Buying Where You Don`t Live

[KevinMurray]

Living in an expensive market makes it difficult to purchase real estate as a novice. It seems the properties are much more affordable across Canada. What is your experience of buying real estate where you don't live? The management of the property could pose several issues and a management company could cost to much.

 

[Thomas Beyer]

[quote user=KevinMurray]The management of the property could pose several issues and a management company could cost to much.
Yes property management is critical. You either do it yourself, and possibly never buy another asset in your life, or you hire a competent firm and pay them 10-12% of rent collected and have no headaches with a good firm, and continue buying 45 more properties and retire a multi-millionaire. Which approach costs too much ?



I assume you also don't make your own bread, toothpaste or build your own gasoline plant to fill your vehicle, although you may. Making bread, as an example, might cost you only 50 cent in material but 3 h of your time, so paying $4 at Safeway or your local baker usually makes more sense. The baker makes bread in bulk and sells it for a tiny profit per loaf, but likely also doesn't make salami himself.



In life you make or you buy, either services or products. Same in real estate. You could also paint your own property, do the roof yourself or do your own legal work, but most folks outsource this. Why is PM any different ?



If the margin for a PM is too tight perhaps the asset should not be acquired.

 

[kfort]

If pricing in management at 10% kills cash flow then it was a bad deal to start with. My personal experience had been a good one but I also started off living there, then moved away. So my systems were already established. Plus I was ready to step back a bit. Starting off this way would be trickier, be sure your team is too notch.

 

[Dan Golby]

We just bought a property away from home, partly because it was a good deal in a strong market and the other reason was just to prove that we could do it and we were comfortable with it.



The property management obviously hurts the cash flow, but it still cash flows positive and is a great investment. Build a great team and execute and don't get caught up in the fact that you don't get ALL the profit, because you don't have to do ALL the work either.



I like the restaurant analogy: If you go to a restaurant and order a burger and fries you usually have to tip the waiter/waitress 10%, and all they did was carry some food to your table that COST you money (and that is a bad tip). With a property manager you are paying somebody 10% to watch your asset that MAKES you money....which is a better use of capital?

 

[trevismcconaghy]

Excellent thoughts on becoming an absentee owner to Dans post.

The critical thing here is building a good TEAM to manage your property, or using a reputable PM company with a team in place.

Initially, I had a difficult time myself in hiring others to do work which I could do. When I started to value my TIME, it is well worth hiring good people to do what they do best, and better using your time to do what you do best.

If I can find or create just one more deal worth $30,000, why would I paint the inside of the unit, or deal directly with tenants? Time for the next deal...... It is worth using other for PM and freeing up TIME.

 

[KevinMurray]

Wow! Thanks for the response everyone. This was eye opening to say the least. I really appreciate the analogy used and moving forward I will consider the cost of a PM into my operating expenses. Overall I think I will end up with a better asset.



My first property was very tight on cash-flow so I have been managing it myself. It hasn't been difficult but has been time consuming at times.

 

[Rickson9]

[quote user=KevinMurray]Living in an expensive market makes it difficult to purchase real estate as a novice. It seems the properties are much more affordable across Canada. What is your experience of buying real estate where you don't live? The management of the property could pose several issues and a management company could cost to much.





I'm a real estate novice. I purchased condos and detached homes as rental properties in Phoenix, AZ which is away from my home in Toronto - I think a 5-6 hour flight (I don't remember exactly; it's been awhile since I've visited). My experience has been fantastic. Property management costs 8% of gross rent. Which appears to be within the range of normal.



I never invest to do more work. I always invest to do less work. I don't understand people who actually want to spend time working on their real estate 'investments'. I have a wife, daughter, family and friends with whom I would rather spend time. Honestly, even if I didn't have all those people, I would still rather watch television.

 

[3canctheayr]

I agree that PM's should be factored in, but only in the following situations, IMO;



-You already have a small collection of buildings and time is becoming an issue. Hire one so you can focus on growing your business.

- Location, the property isn't nearby to you.

-You have lot's of starting capital and can easily afford to pay them.



IMO Every small time novice property investor should do their own management for at least a couple years and a few properties at the start. Why?

- it conserves precious cash flow which is very important when it is just a trickle.

-Because, by learning how to run your own buildings properly, you will know learn to choose the right PM, and will know quickly if they are being straight with you or playing games.

-Also, if a problem develops with the PM, or they for some reason can't fulfill their commitments, you will already have the skills and knowledge to temporarily step in and run things til you replace them.

-Also, by doing your own work on the first few units, you develope a much better eye when viewing buildings to purchase.

