The purpose-built rental building is a great income source. Many investors have gone the way of investing in residential rental buildings. They understand them and they know that in any economy they can rent them out. they will just have to lower their rents in the harder times. But they still generate revenue. This is much better than an industrial or retail unit which may sit empty for some time before a suitable and long-term tenant can occupy the space. There is always more than one side to every investment story, so this section is limited to the residential investments.
In Canada there were incentives to build rental buildings in the 60's and 70's. The federal government gave concessions like tax incentives, grants and low-interest loans to spur the development. There was a serious shortage and the baby boomers were coming on strong. This led to many cities building plenty. The incentives and tax deductions were taken away in the 80's and then the GST was introduced in 1991. This has really put a dent in the new construction of purpose-built rental buildings. The Canadian Home Builders Association(CHBA) wants the feds to start back with those programs again. They would like to see the government allow the deferring of capital gains tax and also the recapturing of depreciation costs. It would also be beneficial if there were no more GST/HST on the purchase of a purpose-built rental building.
The statistics and economics of these types of structures in a society can benefit the cities. Right now the average rental rate in Vancouver is $2.25 per square foot. This is bearable for now for the support workers of our hospitals, schools, and commercial industries, etc. should the prices get out-of-hand, then we may be seeing a shortage of qualified personnel. Therefore the system gets volatile. The commercial companies start to walk away from the area and set up shop elsewhere. the trickle-down effect can be disastrous. The support staff of hospitals and schools leave town and live in the suburbs or rural areas because rent is cheaper and more abundant. A balanced vacancy rate is supposedly between 2-3%. This seems to be where in Canada is right now, but the buildings that are used as primaries for rentals are becoming fewer. some are getting demolished and some are being stratified, meaning they are becoming freehold strata condominiums for sale individually. The rate of new units being built is not at a sustainable level. The reliance for rentals is falling upon the secondary market. This is a rental unit in a building with fewer than three rental units. ie. Duplexes, basement suites, detached homes, townhouses, etc. This can be a great mortgage helper for cash-strapped house owners.
Another group of people look at the purpose-built rentals as a potential problem. They see that there will be wear and tear that does not get addressed as individual strata owners would. It is true that owners do take better care of their living areas better than renters, in general. The stories of slum-lords are true. Not every rental building owner is a slum-lord. There are good owners out there, but it is always the bottom-line with an investment. some owners just don't have the funds, the time, the patience, or whatever to deal with problems. They just see that they can rent it out anyway, so why bother doing more than the minimum necessary. This can really bring down the value of a neighbourhood. Then the income levels of the neighbourhood also go down, which can be a vicious cycle.
There is fine line in keeping up with the demand and also being considerate of the nearby home-owners. More questions will always be asked and more research will always be demanded. No one really knows how it will ultimately effect an area until it is built. The effects may not even be realized for a few years, even a decade, down the road.
Check out these links to learn more.
Urban Development Institute of BC
Canadian Home Builders Association
University of Winnipeg