Renovating Between Tenants

A unit turns over. The outgoing tenant leaves marks on the walls, the kitchen looks its age, and the rent the unit can command depends on work being done in the two or three weeks before the next tenant arrives. Every landlord knows the job. Fewer have decided in advance where the money for it comes from. The answer is usually improvised at the counter, and improvised money is expensive money.

This page sets out the routes, what each one costs, and the cost that decides the arithmetic, which is almost never the interest rate. Deciding it once, in a quiet month, removes the decision from every turnover that follows.

What does the empty time actually cost?

More than the work, in most Canadian markets, and this is the number that reorders every other decision on the page.

While the unit is empty the mortgage payment arrives, the property tax accrues, the insurance runs, and any utilities in your name keep running. None of that pauses because a floor is being sanded. Add those up for one week and you have the carrying cost of a week of vacancy, which is a real number specific to your building and usually larger than landlords expect when they say it out loud.

Now compare it to the financing. The difference in interest between the cheapest and the dearest route, on a few thousand dollars over a few months, is frequently smaller than two weeks of carrying cost. That single comparison is why a landlord who accepts a higher quote from a contractor available on Monday usually finishes ahead of one who waits three weeks for a lower quote.

Speed is the variable that pays. Price is the variable everybody negotiates. Weeks are the unit that matters here, and points of interest are not.

What are the routes?

Four, and they are not interchangeable.

Reserve cash is the first. It carries no interest, no application and no paperwork, and the reserve exists precisely for expenses of this shape. Using it is not a failure of planning; it is the plan working.

An undrawn secured facility is the second. It costs nothing until drawn, it is priced against a published index, and for most established landlords it is the largest source available. Its weakness is that it is reviewable, which matters in a bad year and not in an ordinary one.

A policy loan against a participating contract is the third. It is smaller, usually dearer on rate, and certain in a way the facility is not, since no institution can withdraw it. It is a second or third call and not a first.

A supplier or dealer plan is the fourth, and it is the one most often used. It is offered at the counter, on the day, by the person quoting the work, and the convenience is real. The cost is usually the highest of the four, sometimes by a wide margin, and the promotional period ends whether or not the unit is rented. Each of the four has a season, and none of them is always right.

How is the right route chosen?

By the size of the job, the state of the reserve, and how soon the work has to start.

A small job, a few thousand dollars of paint, cleaning and minor repair, comes out of the reserve and is rebuilt over the following months. Borrowing for it adds paperwork to an expense the reserve was sized for.

A large job, a kitchen or a bathroom or a mechanical system, is where the facility earns its place. The sum is big enough that the fixed effort of drawing is worth it, and the work usually adds value that supports the rent for years and not months.

An urgent job, where the work cannot wait and the reserve is already spent, is the one case where a policy loan is the sensible answer and not the convenient one. The advance arrives on a written request without a credit decision, which is exactly the attribute that matters when the file will not support a new application this month. The pressure is what makes the expensive route look reasonable.

The dealer plan is rarely the right answer and is frequently the one taken, because it is the only one available at the moment the decision feels urgent. Deciding the route before the tenant gives notice removes that pressure entirely.

What is a repair, and what is an improvement?

The distinction decides the tax treatment, and it is decided on the facts of the work and not on what the invoice is titled.

Work that restores the property to the condition it was in is generally a current expense, deducted in the year it is incurred, under the income earning test. Replacing a broken window with a comparable window, repainting, repairing a furnace, fixing a leak: these are ordinarily repairs.

Work that betters the property beyond its original condition, or that materially extends its useful life, is generally a capital outlay under section 18(1)(b) of the Income Tax Act. It is added to the cost of the property and recovered through capital cost allowance and not deducted at once. A new kitchen where there was a serviceable old one, an addition, a full window replacement in modern units where single panes stood: these ordinarily sit on the capital side.

One invoice can contain both. A contractor who repairs the plumbing and installs a new vanity has done two things, and an itemised invoice is what allows an accountant to treat them correctly. Ask for the itemisation while the work is being quoted, because a single line reading renovation is worth arguing about later and cannot be reconstructed.

None of this is tax advice and the practice does not give tax advice. It is the shape of the question a CPA answers.

Which work raises the rent, and which only spends money?

The two are not the same list, and confusing them is the commonest way a turnover budget doubles without the rent moving.

Work that a prospective tenant can see and price is the work that moves the rent. A clean kitchen, a bathroom without stains, floors without damage, light, paint, and appliances that look like they will last the lease. Those are the items a tenant compares against the other unit they viewed on Saturday, and they decide what the unit rents for and how quickly.

Work that a tenant cannot see moves nothing in the short run and matters over a decade. Insulation, a service panel, drainage, a membrane. None of it appears in a listing photograph and all of it decides whether the building is still economic in fifteen years. It belongs in a capital plan funded from cash flow and not in a turnover budget funded under time pressure.

The trap is a turnover where both lists are attempted at once, because the unit is empty and the trades are already on site. That is how a three week turnover becomes eight, and the eight weeks of carrying cost exceed the value of the invisible work by a wide margin. Do the visible work at turnover. Schedule the invisible work in a planned window, with a tenant in place where the trade allows it.

There is a third category worth naming, which is work done to satisfy the owner and not the market. A finish the landlord prefers, a fixture they would choose for their own home, a colour scheme. None of it is wrong and none of it raises the rent, and it should be recognised as spending and not investing before the cheque is written.

