Passive income, or cash flow one, is received on a regular basis as a result of an idea, business, or ownership of something. The income is a by-product of work upfront with minimal or no work afterward. This idea of having income or cash flow without even having to lift a finger all while relaxing on a beach with a cold drink in hand, is what motives many of us investors to invest in real estate. But is this a reality? How passive is your passive income portfolio? If your income portfolio has a number of properties, you probably have experienced the reality of it not being a true passive income stream, and therefore, you have had to work hard to maintain it.
Speaking with fellow investors, I am very familiar with the big list of problems that come with investments; difficult tenants, leaky roofs, plumbing issues, overdue rent cheques, destroyed suites, neighbour issues, insurance claims, and so on. Speaking from my own personal experience, owning investment property does have its challenges and it does take effort to maintain a well-run portfolio.
I believe that there is a correlation between the number of issues or amount of effort required and the quality of the property. We will start with what I like to call “A” properties. “A” properties generally have no issues and allow you to enjoy that cold one while sitting on a beach. However, the cap rate will be much lower at around 3-5%. “B” properties have some issues and will require a bit more work and time spent at the property but they will still allow you to sit back and relax. The good news with “B” properties is that the cap rate will be higher than “A” properties at 6-7%. This increase in cap rate helps justify the extra work that is required to maintain the portfolio. What about “C” properties? The cap rate will be a generous 8-10%, but these properties take a great deal work and are very time-consuming. You may make more money, but they are no longer passive income properties; these properties are full-time work for you or for your property manager.
There is no right or wrong class of property to invest in as it really depends on the individual that’s investing. On one hand I have clients that only invest in “A” properties, and on the other hand, I have clients that believe that “C” properties are the best way for them to invest. And that is why investing in real estate is so great! There are many different ways to invest with different financial expectations, goals, beliefs, and passive income models.
The key to investing is to understand what your passive income meter is. Is it an ultra-high passive number or a low passive number? How little or how much work is required to buy that cold beer on the beach? For myself, my passive income meter is high. My goals as an investor are little to no work, effort, or inconvenience from my portfolio so that I can enjoy that cold one on a beach too. Maybe for you, you would rather find your happy place squeezing in a quick cold one after spending a lengthy amount of time and dealing with your “C” portfolio.
Whichever property you choose to invest in – property “A”, “B”, or “C” – they all work and they all have their pros and cons. It just depends on what you prioritize in an investment and what you want out of a property. So, I will ask it again, how passive is your passive income portfolio?
Speaking of passive, Buyers certainly took a passive approach to the market throughout the Fraser Valley and Vancouver markets in the month of September. The only market areas and property types that had any resemblance to the past Sellers’ market was Port Coquitlam condo sales with an STR (Sell Through Rate) of 25% and Tsawwassen with a 21%. Whistler’s townhome and condo market also showed strength with a Sellers’ market and STR numbers of 22% and 21%. However, the balance of the Vancouver market was entrenched in a Balanced to Buyers’ market.
The Fraser Valley market fared better throughout September, with most market areas and types in a Balanced market. However, a few of the townhome and condo market areas did a bit better, showing as a soft Sellers’ market. As we move into the final quarter of the year, it is shaping up to be an excellent buying opportunity for investors and buyers. The shorter days, the wetter weather and the pessimistic headlines bring buying opportunities to the deal diggers. In addition, a down-market cycle change often catches sellers in a must-sell situation for a variance of reasons. Are you looking for a good buy? Give me a call to discuss the opportunities that are available today.
Randy Dyck
Personal Real Estate Corporation
604-807-4366 or randy@eximus.com
STR (Sell Through Rate) Formula = Sales ÷ Active Listings + Failed Listings + Sales
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