Taking the emotion out of property management – give it to someone else!

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.

Warren Buffett”

Let’s face it. Whether you are a home owner who has temporarily left Canada and want to keep your house, or a small investor who rents a condominium to students, you are not in this to lose money! Furthermore, in an inflationary world you want the value of your property to go up and up! Investors (as opposed to the “quick flip” artists) understand that property values increase partly as a result of the combined effects of inflation and compounding. Inflation and compounding take time. This means that you must hold and manage the property through that time period. How long? How would I know. Investors are not in the business of predicting market cycles.

This all sounds simple. In the world of real estate, inflation and compounding are as certain as death and taxes. So, why don’t people hold their properties? Why do people lose money in real estate?

I believe the answer is that: investors can make money in real estate if they are able to stay calm – to think objectively – to behave rationally – with an eye on the long term. In other words when it comes to investing:

–          the first issue is the nature of the investment

–          the second issue is the temperament of the investor.

So, when you consider an investment ask:

First, does this seem like a good investment? The answer to this is often based on the price you pay for it. Gold is a good investment at $100 but perhaps not at $1000. A property you are considering might be a good investment at $200,000 but not at $400,000.

If you are able to decide that you have a good investment, you need to ask the second question which is:

Second, am I the right kind of investor for this investment? Examples include: can I manage the cash flow required to maintain it? Can I emotionally mange the volatility associated with this stock?

Emotions and investing

When it comes to real estate I badly overpaid on my first investment (I still own it as a reminder of my stupidity). But since, then I don’t think that I have overpaid on a single property. That said I have lost money because of my inability to manage my emotions with respect to properties.

Examples of emotional mismanagement resulting in real estate losses:

–          I have sold properties because I no longer wanted to deal with tenants

–          I have sold properties in bad markets because I felt I couldn’t wait for the market to turn around (I even paid capital gains taxes which eroded the capital. Note that you may actually be better getting money out of your properties through mortgage then through sale.)

In hindsight this was stupid and I mean really stupid. But, what’s worse is I knew at the time that it was stupid. (I of course rationalized all of this in other ways.) If I had been asked to advise someone else in a similar situation, I would have said: don’t be an idiot. You have a good thing going – just manage the situation. Deal with it. But, because they were my properties, I couldn’t move beyond the emotions of the moment.

The bottom line is that I was emotionally unable to deal with the properties that I sold. It was stupid, I should have just hired a competent property manager – then the emotional aspects of the tenants and the management would not have existed. I would not have dealt with the tenants. The property manager (because it was not his property could never have become as emotionally involved – irritated maybe, but not emotionally involved.)

The cost of a property manger – yes it is significant!

Good property managers are hard to find. You only want a property manager where their interests are completely aligned with your interests.

(Never use a real estate agent to find you a tenant – worst tenants I have ever had. The reason is that the only interest of the agent is to collect a commission to find you a tenant. The agent has no interest in the stability of the situation. See this article from the Star that gives the opposite view.)

But, if your emotions are getting the better of you – you must transfer the “emotional fallout” managing your properties to someone else.

For many real estate investors the question is:

Not, what does it cost me to hire a property manager!

The question is:

What will it cost me if I do NOT hire a property manager?

We at Landlordrelief.ca believe that will do a good job of managing your properties.

Remember that all property mangement fees are a tax deduction!