Payback period of Cash for Keys offer

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Payback period of Cash for Keys offer

Jamie Blair
Brockville, Ontario · Member since 2022 · 36 posts · 27 votes

I met with an investor in Montreal on the weekend of he was describing how he uses cash-for-keys to incentivize his current tenants to return their lease to him when they move out, instead of passing it on to someone else to the same price (an extremely common practice in Quebec). And once he has the unit back in his hands, he can reset the rent to market rate. He was describing that the highest he's ever offered was 25k, and was turned down. My question for you guys, do you have a typical rule of thumb for a payback period on this "investment"?   Ie. If I have a 1-bedroom unit that's currently renting for $600, but market rate is $1100, if I offer the tenant up to 5-10k, the payback period is 10-20months. I plan on holding the property as a long term investment, so increasing monthly cashflow makes sense......or is there another way I should be thinking about this? 

(I plan to ask this investor this question next time I see him, but not sure when that will be!) 

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Frederic Babeux
Rental Property Investor · Saint-Hubert, Québec · Member since 2017 · 70 posts · 44 votes
4y

Landlords in Quebec have to disclose the previous rent and you can be forced to give it to them.

It is very difficult to raise rents year over year in Québec, there is a formula provided by the housing tribunal that you have to use in order to justify your rent increase. You're lucky if the increase matches inflation.

That is one of the main reasons I do not want to buy locally, the law is really in favor of the tenants.

But to get back to your question, the payback period depends on your plans for the property. If you want to sell, the amount you can offer is much higher due to the fact that a higher NOI will increase the property value by a lot.

For example, if you manage to increase the rent by 500$/mo (that's a realistic thing here in Quebec due to the fact that we still have some leases @ 700$/mo when the market supports 1200-1500/mo. Now let's say that you get 6k in NOI at a 3.5% cap rate in Montreal, that is an extra 170k in value!! I'd have no problem offering 25k+ if I wanted to sell.

If you want to keep holding, it's also similar because your NOI will drive your refinancing...

Hope that clarifies it for you!

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    4y

    I've never heard of being able to transfer the lease.  Can you not word the lease to clearly state that it is non-transferable?

    0Reply
  • Stevo Sun
    Calgary, AB · Member since 2021 · 327 posts · 176 votes
    4y
    Quote from @Jamie Blair:

    I met with an investor in Montreal on the weekend of he was describing how he uses cash-for-keys to incentivize his current tenants to return their lease to him when they move out, instead of passing it on to someone else to the same price (an extremely common practice in Quebec). And once he has the unit back in his hands, he can reset the rent to market rate. He was describing that the highest he's ever offered was 25k, and was turned down. My question for you guys, do you have a typical rule of thumb for a payback period on this "investment"?   Ie. If I have a 1-bedroom unit that's currently renting for $600, but market rate is $1100, if I offer the tenant up to 5-10k, the payback period is 10-20months. I plan on holding the property as a long term investment, so increasing monthly cashflow makes sense......or is there another way I should be thinking about this? 

    (I plan to ask this investor this question next time I see him, but not sure when that will be!) 


     You can pass on your lease in Quebec? Sorry Im in Alberta and that practice is foreign to me. How does it work? Are you saying you don't get to pick your tenants as the old one moves out?

    0Reply
  • Account Closed
    Rental Property Investor · Port Coquitlam, BC · Member since 2017 · 520 posts · 527 votes
    4y

    Have a read through this... you still have an obligation to disclose previous rent paid and new tenant has the right to request a rent adjustment.  https://educaloi.qc.ca/en/caps... 

    By my read, you could consider leaving the unit vacant so that it has no rent history in the previous 12 months... that would cost you $7200. Then you'd be free to set the rent to market. I don't invest in Quebec, though, so have no experience managing tenants there. Good luck!

    0Reply
  • Yan Sully
    Member since 2022 · 24 posts · 6 votes
    4y
    Quote from @Jamie Blair:

    I met with an investor in Montreal on the weekend of he was describing how he uses cash-for-keys to incentivize his current tenants to return their lease to him when they move out, instead of passing it on to someone else to the same price (an extremely common practice in Quebec). And once he has the unit back in his hands, he can reset the rent to market rate. He was describing that the highest he's ever offered was 25k, and was turned down. My question for you guys, do you have a typical rule of thumb for a payback period on this "investment"?   Ie. If I have a 1-bedroom unit that's currently renting for $600, but market rate is $1100, if I offer the tenant up to 5-10k, the payback period is 10-20months. I plan on holding the property as a long term investment, so increasing monthly cashflow makes sense......or is there another way I should be thinking about this? 

    (I plan to ask this investor this question next time I see him, but not sure when that will be!) 

