Protecting Your Investments from Inflation

Welcome to Canada's Property Management Podcast, your number one resource for investing, managing and maximizing the value of your real estate assets. Now here's your hosts, Carla Brown and Adrian Schultz, Canada's rental property experts.

Carla:

Welcome back, Adrian. Here we are again.

Adrian:

Yeah. You know what? I know we're talking about protecting, but I'm already starting to sweat and that has nothing to do with inflation.

Carla:

Okay. Am I putting you in the hot seat? You feeling it?

Adrian:

Yes, very much. I'm feeling it.

Carla:

Okay, so we are talking about inflation today. We've talked about inflation before. The media constantly wants to talk about inflation. They're spinning it in a way that everything is doom and gloom. I want to spin it in a different way and I really want to talk about how from an investor standpoint we can protect ourselves during these times of higher inflation. Today, I'm not dating, because it could be almost any day in 2022, interest rates are rising again, right? Bank Canada made another announcement today and that again, gets just people spinning on what this is going to do to inflation. We're heading towards recession. We've all heard it a million times. Let's talk about specifically from an investor viewpoint, what's the first step that somebody should do when we're dealing with inflation? How are we going to protect ourselves because the reality is we have to lower our costs somehow?

Adrian:

Yeah, so two initial thoughts. Number one, if you're in a market that has rent controls, it's extra challenging.

Carla:

Yeah.

Adrian:

If you're in a free market, you've got some flexibility and options on how to handle the challenge. But in both cases, what you're presented with as a property investor during a time of high inflation rates is obviously that your income may not keep up with your costs or at minimum, your positive cash flow will be reduced, significantly reduced, or wiped out altogether.

Let me give you just a broad example. As of today at the recording of this episode, and just in the light of the conversation, I'll say that we're in October of 2022 and as of today, inflation sits at 6.9%. What does that mean? Well, that means that with simple compounding at a 6.9% inflation rate, the cost of things will double in 10 years. If inflation was to remain at 6.9%, the cost of things doubles in 10 years, in a decade. Very unlikely that wages would keep up so everybody would obviously feel the pinch. Now, let's hope that inflation doesn't stay at 6.9% for 10 years, because then we would have a bigger challenge.

But what does that mean when you're in a rent controlled market? For example, in Manitoba this year, we have a rent freeze because of the pandemic meaning as a rental property owner, you can't increase rents because of a government mandated rent freeze. Depending on what province you're in, that's going to differ but costs are going up. What do you do? Now there are some exceptions to that rule. You can apply for an exception if you can prove that your costs are in fact growing at a rate greater than what is common in the industry, but most landlords have the same cost increases right now. Everything, utilities, service providers, insurance, banking fees, your property manager has costs increasing so they may need to increase their rates as well, or it's a percentage of rent and then it works out.

The first thing that we're doing is going through every single line item on the expense sheet and seeing if there are any savings opportunities. Do we go into some of those in detail?

Carla:

Yeah, yeah. Yeah, I think so. I think these are the things that our investors need to understand, that there are some proactive ways that you can do it, and then I want to talk about some other strategies in a little bit.

Adrian:

Sure.

Carla:

But yeah, let's talk about what you personally found. I think it's really good to share this.

Adrian:

Sure. I'll just give three very simple examples of how any rental property owner could potentially reduce or minimize their expense cost exposure. The first thing was shopping property insurance. In my case, it was most beneficial to convert to what is called a group or a master policy. There's a couple of ways to do that. One is most property management companies will have a master group policy program, so that's one way. Another way is depending on what home insurance provider that you're with, some home insurance providers for your primary residents offer what is called a investment property or a rental property add on or a rider. Not everybody knows that. Some policies allow up to one rental property, others allow up to five rental properties and potentially more, I don't know every single insurer, but in our case, it reduced our property insurance costs by approximately 40%.

Carla:

Oh, wow. Yeah.

Adrian:

We were able by adding it to our home, it's a group program rider on our home insurance policy. That's one. I don't know if it was dumb luck, but sometimes opportunities do exist. There is one.

Number two, the utility companies, many in Canada offer energy saver programs and some actually offer free hardware, not all, or discounted hardware such as water saving devices for the shower, I like the water hardware, the shower outputs, et cetera, energy savers so that you're using less water in case you have a property, a rental property, where water is included with the rent, this way your consumption goes down. They're great devices. I have one at my home where it reduces the water output a little bit, but the power that it's coming out at is greater, so the effect on the resident is minimal or none at all. Power or water saving devices, we installed those. Goes without saying to make sure that all of your common area lighting is switched to LED bulbs and you don't have to buy LED fixtures. That's a common one is just switch all your bulbs to LED bulbs. If you find them too expensive at the local hardware store, consider looking online. There's a lot of great bulk LED suppliers online. That was number two.

