Like many long-time investors, from time to time I get bored and deviate from my tried-and-true passive income formula. We all have a story like this: the lesson learned, the wise advice we can give to those who seek it. This is one of those lessons and I hope you can learn from it.
As the name Zen Investor implies, my investment style has always been to look for renovated or new condos with an already established management company and a passive and positive cash flow. Not that I am against the daily routines of property management (although I must admit that I have better things to do with my time), but I developed this investment model out of a matter of necessity: always busy looking for the next mature market and ideal. project, I travel for months out of the year and just can’t give each project the time needed for a quality management program.
But like I mentioned before, sometimes I like to test the water, just to see how it feels. Well boy did I get burned!
What was the beast that brought me down? A competitively priced 11-story building in the heart of Montreal, Quebec, strategically located near a hospital and university.
Sounds pretty good, doesn’t it? Well, let’s take a closer look.
Do not misunderstand I know that buying a multiplex is a different animal than buying managed condos. It is not the same type of investment, far from it. But let’s take this experience to see how different it turned out to be, comparing it to my typical condo investment model.
The multiplex
Capitalization rate:
5% Cash on cash: 3%
Potential appreciation: 3% per year
The managed condo
Capitalization rate¹: 7%
Cash flow ²: 12%
Potential recovery: minimum 3% per year
¹ Net income without mortgage / sale price
² Refund cash over cash in my initial payment
If those numbers don’t convince you, don’t worry, it gets worse.
First, after interviewing a thousand and one management companies, I realized that outsourcing management for something less than an 11-door building was simply not profitable. I started to imagine myself with a wrench in hand, chasing rent checks, wondering how much money I would have to set aside for advertising. It is not a pretty image.
But it’s not just that he’s allergic to elbow grease. The numbers on the multiplex started to look really bad when the inspection revealed that $ 30,000 worth of bricks was needed in the building. My cash in cash dropped to 2-3% in the first three years, and I was only able to pray for 5-6% in cash in the fourth year.
Which finally sent me rushing home to my Zen Investor model of buying wholesale managed condos. Let’s face it, it’s hard to beat. And there are too many things against investing in multiplex – ROI and capitalization rates are much lower, so you have the time and effort to manage tenants, business risk of non-paying tenants, maintenance and the major repairs involved in these older buildings. …
So unless someone can convince me otherwise, I’ll stick with what I know works: the Zen Investor model. Life is too short not to be a Zen investor!