    Cash for keys is more so to end the lease and ask tenants to move out (when you don’t normally meet the general condition of take the unit back). In Quebec, tenant has cap rate, so they would prefer to stay. I have considered this practice when I purchased my condo. Currently my unit rented out for $733 for a one bedroom apartment and market price is 900-1000. Generally, if I want tenant to move out after yearly lease, government is mandated to give 3 month rents to help them move ( I have to double check since it has been a while when I checked the rules). That’s if I would move my in laws in or direct family members in. So $2200 is a given. To motivate tenants to move, I suspect I would need to offer 5-10k in this case (that’s pure speculation since I never done so). So, take 5k as an example, I have to use 25 month to recover this cost (assume I can rent for $933). Mostly likely I would need small renovations and 1 month to do tenant switch in order to get a decent rent, so that’s add another 2-3k. In total it would take another 10-15 month to recover. Therefore, I am looking at roughly 3 years to recover the cost if the tenant willing to take 5k. If tenant wants to take 10k, then I am looking at roughly 60 month, so 5 years to recover the cost. I personally don’t want the hassle.

    The only exception I would do that, is when I want to sell the property. If I offer 10k, but can get 20-30k extra back, then it’s worth the effort. 
    0Reply
  • Jamie Blair
    OP
    Brockville, Ontario · Member since 2022 · 36 posts · 27 votes
    4y

    @Stevo Sun and @Theresa Harris Here's an article from a couple years ago explaining the practice. And it's become way more prevalent in the last 2 years! 
    Montreal tenants are swapping apartments to avoid rising rents | CBC News

    Although the investor I was talking to uses cash for keys to avoid apartment swaps in his market (quebec), I'm actually interested in using cash for keys to have tenants just voluntarily end their lease (I'm in Ontario and apartment swaps doesn't seem to be a thing here). And so I was wondering if there were any rules of thumb on payback period. 

    @Yan Sully It looks like you'd be ok with 3 years but not 5.....I was thinking 2-3 years as well, and I agree with your point on selling. thanks for the input!

    2Reply
  • Jamie Blair
    OP
    Brockville, Ontario · Member since 2022 · 36 posts · 27 votes
    4y

    @Account Closed thanks for linking that! I didn't know landlords were supposed to disclose previous rent. I don't invest in quebec either, but many of my friends and fellow investors are in the Montreal area and I haven't heard of that being discussed before, so will ask them about it next time.  That would definitely be SUPER annoying if you have a new lease signed with a new tenant, and they were savvy enough to apply and have rent reduced in half, ughhh. goodbye investment. 

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    4y

    If you do decide to do it, do not pay them until you get the keys and they are out.  Also get it in writing.

    0Reply
  • Yan Sully
    Member since 2022 · 24 posts · 6 votes
    4y
    Quote from @Jamie Blair:

    @Account Closed thanks for linking that! I didn't know landlords were supposed to disclose previous rent. I don't invest in quebec either, but many of my friends and fellow investors are in the Montreal area and I haven't heard of that being discussed before, so will ask them about it next time.  That would definitely be SUPER annoying if you have a new lease signed with a new tenant, and they were savvy enough to apply and have rent reduced in half, ughhh. goodbye investment. 


     This why people normally do a small Reno, to avoid that situation. For new tenant, with shinny floors and washroom, they normally know rent has been increased due to Reno.


    In Ontario I know realtors do cash for keys in order to get premier sales price especially in last couple years. 

    0Reply
  • Anthony Therrien-Bernard
    Realtor · Calgary, Alberta · Member since 2018 · 291 posts · 132 votes
    4y

    Sorry I know I'm not bringing in helpful information but I just had to say it: What a mess you have in Québec with landlord/tenant laws!

    0Reply
  • Frederic Babeux
    Rental Property Investor · Saint-Hubert, Québec · Member since 2017 · 70 posts · 44 votes
    4y

    Landlords in Quebec have to disclose the previous rent and you can be forced to give it to them.

    It is very difficult to raise rents year over year in Québec, there is a formula provided by the housing tribunal that you have to use in order to justify your rent increase. You're lucky if the increase matches inflation.

    That is one of the main reasons I do not want to buy locally, the law is really in favor of the tenants.

    But to get back to your question, the payback period depends on your plans for the property. If you want to sell, the amount you can offer is much higher due to the fact that a higher NOI will increase the property value by a lot.

    For example, if you manage to increase the rent by 500$/mo (that's a realistic thing here in Quebec due to the fact that we still have some leases @ 700$/mo when the market supports 1200-1500/mo. Now let's say that you get 6k in NOI at a 3.5% cap rate in Montreal, that is an extra 170k in value!! I'd have no problem offering 25k+ if I wanted to sell.

    If you want to keep holding, it's also similar because your NOI will drive your refinancing...

    Hope that clarifies it for you!

    3Reply
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