Failing to Plan for the Unexpected

Jessilyn Persson: [00:00:52] Today’s topic is going to be on failing to plan for the unexpected. Many first time investors focus solely on the purchase price. I know, we were there. We did that quite a bit, only to be blindsided by a host of hidden expenses. We don’t want this to happen to you, our listeners, so we’re going to go through and give you a few takeaways on how to prevent this. And the first one is going to be to make sure you have a plan B and C.

Brian Persson: [00:01:22] And sometimes a D, depending on the property. When we started investing early on, we did not go into our real estate investments with a plan B. What is the alternative if we can’t get it rented, if we can’t sell it? None of that had a plan B. Only over the last five years have we really cleaned up some of those properties. It would have taken us ten years to clean up some of those properties that we didn’t quite have a proper plan B or C for.

Jessilyn Persson: [00:01:57] Now we just put an offer in and then once we were approved, we did all our due diligence to get it approved, and then it was just hope for the best. Of course we did our work to show it and get tenants, but we really did not think about exit at all. We didn’t think forward a decade or two about market volatility, about things like pandemic, the economy, how it would impact our budget, but our real estate portfolio knew. But recently we got wiser and started planning all that into our properties. Now going forward, as we buy new properties, it’s all part of the bigger picture.

Brian Persson: [00:02:37] By recent, probably just short of ten years recent. I think the last ten years we’ve done pretty well in buying properties. 2016-ish is when we really got our real estate brains around us and got the right team around us, got the right mindset around us, a lot of things changed then. But before that, I can tell all kinds of stories, but the two simple ones I can think of are buying in the wrong location and losing a lot of equity on the buy and not really understanding how to get out of it, how long you have to rent it. What other things can you do to that property to make it profitable? There was no plan B for that particular property that I was thinking of. It was a little condo here in Edmonton. And the other one was a property that had done okay over the years, but eventually started to not cashflow anymore. I was a little bit smarter at that point and started looking for Plan B’s and Plan C’s, but because of the way I bought it, there were really no options for plan B or C, and I ended up having to sell it. Still made money on it, but maybe perhaps not as much as we could have if we had gone into the deal with multiple plans in place so that the worst case scenario happens and you can still profit from your real estate investment.

Jessilyn Persson: [00:04:07] Absolutely. Another thing, I don’t think that most real estate investors, especially new or budget for, is when it comes to condos. I know this because I had a great conversation yesterday with my laser tech who currently has a condo, and she said her and her partner are looking to buy another two properties in the next couple of years. Of course, a love of mine so I started chatting about it. One thing we had in one of our properties was one of our condos. The condo fees eventually became higher than our mortgage, and we didn’t plan for it to get so high. If you’re not planning for that and part of your portfolio is, whether it be cash flow, long term money for your retirement, that eats away at all that. Another one of our properties, we had a huge assessment. I’m talking about a $60,000 assessment on it. Most people don’t plan for any assessments, never mind one that large. If that happens are you, as an investor, in a position to instantly have $60,000 to pay that without all the interest charges? If you have to borrow from the bank or a third party lender to cover that expense, a lot of times we don’t prepare for that. Again, plan B, if you get an assessment or your condo fees start to go incredibly high, are you sinking or are you still swimming with your properties?

Brian Persson: [00:05:32] Condos can be a very attractive investment for a new investor because they’re quite cheap. In Edmonton nowadays, in 2025 here, you can get condos for $100,000. If you think about it, that’s super accessible for your first time investor. And that’s where we were over 15 years ago when we started. We just looked at it as very accessible real estate investing, and the condo itself is actually very easy to maintain because you don’t have to worry about lawn maintenance, shoveling, all the common areas are maintained. You might have to fix a toilet or a sink every once in a while, but otherwise there’s nothing to maintain. It’s very attractive, but it comes at a cost. There are a lot of hidden costs to a condo that will come out of the blue, and chances are you will have absolutely no control over it. Houses, which is what we primarily invest in nowadays, we have complete control over the house. We can wait a year if it makes sense to change the shingles on the house. But when it comes to a condo, you’re at the mercy of that condo board, and you better make sure that you have some kind of liquidity in order to handle any plan B or plan C that might have to come in place.