 

[Thomas Beyer]

[quote user=3canctheayr]

IMO Every small time novice property investor should do their own management for at least a couple years and a few properties at the start.
While that may be true for some people, I think generally this is a bad idea as most novice investors do not have the skills nor legal background nor stamina nor the time required to this themselves properly. Specifically, as detailed in my book, I was a very busy IT professional in the late 90's when I started in real estate investing but had a bit of money to invest, so I bought one condo a year for 3 years, then switched to more economic apartment buildings. I did not have the time nor the knowledge nor the inclination nor the desire to manage these condos, and if I had done it myself I probably would have never bought more real estate. Today I co-own a PM firm managing 1500+ units but I do not run it; but a far more capable president who is also a co-owner. One has to specialize.



Managing properties yourself makes sense only if you have the time, and the desire to actually learn bot the formal and informal rules of the business. I still believe that focus on finding the assets and finding investors is where you should spend your time to build significant real estate wealth, not property management, as many capable firms or individuals can be hired in that space (like in taxation, accounting, painting, plumbing ..)



Managing properties, like being a tax expert or a painter or a mortgage broker or a bread maker or a salami maker, is a skill that takes a certain type of person with abilities, formal training and time to hone one's skill. Yes, some real estate investors also paint, and some also do their own taxes, and some even bake bread, so for some managing their own assets makes sense, but for most it does not. Use your valuable time rather for finding more assets, finding investors or enjoying other more pleasurable tasks in life.

 

[Dan Golby]

[quote user=3canctheayr]

IMO Every small time novice property investor should do their own management for at least a couple years and a few properties at the start.


Some great points, and we do have an existing property that we have self-managed for 2 years. Overall it has gone fairly well, but there is room for improvement. Since getting involved with a professional management firm (and joining REIN) I have learned some tips and tricks that I will be using on my existing property. I'm not sure I would have learned them otherwise.



People often have an attitude of "anybody can do that" when it comes to property management, and given time, training, and experience this is true, but it is true for anything. As an electrician I have made good money over the years fixing the work of do-it-yourself people who had the "anybody can do that" attitude. Don't get me wrong, sometimes they do a fine job, other times it was a major fire hazard....all I'm saying is it doesn't hurt to hire a journeyman if you're an apprentice.



Time is also a huge factor as mentioned by others several times, I have 2 kids ages 1 and 3 and my job takes enough time away from them, real estate doesn't have to.

 

[KevinMurray]

I have managed my first investment (1 bedroom apartment in east vancouver) for the past 4 years. The only major benefit has been an education and an understanding of what goes into the process. I jumped into buying a place without any real strategy at the time but lucked out with the numbers. Moving forward I am definitely taking a PM company into account so I can focus on actually building a real estate business and not a hobby. Doing the research, property analysis, and partnership development seems like a far better use of my time.



I am excited to get started as I was officially approved this morning!

 

[Rickson9]

[quote user=3canctheayr]I agree that PM's should be factored in, but only in the following situations, IMO;



-You already have a small collection of buildings and time is becoming an issue. Hire one so you can focus on growing your business.

- Location, the property isn't nearby to you.

-You have lot's of starting capital and can easily afford to pay them.


Also: You collect a lot of rent relative to your purchase price and can easily afford to pay them.



[quote user=3canctheayr]IMO Every small time novice property investor should do their own management for at least a couple years and a few properties at the start. Why?


I think each investor should decide what works best for them. Having said that, I disagree with all of the below points (for me), and I'll give my reasoning. Again, to each their own. What works for me may not work for others and vice versa.



[quote user=3canctheayr]
- it conserves precious cash flow which is very important when it is just a trickle.


I don't really care about conserving cash flow because I purchased at prices where I had 20% gross margins. That's more than enough to pay for a PM. I never had a "trickle" of cash flow. Nor would I invest in a situation where I would have to manage a "trickle". Unless I can comfortably pay somebody else to do the work, I won't get involved. I don't like work. I'm extremely lazy. I don't shovel my own snow, cut my own grass nor do I do any maintenance around my own home. Other people are different. Some people really like doing it.



[quote user=3canctheayr]-Because, by learning how to run your own buildings properly, you will know learn to choose the right PM, and will know quickly if they are being straight with you or playing games.


There are enough sources of information where I didn't need to learn how to run my own buildings to determine if my PM was being straight with me. I've never had a problem with this.



[quote user=3canctheayr]-Also, if a problem develops with the PM, or they for some reason can't fulfill their commitments, you will already have the skills and knowledge to temporarily step in and run things til you replace them.


I constantly get solicited by other PM companies to switch. I ignore their ads and phone calls. I don't even know how they find me since my properties are in Phoenix, AZ and I'm in Toronto. They're obviously doing some land registry searches. I like my PM at the moment. If I had to switch, there would be enough for me to choose from. For my current PM, I simply interviewed 3-4 of them (again using the internet to determine what questions to ask), and picked the one that I felt understood what I needed.



[quote user=3canctheayr]-Also, by doing your own work on the first few units, you develope a much better eye when viewing buildings to purchase.



