Yanks. That’s likely partly because the Canadian real estate and banking system has been so stable, say experts.

In the U.S., individual investors owned just under 38 percent of the 49.5 million rental units, according to 2020 HUD statistics, with corporate entities dominating the rest except for small amounts under the control of nonprofits or housing co-ops. By contrast, Canada Mortgage and Housing Corporation surveys have found over the years that a steady 49 percent of all rental homes in the country—4,953,840 of them in the most recent census—are owned by individual investors. The rest are owned by a mix of small companies, limited-liability partnerships, pension companies, real estate corporations and real estate investment trusts. And small-time investors are the bedrock of trusts.

In B.C., where the housing market has been at 50,000 or more on the Scoville heat unit hot-pepper scale for three decades, small investors have been a notable factor in the market for quite a while. B.C. has the highest proportion of investor-occupiers—owners who live on a property where they rent out one or more units—of any province in Canada. That seems to have primed some of them to move on from just renting a basement suite or laneway on their property into new investment frontiers. They’re what UBC sociology professor Nathanael Lauster calls the province’s “artisanal landlords,” who together rent out a third of all the condos in the province, along with thousands of basement suites and laneway houses.

The real estate fever doesn’t get to those Hot Ones temperatures on its own. There are endless seminars, workshops, conventions and investment clubs (not to mention emailed newsletters, online blogs and a steady stream of promotional news articles) enticing even more people to plug into the dream. At a September workshop put on at Surrey’s Sheraton Vancouver Hotel Guildford by developer Alfonso Cuadra, affiliated with Ontario-based WealthGenius, the sense of quasi-religious mission was in the air.

“You create freedom for yourself” by investing was the steady reminder all evening from Cuadra as he boisterously recounted success stories about others who have taken his seminars to the crowd of 30 potential new disciples. He talked about his former student, Maulen, who just built a 59-unit apartment building. Mike, who bought a four-unit cash-flowing property. James, who graduated from buying bungalows and putting suites in the basement to acquiring a 33-unit building for the low, low price of $3.2 million that he “repositioned” and “ethically exited 21 tenants,” turning it into an asset now appraised at $8.5 million. To keep the high spirits going, Cuadra would get his small audience to repeat his mantras loudly throughout the two-hour session: “Good times are coming.” “I want to learn how to raise millions and millions of dollars.” “You can do this using other people’s money.”

The crowd he spoke to was young, a faithful multi-ethnic reflection of Vancouver, and ranging in experience from Jasmine Kaur, a marketing student at BCIT, to Joanna Huang, an environmental engineer turned mortgage broker, to Farsheed Farid, a local operations manager, all trying to understand the first steps. But there were also some with more experience, like Annie and her husband, who are thinking of buying an eight-unit property in Edmonton—a different kind of investment approach from what they have been doing recently, which is just investing cash directly with developers and then getting their returns when the building is sold.

Younger people like Sharma, along with many at the WealthGenius seminar, are part of the new wave that seems even more fired up about owning investment residential than other cohorts. According to a report by Royal LePage, 18- to 34-year-olds in Canada are more likely to own more than one investment property than older people—even though 15 percent of those young people don’t own a home they live in themselves.

That’s a group that’s likely to move into the next category up for real-estate investors: portfolios with half a dozen properties. Then, if they remain ambitious, maybe an entire small building. Or three. Maybe they start putting straight wads of cash into a project, through a developer’s private circle of investors. Or they might take what seems like the safer route and put money into the growing vehicle of real-estate investment trusts. That would be entities like Skyline Wealth Management, a company that promises participation in “private alternative investments,” with an apartment REIT started in 2006 “that is positioned well to meet the demand in Canada’s housing crisis.”

Skyline, with $9 billion in assets and 7,000 investors, is the fifth-largest REIT in the country, counting 23,000 apartments in its Canadian portfolio and growing, though with only about 800 in B.C. so far, all on Vancouver Island. The company is popular, and not just with investors, says relationship manager Sasha He: “We have municipal governments approaching us to build rental. A lot of people cannot afford to build these days.”

To people in the housing and building sectors, most of these investors are doing a good thing. “Investors provide a lot of liquidity to the market,” says CMHC’s Dugan. “Even if they are intending to flip, they’re causing the projects to go ahead.”

