February 15th 2025
Last issue we looked at the challenge of setting out to build an investment portfolio. We saw that while a multi-family building is a great place to start, regardless of the investor's profile, there are a number of considerations as we continue to develop.
What about condos for example? Yes, it’s good to have a couple of condos in your portfolio. Primarily because they are easy to manage. You don’t have to worry about outside maintenance, snow removal or yard care. They are taken care of for you. But keep in mind you pay for these things. And that’s the Achilles heel. Cost. It’s tough to make condos carry. And that’s why your first few acquisitions shouldn’t include a condo. Wait till your portfolio is generating positive cash flow so it can subsidize. I’ve got a condo townhouse that I’ve had for years. It’s paid for, fortunately. But the 
rent doesn’t cover the CAM charges. I’m subsidizing every month to keep my tenants there. And with condo fees and taxes going up more than the provincial guidelines for rent increases each year two things are apparent. I’m never going to catch up. And the tenant is never going to move. So, add a condo or two to the mix if you like, but not in the early stages of development.
Now let’s talk a few minutes about commercial real estate. Commercial property is a really valuable component to have in your investment portfolio, for two important reasons. One they do not fall under the Residential Tenancies Act. Rather they are covered by the Commercial Tenancies Act. A much more fair and balanced piece of legislation. And secondly, most commercial tenancies are what we call ‘Triple Net’. That means the tenant is responsible for the general maintenance and upkeep. You don’t get calls when a toilet backs up or a light fixture starts to flicker. And because you aren’t burdened with these added expenses, gross rent is pretty much the same as net rent.
But let me say this, and please heed what I’m saying here. Don’t dabble in commercial investment until your first 10 residential properties are in place and largely paid for. The reason is simple. Exposure. I believe there are some risks involved in real estate investment, but we need to plan for them and keep them manageable. Never put yourself in a position where the whole thing could collapse because of a bad investment call.
I had a good friend some years ago who owned a small electronic manufacturing facility. About a dozen employees. Good contracts. Doing well. He told me one day he was approached by G.M. They wanted to hire him to make a particular electronic component for one of their vehicle lines. Huge contract. Very lucrative. He told me ‘I’m not sure I’m going to agree to it.’ ‘Why’ I asked. ‘Can you make the components?’ ‘Of course, I can’ he replied. ‘But it means I will have to expand to 10 times my current size. Over 100 employees. Huge commercial space. Hundreds of thousands invested in machinery.’ ‘But won’t it be profitable?’ I asked. ‘Immensely’ he replied. ‘But if ever they cancel the contract, or stop making that line of vehicles, or outsource it to Mexico for example, I am out of business. I couldn’t support the new infrastructure.’
Investing in commercial real estate can be exactly like that. People will always need a roof over their heads, but they may not always need a factory or a retail plaza spot. Or an office. And it’s quite conceivable that once vacated that commercial spot you own could sit empty for months (or years). Can you carry that?
In 1996 I was operating my RE/MAX company in Burlington and decided to expand into Waterdown. I purchased a 5,400 sqft plaza and occupied about 3,500 sqft for my office, renting the balance out. I spent in excess of $350,000 on leasehold improvements. Cherrywood trim, barrel vault ceilings, brass sconce lighting, etc. etc.
Then 20 years later I sold my Burlington/Waterdown division. The RE/MAX company that bought it elected to close down the Waterdown operation at the end of the lease. Vacant space. I tried to attract a business like accountants or lawyers. It would have been turnkey for them, but it was too large for those uses. In the end, we rented it out to a pizza conglomerate. Retail and head offices. They ripped out all those leaseholds. Broke my heart.
But I ended up with a strong covenant and a 10-year lease. But it had sat empty for over a year. At about $20/sqft and another $10 for TMI, that’s over $100,000 in lost revenues. Fortunately, I had owned the plaza for over 20 years. It was paid for. And I had my base of 10+ residential properties. I could weather the delay. But imagine if this had been my first investment. That hit would wipe me out.
So, my point is yes. Diversify. Yes, invest in low-return condos from time to time. And for sure invest in commercial real estate. But timing is important. Have a plan. Don’t be totally risk-adverse. But never put yourself in a position where it could all come tumbling town.
And in closing. Get a competent realtor/advisor. Not just one that can fill an order. But one who can evaluate your financial situation. Taking into consideration your age and circumstances and can advise you along a sure path for prosperity.