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Property Management: Is It Worth It?

 

Under Investment

 

Written by on August 4th, 2017

Property Management: Is It Worth It?

 

For residential property investors on Central Vancouver Island, the last two years has been exhilarating for those with a sizeable portfolio, while increasingly challenging for those patiently waiting for the right property to come along and in the process chasing the market up. Currently, you have about as much chance of finding cash flowing residential property without a sizeable down payment around here as the Canucks do of making the playoffs next spring…while not technically impossible, highly unlikely.

While returns are still far more attractive on a cash-on-cash basis than you would find in the Lower Mainland, the fact is margins are very thin and it has never been more important for investors to watch their spending to make the numbers work. So…how about that 10% property management expense? At first thought, it may seem like the property management expense is the surest way to ensure that your investment property will not cashflow. After all, the rental market is competitive, so place an ad on Craigslist, lock the tenants into a 1 to 2 year fixed term, and watch the rent cheques roll in… If you are currently managing your own portfolio, I can feel your eyes rolling through your screen. You know it is not that easy. In fact, tenant relations, maintenance issues, and general property management are the primary reason many investors avoid investing in the #1 wealth building asset class in the world. You’ve all heard the horror stories… the toilet floods at 2:00 am, the tenants disappear in the night without paying rent, the property unknowingly becomes a grow op… Over the past eight years or so, I have personally had quite a few tenants. While some were outstanding, I could probably write 2 or 3 blog posts about the horror stories and keep you thoroughly entertained, this despite being quite diligent with background checks on our tenants.

Maybe you are great with people, maybe you are extremely handy and can fix just about anything, maybe you are retired and enjoy having something to get up for in the morning, whatever the case may be, I am sure property management services are not necessary for all investors. However, if you are not investing in the #1 wealth building asset class that some say has created 90% of all millionaires because of the hassles involved with “active management,” you are really missing an incredible opportunity to secure your financial future. In my former life sitting on the other side of the fence working with primarily high net worth investors helping them build their wealth, I would attend sponsored seminars whereby we were wined and dined by some of the largest hedge fund and mutual fund managers in Canada. Part of the pitch they were trying to cement in the minds of the financial advisors in the room was that managed funds offered investors a very low-cost way to have the top money managers in Canada secure their financial future. No stock picking, no fixing toilets in the middle of the night, just set up that pre-authorized contribution and enjoy the margaritas on the beach in retirement.

Last year Morningstar determined that the average Management Expense Ratio (MER) on equity mutual funds in Canada is 2.35%. In comparison to the 10% charged for property management, that seems relatively cost effective. However, you are not comparing apples to apples. The 10% is on rental income actually generated. The 2.35% is on assets under management. Good, bad, 2008 when your portfolio is down 40% and you now have to work an extra decade to fund your retirement… you’ve got it, they are taking the 2.35% plus additional fees not included in the MER calculation. Translated to real estate, this would be like paying 2.35% of the value of your home each year to the manager regardless of whether the value goes up or down. On a $500,000, that is $11,750 per year. In this market, a $500,000 home would likely generate about $2,000 a month in rental income, $24,000 per year. 10% of that is $2,400, just over 20% of the cost that would be charged on the same asset value in the average equity mutual fund. That’s right when you do compare apples to apples, you are paying nearly 5x as much for fund management as you would likely be paying on a real estate asset of the same value and you have likely been doing so unknowingly for many years. I am sure you would be surprised to know that a 2016 survey by Nest Wealth determined these fees could cost the average Canadian household approximately$323,655 over their investing lifetime, about $80,000 more than the average household spends raising a child to the age of 18. Have I made my point? There is a significant cost incurred to invest in the financial markets. If turning over your hard earned money trusting that our financial service sector will ensure you a secure retirement with you taking all the risk and the fund managers taking their cut regardless of performance is something you justify as the cost of doing business, isn’t the services of a property manager who is ultimately paid for performance well worth the cost?

As far as I am concerned, all investors should be calculating in the cost of property management when evaluating properties for potential investment. If you are a regular reader of our Investor Insights series, you will know that I don’t recommend investing in properties unless the numbers make sense. In other words, clear cash flow potential after all costs have been considered (including 10% property management & 10% maintenance). There are real estate investment gurus out there suggesting that if a property is not generating annual rental income that is at least 10% of the initial cost of the property, you shouldn’t even consider it. While this may seem ludicrous and nearly impossible, it just shows you how over inflated our current market is. In Nanaimo, you would be lucky to get 5%. However, look outside of Vancouver Island, the Lower Mainland, the Okanagan, and as long as you avoid Toronto, you have a shot. I often hear people say that they only invest in their own backyard, they like the security of being able to drive by and check on their own properties. What I’d ask those folks is whether they hold any global funds or shares of international companies in their retirement accounts? Do they go visit the head offices of these global holdings and sit down to chat with the CEO to ensure they are being run to their satisfaction. No, of course not, that very notion is ridiculous, why would you need to do that when there is a professional money manager looking after the investment for you?…My point exactly…You can invest in real estate in Nanaimo, in other communities on the Island, across the country, and in many nations around the globe. In fact, by doing so you would be diversifying your holdings and could receive substantially higher returns. How would you go about doing so? Property management.

At the end of the day, the property management decision is up to you. If the hassles of property management are going to prevent you from investing in real estate in favour of the convenience of turning over your money to a well-compensated fund manager (who is taking 20-30% of the profits with 0% of the risk), I would suggest you may want to reconsider your approach. Real Estate has created more wealth in this world than any other asset class, and that is not likely to change anytime soon.

If you are considering an investment in real estate or need some assistance in developing a plan of action, put our team to work for you. Need property management services, we’ll point you in the right direction. Contact us anytime for your complimentary consultation at 250-751-0804 or info@jahelkagroup.com.