Real estate is worth it

I like to tell war stories.

You know, the really gritty, tough moments of being a Kelowna real estate investor — the nightmare tenants who are three months behind on rent, the money-sucking roof repairs, flooded basements, and backed-up sewer lines.

Maybe it’s a badge of honour, or maybe I just like to vent, but inevitably every time I share one of these trials with someone, I get a similar response.

People say, “Yeah, I just don’t think it's worth it” or “Seems like it’s not worth the hassle."

Now, to be fair, typically the people I’m chatting with aren’t high-powered executives or independently wealthy types.

They’re regular, working-class people like you and me, who work a 40 or 50 plus hour week in exchange for a wage or salary. Most of them are daily facing some level of challenge at their workplace, whether physical, mental, or emotional.

Labour Board statistics say that the average hourly wage in B.C. is $26. But let’s say you are a trades-person with a ticket and you make $45 an hour. Or maybe you went the higher education route and landed a corporate job with a six-figure salary.

No matter your position in the work force and no matter what your income, you still face a disproportional amount of unpaid, off-the-clock hours thinking about, worrying about, and otherwise preparing for work.

Most people have made the decision to spend as much as one half of their waking hours on work-related things that result in no pay. This is a fact of life.

We must be willing to focus our attention on, and endure the hardships of work in order to earn the money required to fund our lifestyle.

With that in mind, let's break down the trade off between hours spent working on, or thinking about, an investment property and the benefit received in return.

Let me consider the worst property of my Kelowna Real Estate portfolio because it has the weakest revenue and causes me the most headaches. 

I’m going to go back to a time before I delegated said headaches to a property manager and became an actual investor versus an active landlord.

The property was a duplex with basement suites in a fringe location. I had a revolving door of tenants all of whim lived from paycheque to paycheque and were chronically late on their rent.

One of the worst years saw two midnight dashes that required extensive time and money consuming, clean up and the need to re-rent. This same property had the toilets back up three times that year, a broken down washing machine that required replacing, and a tree that fell on the power lines.

It was a handful.

I will now attempt to estimate the hours spent on this property for this year. I am going to over estimate the hours spent to be on the safe side. 

  • Collecting rent from 4 tenants monthly: 2 hours (can be automated but the late ones require time)
  • Attending to maintenance items monthly: 2 hours (would go months with nothing, but let's go high)
  • Communications with tenants monthly: 1.5 hours
  • Banking: 1 hour
  • Book keeping: 1 hour
  • Advertising: .5 hours
  • Tenant Screening: .5 hours (2 hr x 3 times per year )

Total: 8.5 hours per month x 12 months equals 102 hours per year — Or 102 individual ass pains in one trip around the sun.

OK, so we have established the cost — 102 hours out of the roughly 2,500 productive working hours per year. Or, to put in another way, two full working weeks of crap to deal with. If you are already working a 50-hour week, you are increasing your total workload in your life by four per cent.

So now let's examine the benefit:

  • This duplex was purchased for $700,000
  • The financing of $560,000 cost me $2,300/mo
  • The taxes were another $400/mo
  • The insurance another $200/mo
  • And the maintenance bill for the cleanup, plumber visits and appliance repair was almost $4,000 for the year so lets just round up to another $350/mo

The total monthly expenses averaged $3,250/mo

My monthly rent was $1,900/side for $3,800/mo total

Annual cash flow of $6,600

Now, if that was all I got, the $6,600 bottom line divided by my 102 hours of output has me at approximately $65/hr. Not bad, but there might be more enjoyable ways to earn $65 an hour.

Every time I made a mortgage payment, using my tenants rent money, my mortgage balance was reduced by $1,000. At the end of the year, the total paydown was $12,000.

At the same time, the property appreciated by five per cent a year in line with the 80-year average, not the double-digit stuff we’re seeing now. This five per cent resulted in $35,000 in capital appreciation

Combined, I have $47,000 in new equity and the $6,600 in net cash flow for a total benefit of $53,600.