I never raised a hammer and I feel that I had no problems as a novice without "doing my own work" in evaluating the properties for investment. Only speaking for myself, being handy (or not) has had no impact on my ability to screen a building for investment.



I have to agree with Thomas on this one. I don't do my own accounting. I don't do my own legal work. And I certainly don't do my own maintenance. I don't want to do any of that stuff. If I can't get an investment at a price where I can easily pay for everything, I won't bother. Life is too short for me to do accounting/legal/maintenance/property management. I'm getting too old too fast as it is.

 

[3canctheayr]

I think when I used the term 'small time investor' in my post above, I should have defined what I meant by that;



To me, a small time investor is someone that has just one or two units and is just starting out, with very limited capital.



I do get that some investors will be completely helpless, or hopeless, or have no time, or location challenged when it comes to actually working on and with houses, so for them a good PM, may be the way to go, as long as they've priced it in when they bought.



Personally I feel quite comfortable doing almost anything with buildings etc. and can do work better than a lot of contractors & trades. Ultimately, I want to pay people to do all the work, I just can't afford to right now. I've learned a ton in just the last 3 years alone out of many more being a small LL, and am currently working on getting a 3rd building and then a 4th soon after.

 

[invst4profit]

I also strongly advise that those starting with their first property purchase reasonably close to home and self manage. Personally I believe, based on the number or bad property manager stories out there, that without the first hand experience of managing your own property you are at the complete mercy of a management company. How can you know if you have a good management company or not if you have nothing to base there work on.

You need to know what is and is not necessary to be done and the cost of what that work really is. How do you know for example if the management company is not having a relative do unnecessary work at exorbitant cost if you don't know your own business. You can not know everything but you can put the effort into knowing as much as possible otherwise your business is at the mercy of others. Trust only goes so far in any business.



Once you have first hand experience you can then graduate from a Landlord/Investor to Investor.

 

[kfort]

I think most would agree you need to have at least enough knowledge about the management process to know if you are getting taken. Being able to properly evaluate performance of all team members is an asset I enjoy having. If I had never self managed anything I would probably be expecting too much from those folks.

 

[Thomas Beyer]

[quote user=Rickson9] Life is too short for me to do accounting/legal/maintenance/property management. I'm getting too old too fast as it is.


Well said.

 

[Rickson9]

[quote user=invst4profit]You need to know what is and is not necessary to be done and the cost of what that work really is. How do you know for example if the management company is not having a relative do unnecessary work at exorbitant cost if you don't know your own business.


Again only speaking for myself...



If my PM tells me that I need work done, I first get all the details (how it happened, what was involved, cost, materials, labour, etc.) and then tell them that I would get back to them. I then tell this to 3rd parties. I also get quotes from the 3rd parties. If maintenance made sense and the 3rd party quotes were close to what my PM was quoting me, then I gave my PM the go-ahead.



After I cross-reference a number of different sources I can get a pretty good idea of what is needed (but still don't know how to fix it myself). I always ask the same boring questions: Give me the background; what happened? What would cause that to happen? What was affected? Why would I replace the part vs. getting a new/used one? What needs to be replaced? How much does that cost? How much time would it take to do that? What is the labour cost per hour? Blah blah blah.



My PM provides me with monthly statements (including copies of invoices if there was work done), which I correlate with my emails and bank account to make sure it all made sense.



That's pretty much it. There's so many people out there with expertise that it's easy to find
out what is involved without actually having to do any manual labour
whatsoever. There is no point (or financial benefit) for me to know how to do any maintenance work. It would actually be a negative since it would take me time to study, learn and execute - which would take time away from things that I actually want to do.

 

[invst4profit]

I agree there are many ways to manage a property and a property manager but again without having managed yourself even your system of counter checks may likely be foreign to the novice "investor".

Managing a first property is easy, takes very little time and should be a prerequisite in this business but I also believe it should be mandatory for individuals to take landlord/tenant regulation training before being allowed to purchase their first rental property.



Remember self managing does not mean you have to change toilets yourself. It simply means you are on site, determine what needs to be done and call the repair person.

Having a property manager means he is on site, determines what needs to be done and calls a repair person.



After a few unnecessary calls to a plumber, simply to watch him plunge a toilet, a landlord learns the ropes pretty quick. A property manager however would continue to call a plumber and bill the landlord for his time and the plumber.





The investor is all too often at the mercy of the manager and the managers brother-in-law plumber/carpenter/painter etc.

 

[Rickson9]

Thankfully the PM company that I use hasn't been one to "continue to call a plumber and bill the landlord". I haven't had any maintenance issue that comes up on a regular basis so far. Knock on wood.



However, having said that, I didn't want a PM that was an individual or a couple of individuals. I wanted a business with account managers, finance department, leasing agents, maintenance co-ordinator, etc. If I had an issue with any aspect of the management of my property, I know which department to call and who to speak with. If the individual can't help me, I know how to escalate. I haven't had a problem yet. Again, knock on wood.