He even sees REITs—which have grown from almost nothing in the late ’90s to somewhere between 6 and 12 percent of the whole rental market as they strike a chord with small investors who don’t want to get into buying and managing an individual condo or building themselves—as a good vehicle for helping to provide supply. (That’s more true in B.C., where REIT principals say they haven’t been able to find much desirable product so they are partnering with local developers to build new apartments.)

REITs have taken heavy shelling in academic and political circles recently, seen as part of the “financialization” of housing that many believe is more a cause of astronomical sale and rent prices than a lack of supply. They’re viewed as entities that pay higher prices than people just looking for a home might, shutting those people out of the market, and then, the narrative goes, they embark on deliberate campaigns to evict long-time, low-paying tenants in order to do minimal fix-ups and re-rent at much higher prices.

In a sign of the current times, federal NDP leader Jagmeet Singh recently tweeted that Canada needs to get corporate investors out of the housing market. In late September, he thundered: “Today, the biggest financial firms collectively own close to 400,000 homes—nearly 20 percent of the rental units in Canada. In the mid-1990s that number was 0. New Democrats will introduce a bill that will ban corporations from buying homes people can afford.”

(Word of warning: it’s not clear where Singh’s stats come from. As previously noted, the last census said there are about five million rental homes in the country. So, 400,000—a number that seems to be loosely related to the 350,000 apartments that are owned by real-estate investment trusts—is 8 percent of that, not 20.)

Singh does have a point that corporate investors have been playing a bigger part in both the Canadian and U.S. housing markets since the late ’90s and early ’00s, particularly after the 2008 recession when entire subdivisions ended up vacant. In the U.S., those bulk buys set off alarm bells among many because big operators targeted particular types of neighbourhoods and particular types of housing: lower-cost single-family houses that they could buy up en masse. That kind of buying is widely viewed as enough to distort a market, as it removes hundreds of homes in a specific catchment for first-time, lower-income buyers.

But Canada hasn’t seen that kind of buying. It hasn’t had the wild housing crashes that some U.S. cities have experienced as they’ve gone through big bubbles and collapses, nor does it have a lot of companies big enough or experienced enough to start buying hundreds of millions of dollars’ worth of residential real estate at once.

Dugan and those in the housing industry have doubts—or at least more context to offer—about some of those claims. REITs appear to pay more for apartment units than the median price because they are deliberately choosing to buy buildings in better locations or in better shape. And they don’t control enough of the market to be able to set their own prices. They’ve got a lot of competition. “It’s hard to charge a premium if you have an identical product,” says Dugan. “When people take aim at REITs, they forget that the ability of landlords to raise rents is a symptom of low supply.” Not, he says, some inherent evilness about a new generation of apartment owners.

But there are still many gaps in everyone’s understanding of how investors, especially the very large cohort of small-time investors, behave as they put money into REITs or individual units. Housing-investment critics say that investors pay more for homes (data not always provided), shutting out potential real users.

There’s mixed anecdotal evidence about that. Some say people who are purchasing a place to live in will often be driven by a lot of emotion—desperation to get into the market, a conviction that a given neighbourhood is the only one in which they can function as a human being, a sense of panic. But investors will theoretically be looking at cash flow projections and are unlikely to pay exorbitant amounts and face having to subsidize their investment for months or years.

“My perception, though anecdotal, is that end users are willing to pay more,” says Ryan Berlin, head economist and vice-president of intelligence at Vancouver’s prominent Rennie marketing group. “Some of it may relate to ‘bank of mom and dad’ funding—possibly a lesser source of ‘financing’ for investors—but investors right now are poking around to see which sellers are willing to give up the most, price-wise, in an effort to establish a return/cash flow situation that’s amenable enough, especially in the short run with high rates and with the investor not able to fully benefit from tenant turnover.”

Their behaviour is of keen interest these days to everyone in the development business because they have… not quite disappeared, but certainly receded.