Dividing this by the same 102 hour input, we arrive at a $525 per hour.

That’s a pretty spectacular hourly rate by most people’s standards.

So I ask you this question: what type of work would you be willing to do for that hourly rate?

If I called you up and said, I have a part-time job offer for you and that the job would entail coordinating service providers, fielding phone calls, collecting rent (sometimes having to ask more than once), running some ads, checking some references, filling out forms, and some light book keeping and banking.

I’ll pay you $525/hr for this job.

Are you going to tell me, "Nah, I’ll pass?"

You see people that don’t own investment property seem to only hear about the horror stories and they develop a bias that keeps them on the sidelines.

They see the costs, the hassles, the worry, and the unexpected surprises and expenses. But the benefits have never been properly explained.

As shown above, you can do a proper cost benefit analysis and determine for yourself. Is eight hours of effort a fair trade off for a $4,000 holiday?

Think of the worst eight-hour day you’ve had at your current job. The absolute crappiest day you can remember. Would making four grand at the end of that day have alleviated any pain?

So, yes, I invested $150,000 into Kelowna Investment Property to buy myself a job, the same way someone might buy a franchise for $150,000. Not with an expectation of a passive return, but as an opportunity to be their own boss and actively earn some dollars in exchange for hours worked.

When you are doing the work yourself, I think this is a better measure, or a better way of answering the “is it worth it?” question.

At this stage, it’s more relevant to quantify what your time is returning to you rather than looking at the ROI or investment performance of the cash invested.

Once you graduate to having a property manager and you are no longer actively land lording, the metrics of internal rate of return and cash on cash return are more applicable. And, because you are paying yourself dividends, there are a myriad of options for dividend returning investments.

If you are someone with zero desire to be a landlord, but who would consider options for wealth building investments, here is how things can shake out with a manager doing all the work.

My bill for the year at eight per cent of the 3,800/month collected is $3,648.

The total benefit for the year is now $50,000 on my $150,000 investment, earning 33 per cent passively.

The property manager with their 102 hours invested, received approximately. $35/hr.

Funny how that works.


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About the Author

AJ is the owner of Kelowna’s downtown boutique firm, Vantage West Realty. The firm takes pride in breaking the mould when it comes to how they practice real estate. With a well-deserved reputation as a real estate renegade, Hazzi has been shaking up the Kelowna real estate scene since 2002.

Having been a student of real estate through two market cycles, AJ has come to see an absence of truly qualified professionals specializing in investment real estate. This has become AJ’s role within the firm and the community: To educate clients on how to achieve financial freedom through real estate.

Arming his clients with knowledge on where to find positive cash-flow, how to renovate for profit, and other creative avenues that most agents completely ignore, Hazzi has carved out his niche as a real estate investment advisor (REIA), and loves nothing more than educating people on the right strategy to capitalize on both boom and bust years.  AJ is a firm believer that the Kelowna market is rich with opportunity, if one knows where to look.

If you are in search of an advisor who practices what they preach, consider that AJ has built his own real estate portfolio up to include multi and single family cash-flow rental properties, development property, resort property, fix and flips, and commercial properties. By sharing the lessons learned from his own experiences, his clients get the knowledge and confidence to invest without having to make the expensive mistakes he and many new investors have made along the way.

His goal is to impart on people, especially of the X and Y generation, that depending on RRSPs and Government Pension Plans to look after us down the road is risky business. Most people don't realize that as little as one or two properties added to your real estate portfolio now, can secure a comfortable, even lavish, retirement.

Bringing a consultant's approach rather than the tired, old-fashioned sales approach, AJ and his partners offer a world class service from finding, pre analyzing, and negotiating your next acquisition, to property management, all tailored to today’s busy investor.

To hear what AJ Hazzi's clients have to say about his service view the testimonials.

Contact Information

For more details or to reach AJ Hazzi, please visit www.vantagewestrealty.com

Email [email protected] Cell 250.864.6433

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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