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 3 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+ 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.

Why Invest in Real Estate?

Labour Board statistics say that the average hourly wage in BC is 18/hr. But, let's say you are a tradesperson with a ticket and you make 45/hr. Or, maybe you went the higher education route and landed a corporate job with a 6-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. Needless to say, 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.

So with that in mind, lets break down the actual trade-off between hours spent working on, or thinking about, an investment property and the benefit received in return.

It's Not Always Easy

Let me use the worst property of my Kelowna real estate portfolio as an example, 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 vs. an active landlord.

The property was a duplex with basement suites in a fringe location. I had a revolving door of tenants, all of which lived from paycheque to paycheque and all of which 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 finding a new renter pronto. This same property had the toilets back up three times that year, not to mention a broken down washing machine that required replacing, and a tree that fell on the power lines. It was a nightmare.

Hourly Breakdown for One Investment Property:

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 lets go high)
  • Communications with tenants monthly:  1.5 hours
  • Banking : 1 hour
  • Bookeeping : 1 hour
  • Advertising : .5 hours
  • Tenant Screening: .5 hours ( 2hr x 3 times per year )

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

Investment Property Cash Flow Example:

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, 2 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 4%

So now lets 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 $4000 for the year so let's just round up to another $350/mo.

The total monthly expenses averaged $3,250 per month.

My monthly rent was $1,900 per side, for a total of $3,800 monthly from the property. This generated an annual cash flow of $6,600.

"At the same time, the property appreciated by 5% a year in line with the 80-year average (not the double-digit stuff we're seeing now). This 5% resulted in $35,000 in capital appreciation".

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, which isn't 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 pay down was $12,000.

At the same time, the property appreciated by 5% a year in line with the 80-year average (not the double-digit stuff we're seeing now). This 5% resulted in $35,000 in capital appreciation.

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

Can You Really Make Money By Investing In Real Estate?

Dividing this by the same by the 102-hour input and 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?

What Beginners Need To Know About Investing

You see people who 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 8 hours of effort a fair trade off for a $4,000 holiday? Think of the worst 8 hour day you've had at your current job. The absolute crappiest day you can remember. Would making $4,000 at the end of that day have alleviated any pain?

So yes, I invested $150,000 in a 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 is 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 8% 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% passively. The property manager with their 102 hours invested, received approx. $35/hr

Funny how that works.

Posted by AJ Hazzi on
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