Does the financing route change the tax position?

The deductibility of the interest follows the use of the borrowed money, and on that test the routes are treated alike.

Interest on money borrowed for the purpose of earning income from property may be deductible under section 20(1)(c), whether the money came from a secured facility or from a policy loan. What differs between them is the ease of proving it. A facility drawn and paid directly to a contractor leaves a clean record. A policy loan deposited into an account that also holds rent, salary and a tax refund creates a tracing problem that may not be solvable later.

The practical instruction is the same in both cases and it is small. Let the borrowed money touch one account that holds nothing else, pay the contractor from there, and keep the statement. It costs an hour and it preserves an argument worth several years of interest. An hour of discipline at the moment of the draw is worth more than an argument two years later.

What should be arranged before the tenant leaves?

Four things, and all of them are easier before the notice arrives than after.

The trades. A contractor available on Monday is worth more than a contractor who is cheaper in three weeks, and the good ones are booked. Establish the relationship during a quiet period and not during a turnover.

The materials with lead times. Cabinets, certain windows, specific flooring and anything on backorder decide the schedule. Order them against a planned turnover rather than discovering the lead time after the unit is already empty.

The money. Decide the route in advance, so the decision is made on the arithmetic and not on what is offered at the counter. If the route is a policy loan, confirm the available loan value with the insurer in writing before you need it, because an illustration prepared at issue is a projection and not a balance.

The scope. Decide what raises the rent and what merely pleases you. Landlords lose more money to scope creep during a turnover than to any financing decision, and the creep happens because the unit is empty and the trades are already there.

What does a dealer plan really charge?

More than the headline, and the structure of the charge is where the surprise lives and not in the rate itself.

A supplier or dealer plan is credit arranged at the point of sale, usually by a finance company and not by the retailer whose name is on the paperwork. Two features recur. The promotional period, during which payments are small or deferred, and the rate that applies afterwards, which is ordinarily much higher than a secured facility. The plan is designed on the assumption that a meaningful share of borrowers do not clear the balance inside the promotion.

The second feature is the treatment of the deferral. On many plans, interest accrues during the promotional period and is charged retroactively if the balance is not cleared by the end of it. A landlord who expected the first six months to be free and clears the balance in month seven can receive a charge covering all seven. Read the clause that governs this before signing, in the agreement and not in the brochure.

None of that makes the route illegitimate. There are turnovers where the plan is the only money available on the day and the work cannot wait, and paying a premium to keep a unit rentable is a defensible decision. What is not defensible is taking the plan by default, at the counter, without having compared it with a facility that was already in place and cheaper.

The rule that prevents it is a single decision made in advance. Know your route before you walk into the store, and the counter offer becomes an option and not the plan.

What does this look like across a portfolio?

It becomes a schedule and not an event, and the landlords who handle it well are the ones who made that shift.

With one unit, a turnover is an occasional disruption. With eight, turnovers happen most years and sometimes twice, and the work stops being an emergency and starts being a line item. At that point the sensible move is to treat the renovation budget as a recurring cost of the portfolio, funded monthly, and not as a surprise funded by whatever is at hand.

That changes the financing question completely. A landlord who sets aside a fixed amount per unit per month arrives at each turnover with the money already present, and stops paying interest on turnovers altogether. The amount is derived from experience: take what the last three turnovers cost, divide by the months between them, and fund that.

The contract sits outside this cycle and not inside it. Turnover money is recurring, predictable and short dated, which is the opposite of what a participating contract is good at. Where the slower capital belongs is set out in where capital waits between properties, and the reserve that covers the ordinary turnover is dealt with in the vacancy and the repair.

What records should the turnover leave behind?

A folder per unit per turnover, and it takes less time to build than to reconstruct.

The itemised invoices, separated by trade, so the repair and the improvement can be told apart by somebody who was not there. Photographs before and after, dated by the camera and not by memory, which settle both the tax characterisation and any dispute about a deposit. The dates the unit was vacant, because that is what turns a vague sense of turnover cost into the number this page has been asking you to calculate.

The financing record belongs in the same folder. Which route was used, what it cost, and when the balance was cleared. Three turnovers later that record is what tells you whether the dealer plan you keep taking is costing more than the facility you already have, and without it the comparison is a matter of impression.

Landlords who keep this find two things within a couple of years. Their turnover cost per unit is higher than they believed, which is uncomfortable and useful. And the routes they take are not the routes they would choose on the evidence, which is the point of keeping the record at all. The arrangement as a whole is a sequence, and turnover money sits near the front of it.

Who this helps, and who it does not

It helps a landlord who has been paying for turnovers on a card or a dealer plan and has never compared that against the alternatives, which is a larger group than the group that admits it.

It helps a landlord assembling a portfolio who wants the turnover cost budgeted before it arrives and not absorbed afterwards, and a landlord who has discovered that the empty weeks cost more than the work.

It does not help a landlord whose reserve does not yet exist, because the answer there is the reserve rather than a financing route. It does not help someone looking for a reason to fund a contract, since a contract is a poor instrument for a recurring short dated expense and this page says so plainly. And it does not answer the tax question, which belongs to a CPA who can see the invoices.

The whole arrangement, and where a participating contract does and does not belong beside a portfolio, is described on the real estate investors page.