At Rennie, investors accounted for 46 to 51 percent of all pre-sales in the four years leading up to 2024. Now they’ve dropped to a 26-percent share of all sales. Since you were already wondering, the Rennie stats show that 87 percent of investors were from Metro Vancouver, 3 percent from elsewhere in B.C., 5 percent from elsewhere in Canada and 2 percent from outside Canada. They’re not rich, either. Almost 60 percent had household incomes between $100,000 and $200,000. Only 10 percent had household incomes of more than $250,000.

The ghosting investors are a problem, especially in B.C., where the real estate ecosystem depends on them to get projects airborne. Condo developments usually can’t get approval for financing from banks unless they have 60 to 70 percent of the units sold through pre-sales. Investors like pre-sales, because the early payments are low and manageable and those buyers aren’t panting to find a place to live.

“If investors aren’t participating, developers can’t progress their projects or they just don’t launch,” says Berlin. The way the math works, if there aren’t enough end users to replace the missing investors, one of the projects can’t move ahead. But the pool of end users is restricted. It’s not the entire universe of people out looking for a home to live in. That’s because the move-in date on a pre-sale is likely three to four years away from the first deposit—too far away for people trying to buy and move into something right now because they just arrived in town, just had a baby, just had a second baby, just got renovicted, just need a place right now. So if that particular set of projects can’t find a replacement for the missing investor-buyers—just over 100 of them—one building gets cancelled. That’s 450 apartments disappeared from the housing market, 450 units that end users don’t get a chance to buy as either a pre-sale or final product.

Some housing researchers say it might actually help to have fewer mom-and-pop investors managing their fluctuating supply of individual basement suites or condos and have small investors put money directly into REITs that are building new apartment buildings that will be professionally managed.

“We need investment in rentals,” says Alex Hemingway, an economist with the Canadian Centre for Policy Alternatives. “A lot of the evictions are happening in the secondary market. It’s unstable. And the reality is that it can get toxic with both corporate and mom-and-pops being bad actors and using the shortage to squeeze as much as they can from renters.”

Analysts at the Real Estate Institute of Canada also think a swing is possible and preferable.

“Mom-and-pop investors are withdrawing from the market,” argues Allwyn Dsouza, a senior researcher at the institute. “But government is providing more support programs for purpose-built rental. They can invest there because the economics work differently than when you have to put 30 percent down up front for a unit.”

In spite of that, the B.C. housing sector is still very dependent on small investors, and it’s likely to be that way for a while. So it’s important to have a sense of what will bring them back, something no one has right now.

Many current small-time landlords are frustrated with what they see as a system stacked against them. The BC Landlords Facebook group, with about 10,000 members, is a long litany of frustration from people who have found themselves locked into months-long disputes with tenants over unpaid rent, appliances that mysteriously keep breaking down, new roommates who appear without notice and much more. The province’s caps on annual rent increases and new rules on how much notice tenants have to be given if a landlord is selling or taking over for their own use have produced much grumbling and threats to sell and get out of the business.

On top of that, every new change in policy adds more pain to those contemplating parking their available spare cash in property. Ron Butler, a Toronto mortgage broker who frequently comments on the dynamics of the real estate market, said last fall that investors are essentially being driven out of buying in Toronto and Vancouver in particular because of a change in CMHC rules for providing low-interest loans to developers that makes their projects’ financial scenarios unworkable.

On the social media platform formerly called Twitter, Butler opined that “the era of small investors buying Dog Crate Condos to rent out is DEAD” and that it “may NEVER come back.” The question now is how all those factors will influence the under-40s, that eager and bushy-tailed generation, who are the biggest investors and the biggest optimists about how everything is going to work out.

They’re still there, says realtor Manraj Dosanjh, who works closely with many large developers, as well as a customer base of younger people interested in what they see as the prime remaining good area to invest—the triangle that encompasses West Coquitlam, Surrey Centre and Willoughby-Langley. The prices for condos (relatively low for the Lower Mainland) and the potential rents (high in the good-school, good-transit neighbourhoods) form a pleasing combo for them, he says.

Those young investors are also often from family cultures that highly value real estate—family cultures where the get-togethers for someone’s birthday or a weekly brunch will see everyone exchanging information about what they’ve bought and how it’s going. They’re likely to have older relatives to talk to about how to survive the kind of down cycle B.C. real estate is going through now.

“It will be interesting,” says Dosanjh, “to see who comes back.”

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