It has been our experience that the traditional residential apartment rental business can often be much less profitable than originally anticipated at the outset of a new tenancy. On average, we found that about half of our tenants were problematic even though we applied the same credit underwriting standards across the board. We often experienced high turnover and damage or extreme wear and tear in our units. At the end of each tenancy it was typically necessary to renovate prior to re-leasing the unit, and sometimes, the cost of renovating would almost equal the amount of rent collected in the preceding year from the previous tenant. Pursuing ex-tenants for damages usually ends up costing more than can be recovered. It is for this reason that we started converting our residential units to furnished short term rentals. Short term rentals and even long term furnished rentals generally command substantially higher rental rates than traditional residential rentals. In addition, each booking is insured for damages by the booking platform (ie. Airbnb or VRBO). There is an opportunity to inspect for damage after each checkout and hold the preceding guest accountable or make an insurance claim with the platform.
In 2020, the City's new prohibition on short-term rentals came in to effect. Only primary residences of individuals are permitted to be rented for fewer than 28 days at a time and not for more than six months of the year. This has reduced the number of short term rental units listed in Toronto on Airbnb from approximately 15,000 to approximately 3,500 and has eliminated almost all of the professional hotel-like operators from this market. The impact of this policy was originally limited by the void of tourism caused by the Pandemic and is only now becoming noticeable as we begin to exit from lockdowns and reopen our borders. We are already seeing the beginning of an insatiable level of demand for hotel-like short term rental apartments, and a massive supply shortage which will likely continue to drive prices higher.
At 1364-1370 Queen Street East, the as-of-right zoning permits a hotel and we
made a strategic decision to convert our four apartments at this property to a hotel at the earliest opportunity. At the end of April 2021, our last residential tenants at 1364-1370 Queen Street East vacated their unit. This was one of the last remaining hurdles to allow us to begin operating as a hotel here. While this process has required a substantial investment in the building, we anticipate that the income we will generate from the hotel business will be at least 50% greater than monthly furnished rentals (which are already more profitable than traditional rentals).
Since the fall of 2019, we have invested more than $600,000 into this building. Major improvements have included:
- a new roof,
- complete renovations of all 4 apartments on the second storey
- a renovation to the Chino Locos space to bring their unit up to current Fire and Building Code requirements
- an expansion of the retail store at 1366 Queen St E. to make it approx. 600 square feet from its original 325 sq ft.
- a structural rebuild of the rear addition which comprises the added space for the 1366 retail unit and the 2nd storey studio hotel unit.
- a clean-up of the basement space with new drainage, lighting and fire exits
- new plumbing, electrical, hvac and fire separation throughout most of the building
- adding ensuite laundry facilities to each of the 4 hotel suites.
We expect to finish all renovations at this property before the end of 2021. This will be a major milestone for our fund for two reasons. The first is that our income has been hampered from the vacancies in the upstairs apartments as we have been renovating them over these past couple years. The second is that almost all of our free cash flow generated from our other properties has been allocated to the renovations at this building. We are looking forward to having the hotel operating and generating great income and not needing to invest further in the building in 2022.
Here are some photos of Units 3 and 4 upstairs which have been operating as monthly furnished rentals as we've been waiting for the registration and launch of the hotel. You can click each photo to visit the Airbnb listing for that unit.
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