What is the financial risk of buying a rental property with a sitting tenant paying below-market rent?

The core financial risk is that you generally cannot simply raise the rent to market levels after buying the property; the Residential Tenancies Act, 2006 caps most annual rent increases for a continuing tenancy to a set guideline percentage announced by the province each year, which is typically well below the gap between an existing below-market rent and current market rates. That gap usually only closes once the unit becomes vacant and can be re-rented at a new rate, which depends entirely on when, or whether, that particular tenant eventually moves out.

When underwriting an investment purchase with a sitting tenant, treat the existing rent, not an assumed market rent, as your realistic income for as long as that tenancy continues, since above-guideline increases are only available in narrow circumstances and are not something to count on. This risk should be reflected directly in your purchase price and expected returns, and it is worth discussing with your lawyer or accountant how a below-market tenancy affects the investment's actual numbers before you commit.