Then number three, we actually were challenged in finding landscape and snow providers this past year because we have an intense labor shortage. What happened is the providers that we do have so significantly increased their prices that it became counterintuitive to provide that level of grass and snow service. For grass, we went down to a biweekly cut instead of a weekly cut. Yeah, grass was a little bit taller at times, but ultimately it was fine so the biweekly cut was a big step that reduced our cost. Actually at times I thought the property looked better with nice tall green grass. Then for snow, we actually put out a message to all of our rental property tenants saying, "If anyone is interested in taking care of the snow at the prog," this is from multi-family, So this is where you've got more than a single door. We put out a message saying, "Anyone who's interested in doing the snow, we'd be prepared to offer you a discount," of whatever the dollar amount was but that dollar amount of discount on rent for taking care of the snow at a duplex, triplex, or fourplex was still quite a bit lower than paying a snow provider. What we find is that when the resident is involved a little bit in maintaining the home, they actually take more pride in the home. They feel like it's their home and the whole family gets involved.

I'm getting goosebumps because I saw something just last year is I saw we have a property where there's a family living there and the dad and two of the kids were outside snow shoveling together. When you think about that, how great that is for a family to be outside spending time together with the kids, some dollarama shovels for the kids. I thought it was fantastic. Those are three examples of how we've been able to minimize our expense ratio and reduce some of our cost whilst others are out of our control.

Carla:

Yeah. Some provinces there aren't rent controls and they are fortunate because they can move with the times and I'm sure there is a really good reason why rent controls were originally put in place in different areas, but unfortunately-

Adrian:

To protect people.

Carla:

Yeah, well yeah, but it's at the cost of some of us as investors, unfortunately. I don't think, and I don't think-

Adrian:

We have bad rental product in some rent controlled places.

Carla:

I don't think it's our job as investors to subsidize that piece of it, so we have to look at different ways. And then what it does do I always feel, is that then it forces poorer quality rental housing out there because people aren't doing a lot of the things they need to do to be proactive, to retain the look and feel and the safety of the property. Does it really work? I'm not so sure it actually does. House prices go up and as far as the sale prices, they don't have controls on that, and supply and demand fluctuate accordingly. I think rental housing would fluctuate that way as well.

But there are some strategies that you can use if you are in a situation where you've been in rent control for a long time, maybe you signed a really long lease with the tenant, which we've talked about that one before, but there are some strategies to see whether or not you could move the tenant out to a benefit to them like the cash for key strategy where you're actually paying a tenant to leave the property and they're moving into another property, and then now you have your place that now you can go back up to market rents and advertise. We see that happen in some of the rent control areas. You want to do it respectfully. You don't want to look like you're just trying to pay off a tenant but sometimes the strategy works well.

Adrian:

There's one more thought and that's related to mortgage servicing. As a rental property owner, most will actually have debt payments along with property tax and property insurance, et cetera. But whilst interest rates are at historic medium to highs at the moment, wouldn't say they're a historic high yet, but it's getting there. You do have the opportunity of refinancing to extend your amortization, which would reduce your monthly debt service payments. I think that if you've ever thought about taking equity out, remember that equity takeout is tax free, you're extending your amortization so your payments will lower and the interest is tax deductible so there are some debt planning strategies that should also be considered at this time, probably now more than ever before.

We personally over the years have done those equity takeouts, extended amortization, taken the equity and plunked it down as a prepayment on our principle mortgage because it's tax free money because now our personal housing costs went down, which is great during an inflationary time, and the interest we're paying on the rental property that is tax deductible. There are strategies to be exercised during this difficult time and I would really encourage you to go through line item by line item of your income statement or your monthly income or your annual income statement to determine where the opportunities lie.

Frankly speaking, that the number one spot to get some of that professional advice is from your licensed property manager. They deal with property owners all day long so that would be my first place to have a chat is where are there maybe some opportunities to reduce expenses or enhance the value? It's not just about expense reduction, it's also how do we improve the value of the product we're offering so that we can charge more? Maybe if we have free wifi, people are willing to pay an extra $50 a month and if you split that amongst four units, there's a win. Lots of opportunity.

Carla, anything else? I feel like we could go on forever on this one.

Carla:

Yeah, no, we could and we probably should end it. I think that the whole topic is, we're probably talking a lot more seriously than what we normally do in our podcasts too, but inflation is a very serious topic. It is top of mind for every single family in Canada right now and there's a lot of worry out there. But there is opportunity and I would just dovetail on what you said about talking to a professional property management company because there are ways that you can do significant cost savings. They save a lot in vendor costs. They can save you a lot in insurance costs. There is an advantage. Don't think of it as an added cost. Do the actual weighing line by line, like you said, because I think we did a podcast, maybe I will be a little bit more lighter here. We did a podcast once where I proved that property management was really only 29 cents an hour, which remember that?

Adrian:

I remember that, yeah, yeah. Yeah. To this day, that sort of freaks me out.

Carla:

I think that there's ways that you could ... Where's the value? Where is the cost saving? I'll end it there cause this is a longer one for us but thank you for sharing some of your tips that you've actually put into play during this time, Adrian. I think the key thing is that there is opportunity and that's where we really need to focus on and that is Real Property Management.

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