Investor Mistakes: Treating it as a hobby, not a business
By Arn Mehta
Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.
Property Investment is a business, not a hobby.
Or so I thought.
With property, we are dealing with big numbers and although I knew it was a business, in reality I never really treated it as such. As a result, in the early years I only got the results one would expect you would get by treating it as a hobby.
In my naïve way of thinking, getting a tax refund at the end of the financial year was a great thing. I remember being ecstatic that in some years my tax rate was in effect 0%. That meant that all the tax I had paid through the year was refunded to me. Why? Because I had a huge amount of losses to offset against my personal income. My properties were making a huge loss year on year and I was excited.
However, if we are to ask ourselves what is the real reason we are investing in property, for some it will be purely to reap the rewards of capital gain which has historically proven to be the case throughout NZ’s history. For most though, I’d suggest that it is ultimately to provide a passive income stream that can serve us into retirement. Capital gain (if any) is purely the icing on the cake.
For the first nine years of my property investing journey, I was just intent on growing my portfolio without any real plan. I didn’t want the “hassle” of managing the properties myself and therefore had them managed by a property manager. You hear the stories of landlords saying “I don’t want to be woken up to fix a broken tap of toilet at some crazy hour”. I was one of those who thought that the challenge would be too much.
So here I was, going through year on year, trying to grow my portfolio until one day my bank said to me; “We can’t lend you any more money”. Although I was earning good money, through my job as a real estate agent, almost everything I was earning was being used to top up the mortgages. I had built up a portfolio of around 10 properties in Auckland by this time.
Not being able to borrow more money and grow my portfolio frustrated me. It was this frustration that led me to look at my entire portfolio through a completely different lens. I remember saying to myself;
“Your property business has only ever lost money. How can I change this?”
I took a completely different tack and said to myself, if I was to become the CEO of this business and my job was to maximize the profit, how can I do this?
That day, I created a spreadsheet and inserted my financial data into it. I then looked at what changes I could make to make the portfolio more profitable. There are some costs that you can’t control, particularly land rates, but there are several others that you can control.
There were three major things that I could see were having quite a big impact on my portfolio and if I could change them, they could make a significant difference to my bottom line.
The first was the rent on each property. I had identified that there hadn’t been a rental increase for over three years on some of my properties. After doing a few checks on Trademe I could see that there was quite a gap between what was currently being charged and what the rest of the market was charging. Some were under-rented by up to $50 per week and in some instances even more. At $50 p/w, that’s $2600 pa. Multiply that by 10 properties and there was a potential $26,000 just sitting there. Don’t get me wrong, there is massive value in excellent tenants, what I am saying is that it is important to find the balance between not losing excellent tenants and treating Property Investment as a business and getting market rent (or at least close to it).
The second and generally our biggest expense is interest rates. I used to think that a 0.25% - 0.5% discount off the carded interest rate was great. There can sometimes be more of a discount available. My first rule of negotiation is to at least ask the question. In this instance I was able to secure more of a discount. Let’s assume you have $1m in mortgages. Just a 0.25% discount will save you $2500 pa. At $2m in mortgages and you’re saving $5,000. Now just imagine you could secure a 0.5% or even greater discount. You get the picture. Often, we can become complacent and not pay any attention to these costs.
The third major cost I identified was the property management fee. Now don’t get me wrong, an excellent property manager can be worth their weight in gold. However, if in order to create additional income you need to manage the property(s) yourself, then maybe the sacrifice of potential inconvenience is worth the reward. Managing the properties ourselves saved us around $25,000 pa.
You could potentially look to negotiate insurance as well as looking at preventative maintenance.
To summarize, our property business was running at a loss and costing us a lot of money. Sure, there was capital gain but I don’t intend on selling my properties. My intention is to hold them forever (unless I can make the money work better elsewhere). It wasn’t until we looked at our portfolio differently and ultimately started treating it like a business, that we actually got the results we always hoped to get: TRUE PASSIVE INCOME.
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