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The Psychological Price of Real Estate

This was one of the most important things I’ve read this month. Connie Campbell (Don Campbell‘s beautiful wife) posted a thought provoking article from INC. called The Psychological Price of Entrepreneurship on Facebook.

This has been me, through and through. I’ve been clinically depressed.

It’s also a lot of investors and real estate professionals I know – Realtors, mortgage brokers, contractors. I’ve used personal savings and sometimes credit cards to fund my business and my investing. I’ve stayed up nights wondering where the next pay cheque is coming from or if the tenants I don’t like have finally trashed the place. I’ve dreaded RTDRS hearings and difficult listing presentations. I’ve been through depression, therapists and the darkest of days. Real Estate is home to one of the highest divorce rates of any profession and I suspect the attrition rate of agents and investors will rival that of venture-backed startups.

There’s a couple things that help keep me on an even keel today:

  1. Knowing that I’m not in control. God is in control and I’m following his plan. He’s first, my vocation (my family) is second and I’m third. Serving God means respecting myself, my family, my clients and all of His creation.
  2. Taking mental health seriously. I’ve had a great psychologist in the past and I’m not afraid of seeking professional help in the future. Spiritual direction, a mens’ prayer group, confession and having a wife who is a social worker are all ways I actively examine my emotional bank account. We talk about mental health at home and with my family at least weekly.
  3. Staying conscious of what I’m eating, how much exercise I’m doing and how much me time I’m getting. This morning, like many mornings, I’m at a restaurant having a light breakfast and taking an hour to write. Sure, as a Commercial Realtor I could go work at one of the major firms but I’ve yet to be convinced that it wouldn’t drive me insane. I know that I need the flexibility to be creative and drive my business forward.
  4. Using systems and groups of like minded, supportive individuals. Places/people like RE/MAX, REIN, #krix, the prayer group Mike and I attend, my Church and my family are just a couple of these.
  5. Being honest about myself to myself. I have a couple groups of friends who get together and I know I can call when I’m down. From random ideas to my actual financials – it’s all out on the table. I’m not interested in being prideful and putting up a successful front. My priorities are in #1 above – being the biggest and best in other people’s eyes just isn’t a consideration.

Business is tough and by admitting when it’s tough we make ourselves stronger, not weaker.

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Is The Market Heating Up or Going Sideways?

We’re just into 2014. Calgary’s rocking out. Edmonton’s starting to heat up and I ran into three multiple offers in four days last week. People are bringing rents up by $100-200/month. Does it start to feel like 2004-2007 again? A little bit.

We’re a cyclical economy with a cyclical real estate market.

It doesn’t matter if we’re in a hot market or things have flatlined. There’s always ways to make money in real estate, but there’s a couple things that will help save you in the future if you buy smarter now.

  1. This is no time to skip due diligence. I dusted off REIN’s Property Goldmine Scorecard for some clients last month. Make sure you understand where you’re buying, what you’re doing and the fundamentals that drive the market. Learn about the property, the tenants, do inspections and searches, and always consult experts.
  2. Understand the difference between making a rational decision which may challenge your fears with making a foolhardy decision based on emotion where you overpay for a property. The former could involve buying a more expensive property than you ever have, but one that is supported by the income and quality of the property. The latter is often driven by the fear of missing out.
  3. When all else fails, buy quality and buy slowly. I know several investors who are bankrupt, the subject of lawsuits or are in jail. One of the unifying themes is that they grew far too fast and they bought stuff that was a good deal, rather than buying quality properties. When the market went sideways their values fell faster, the vacancies stacked up and the not-so-great financing fell apart. I bought a townhouse at the peak of the market in 2008, but it was a great unit in a decent complex with incredible tenants. Even with a $30,000 special assessment I’m still positive cash-flow and I’ve survived the dip. I credit that success to quality property, great tenants and great management.

This is the time to make careful acquisitions so you’re well positioned to ride the wave that’s coming.

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What To Do When Your Blog Has Been Hacked

Really, there’s only three things to do when you get hacked.

  1. Fix it.
  2. Apologize to your readers.
  3. Make sure it doesn’t happen again.

My last blog post went out looking fine to me. Then Josephine tweeted me with what I though was a joke about me going to the gym. I’d also had a previous hack experience at the start of December.

What people saw when they got the post emailed to them was this (thanks to Sharon for catching it and letting me know).

Now I’ve taken a bunch of time to clean it, secure this and several of my other sites and I’ve started using SiteLock to help prevent this from happening agin. If you’re having trouble reading or commenting, let me know. For the moment we’re praying we’ve got this locked down and that Google continues to not worry. Traffic is still steady.

It’s easy to fall into a lull where you don’t look at your websites and take the time to review their security.

