In last weeks instalment of “ The BIG Decision ” we took a closer look at Risk Tolerance and Capital Reserves. Bottom Line: It is never a good decision to get in over your head, both in terms of taking a greater risk than you are financially comfortable with, as well as purchasing an investment property that has large operating/capital expenses if you don’t have deep pockets.
Now, let’s keep the concepts of risk and reserves fresh in our minds as we investigate the impact that various investment property types have on our spare time.
The amount of time you are able to commit to an investment property is an important consideration when selecting the right property type to invest in.
Investing in real estate is more involved than simply purchasing a property and raking in paycheques. First of all, in many cases, you will be purchasing a vacant house, unit, or building, which means that you will either have to spend the time marketing your property yourself to secure a Tenant, or enlist the help of a realtor, which of course comes at a cost. This all ties into risk tolerance, as purchasing a residential house with a legal basement apartment is a much easier leasing process than erecting a multi-tenant industrial building and trying to secure 100,000 square feet of commercial Tenants.
Moreover, once the property is leased, you now have to manage the property on an ongoing, day-to-day basis. This is where time allocation is most at stake. Whether it is a 4-room student rental, or a 14 storey office building with 30 Tenants, electrical/mechanical items break, rents are due, Tenants get locked out of their space, disputes arise, driveways/parking lots need snow removed, etc., etc. Managing a property can turn into a full time job and are you going to be the one to do it? If not, you will be paying someone, or even a team of people, to manage your property on a part-time/full-time basis.
Below I will outline a few different investment options and what you can expect in terms of time allocation, duties and expenses:
- will require very little time input as a Landlord
- great first-time investment for those lacking real estate investment experience and spare time
- the monthly HOA fee you pay has property management and depreciation of roof/mechanical systems built into it, so ongoing maintenance costs/repairs are essentially non-existent
- in turn, securing a Tenant is your biggest obstacle/risk
- once a lease is in place, property management within the building will take care of repairs, snow removal, landscaping, noise complaints, etc.
- be aware though, the Tenant is YOUR Tenant, not the building owner’s Tenant, so all concerns must be channeled through you, at which time you contact the building’s Superintendent for remedy
- you will need to be easy to get a hold of and punctual in contacting those responsible for handling issues within the condominium to keep Tenants happy
- these properties can be found in abundance within Guelph, as many new mid-rise developments have been constructed on Gordon, Arkell, Victoria, and Claire Road, as well as some new high-rise developments downtown on the corner of Wellington and Macdonell
Detached Student Rental:
- requires an on-call mentality as a Landlord, but will still be manageable for a first-time investor
- being handy is vital, as the inability to complete simple tasks like quickly changing the lock on a bedroom door will annoy Tenants and quickly eat into your profits
- keep in mind that although renting out single rooms in a detached house can bring in a far better return than renting to a single family, the risk and headaches also increase
- the more Tenants you have, the more disputes that arise, the more items that break, the more accounts receivable you need to collect, the more turnover/vacancy you have
- many investors see renting single rooms in a University town as a real opportunity
- this is true, however, only if ALL rooms are rented
- also remember, the way you configure and market your property will determine the type and quality of Tenant you receive
- if you skimp on quality finishes and market single rooms, you will be leasing mainly to students who don’t respect the property as much, rent for short terms, and may run into money management issues (i.e. non-payment of rent)
- this all translates into lost income in terms of vacant rooms and capital spent repairing/refreshing the space for the next Tenant, not to mention more time allocated to dealing with 4 separate Tenants
- single family Tenants will generally cost you less time, money, and headaches, but with that comes a lower overall rental rate
- the hottest areas within Guelph for detached student rentals tend to be anywhere along Gordon Street due to it’s close proximity and direct bus routes to the U of G, around Zehrs Heartsland since there are amenities galore, and anywhere into the downtown core, especially around Waterloo Ave.
- these investment properties are more complex and a better fit for someone with real estate investing experience
- different legislation governs commercial tenancies than residential, so it is imperative that you understand how they compare
- understanding of zoning compliance, additional rent, accounting, and many other more complex items are necessary
- therefore, if this is beyond your area of expertise, it will come at a significant cost
- an industrial building for instance could have a Tenant mix of machine shops, automotive, woodworking, commercial painting
- how are volatile chemicals to be stored? Do I need an exhaust vent for my automotive repair Tenant? What price per square foot can I expect for my building? How much do I need to charge for additional rent to cover my operating expenses? Do I include depreciation of the roof, HVAC, and mechanical? How do I handle a commercial Tenant that isn’t paying their rent?
- these are all questions/answers that will differ from residential tenancies
- with so many different trades in one building, it’s systems are being worked much harder than a single family renting a house, so repairs can be a daily event
- does it make sense to have a full-time building maintenance staff? How much will it cost?
- be sure when crunching your numbers that you have accounted for everything the way YOU would be running the building
- this is where utilizing a realtor with commercial experience is of paramount importance
- a property for sale that is being marketed as an 8-cap may seem so attractive that you can’t wait to get your offer down on paper
- let an experienced realtor guide you through the process to avoid making a monumental oversight
- just a few of the things a good agent will do is review all of the tenancy agreements. How long are the terms, are there renewal clauses/early termination clauses, how strong is their covenant?
- review the income statement: is the Landlord doing the property management themselves? If so, that could cost 50k/year or more depending on the size of the building. Do you have the time to manage the building yourself? If not, how does that 50k affect the cap rate now? It may not be such a good deal after all.
- it is these seemingly minor oversights that can cause very major time and money related expenses
- commercial investment properties can be found all over Guelph, it is just finding one that’s actually for sale that is the tough part. They tend not to trade too often if they are producing a good return, and when they do, they tend to be off-market sales, so it becomes crucial to have the representation of a well connected investment realtor that has the inside scoop on off-market opportunities.
- although commercial investment properties are everywhere, as a general rule, Retail will be found on main roads adjacent to residential neighbourhoods, some Office will be found accompanying Retail, as well as in distinct business parks, and Industrial is almost always found in dedicated industrial parks away from residential houses for environmental reasons (can be found rurally too depending on zoning)