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5 Thoughts on Critical Mass

One of the wonderful things about my job as a commercial and investment Realtor and as an investor is the conversations I get to have with incredible people. One thing that came up over coffee with a fellow agent and investor is the idea of critical mass in building a portfolio. She made an off the cuff remark while discussing another investor we know:

Really, you need about a hundred (multi-family) units to establish a critical mass, to really get some economies of scale, to make it worth hiring someone yourself.

I’ve got to agree. You can do perfectly fine using property managers, but you often need to have a decent portfolio to really get their attention. But it’s cheaper to do it yourself, especially if you’re using a good system. At about a hundred units you can hire someone to do things like maintence, cleaning, snow, landscaping, renovations, rent pickups and showing suite. You’ll still have the less interesting parts like book keeping, tenant screening, marketing, acquisition and disposition – many of which you can inexpensively send out to a virtual assistant. That’s another blog post though.

This already got me thinking about other critical masses when I got to page 44 of Malcom Gladwell’s David and Goliath . He goes into detail about things like deminshing returns, but it brings me to a couple other things which I’m going to list in no particular order:

2. Single Family Rentals. I think you need 30-50 doors before you get real cost savings and enough going on that you can hire someone just for you full time. Less if they’re larger properties, more if they’re lots of singles or condos. At 50 doors and $100/month you’ve got $5,000/month in cash flow which is enough to pay someone full time. You still get the benefit of appreciation and mortgage pay down, so if you were to hire someone with all that cash flow you’d still be able to do other things, or you can pay your self.

3. Property Managers. My experience is a good manager handling a mix of apartments and singles can handle 200-400 doors with admin support. If they’re making 6% on 200 doors with an average rent of $800, that’s a fee of $9,600, and half that is out the door as overhead and admin costs. It’s not a big money business – you make your money $50 at a time.

4. Dinner Time. Planning, shopping and cooking for just yourself sucks. It got easier once I was married but it wasn’t until my wife and I had our second son that we really got a critical mass for cooking.

5. Income. Gladwell quotes some other researches that more money stops bringing happiness at about $75,000 per year and I have to agree. Technically speaking, I think that the diminishing returns are for the short run, because if you invest and defer the satisfaction of the money beyond that for the future you’ll do better in the long run. In writing this, I just remembered that when Brent and I started the Davies Real Estate Group Ltd I said “really, I’d be happy if our business would throw off $100,000/year and we’d just bank or use the rest to buy buildings.”

What about you folks? Any industries or situations you can think of?

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I get a lot of email and sometimes it’s easiest to respond with a video.

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Calgary’s Freeman on the Land – Pure Nuts!

If you’re an Alberta landlord and haven’t heard about the case of Mario Antonacci, a.k.a. Andreas Pirelli, you’re missing out on a story that will take your mind on a journey to insanity.

This is the Calgary tenant who arbitrarily decided that he owned the rental property he was inhabiting, that the owner owed him $17,000 for unauthorized renovations and that the property was the embassy of the “First Nations Sovran Embassy of Earth”. If this sounds insane, you’re right.

I won’t go into the whole story, but you should listen to the CBC’s episode of the Current about the Freeman on the Land movement. In particular, listen to the tips from Ron Usher (the general counsel for the Society of B.C. Notaries) about how to recognize Freeman-style documents. They’re scary, scary people.

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The number one complaint I hear about managers isn’t that they do a bad job. It’s that they seem to cost to much.

Clients seem to begrudge their managers when a property has great tenants and is ticking along with no major repairs. There’s no real expenses. $1000 worth of rent comes in and the only deduction is the management fee. Usually I’m seeing 10-14% for decent single family property management.

Sure, it sucks when there’s no visible costs and you’re paying $100-140/month for the pleasure. But when the property goes vacant, think of how much time goes into getting the property re-rented.

    1. Receive notice
    2. Confirm vacating date
    3. Schedule out inspection
    4. Conduct out inspection
    5. Arrange repairs/renovations
    6. Supervise repairs/renovations
    7. Bill/invoice for repairs/renovations
    8. Arrange cleaning
    9. Supervise cleaning
    10. Bill/invoice for cleaning
    11. Generate/mail statement and cheque for tenant’s deposit
    12. Advertise rental (1-2 newspapers and 3-7 websites)
    13. Screen calls
    14. Arrange showings
    15. Evaluate applications
    16. Conduct credit checks and background checks
    17. Do move in
    18. Process damage deposit and first month’s rent
    19. Generate and provide statement to owner

Brent’s comment is every time a tenant turns over, it’s a cost of about $2,000. That’s both the costs above and the lost rent while it’s vacant. In the $1,000/month rental scenario, that suite has to keep running for over a year to make back what they just spent in time and hard costs.

Compare that to your lawyer who makes $800-1000 for a week’s work (most of which is done by assistants), or your Realtor who makes $5,000-10,000 per deal.

Property management is a nickel and dime business. It’s a hard industry to make money in and harder to do an exceptional job. You should hire the best people possible, overpay them and cut them some slack.

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