Jessilyn Persson: [00:06:49] I’m sure many have heard this before, but failing to plan is planning to fail. So make sure you have a contingency plan for the various scenarios as we mentioned. Like market downturns, tenant vacancies, major repairs. Condo decisions and changes, even in your personal circumstances.

Brian Persson: [00:07:08] Nowadays a lot of people are turning to Airbnb and Vrbo. So if you do go into condos, make sure that can be one of your Plan B’s because condos can negatively cash flow quite easily. As we mentioned, condo fees go up, assessments start to happen. You might want to consider having a different way to increase your cash flow. It doesn’t have to be Airbnb, but look for plan B before you even buy to make sure that you can increase the cash flow if you need to.

Jessilyn Persson: [00:07:39] And if you are looking at Airbnbs or vacation rentals as a plan B, make sure that your condo association approves that. Because if they don’t, your plan B is now no longer viable. So make sure your condo board is on board with your options and then plan accordingly.

Brian Persson: [00:07:58] Which is exactly why we had to sell one of our condos, because it was starting to negatively cash flow. I had bought it before I even conceived of things like Plan B’s or C’s, and when I started looking for plan B, there was no such thing. There was no way to make this condo work anymore so we had to sell it.

Jessilyn Persson: [00:08:17] Correct. Takeaway number two, budget for the unexpected. I know having a plan B and C taken into account, absolutely you need to have a budget for certain things, but if you get a tenant that is not a tenant you want to keep, even though you might have done proper screening, you can still encounter a difficult tenant. Whether it be late rent, property damage, or even legal disputes.

Brian Persson: [00:08:46] Whether you manage yourself or you have a property manager, there are costs to both. The property manager will charge you for every tenant turnover. If you’re not properly approving tenants with the property manager, or the property manager doesn’t clearly have your tenant profile dialed in, then you’re going to have some significant tenant turnover, and that’s going to cost you. Not just on just the fees, but also lost rent. If you are managing yourself, you can have some pretty good social skills around you but I guarantee you sneaky tenants, and tenants you don’t expect to be really bad tenants, will get through your system. So plan for that. Plan for maybe a little extra work trying to get that tenant out. We’re lucky here in Alberta that it’s pretty easy to get a tenant out when it comes to bad tenants, but other places in Canada, it’s not as easy. You better make sure that you have a runway with that portfolio, that you can handle a couple of bad tenants inside of it.

Jessilyn Persson: [00:09:45] It can cost you a lot if you’re not prepared to have a tenant who isn’t paying, and they’re maybe squatting for a month or two while you still have to pay your bills, whether they pay you or not. Then if you have to go through legal proceedings, there could be costs associated with that with the legal side, but also you still have to maintain your property. Even if they’re not paying it comes back to you, in the end you’re 100% responsible. So if you don’t have the right tenant and you don’t take the right actions, it’s going to cost you and that’s going to eat at your overall portfolio.

Brian Persson: [00:10:19] And if you’re a new real estate investor, go find experienced real estate investors because it is a favorite pastime of experienced real estate investors to trade tenant horror stories. You will find out all the wonderful things that come along with tenants. Your tenants are your moneymakers, but they can also be a big pain in your butt and a significant expense. So go get the experience from someone who’s already done it, before you get into your own trouble with your tenants.

Jessilyn Persson: [00:10:51] And have a clear process for handling these situations and factor in potential legal expenses. Because then you just rinse and repeat every time you have a hiccup with a tenant. If you’ve got a process in place, you know how it goes and it’ll save you time and money, of course, by waiting for them to pay.

Brian Persson: [00:11:09] For me, because we handle our own properties here in our local neighborhood, super easy. We have a great tenant profile, so it’s really easy to manage. But even then I make sure that the tenants have to actually jump through a whole lot of hoops and perhaps go through more work than they actually should have to. That also illustrates how willing they are to get through the system and secure that suite that they want. If you see tenants who are lazy or don’t communicate or have shoddy applications that they’re filling out, whatever it looks like, then you already have a nice little filter right at the beginning of what that tenant looks like. There’s a lot of systems you can put in place before that tenant ever gets into your suite and costs you money.

Jessilyn Persson: [00:12:00] On top of budgeting for the unexpected tenant you may or may not have, you also get the big expenses that can hit you without notice. Like a major repair, natural disaster, or a sudden increase in property taxes which can really strain your finances.

Brian Persson: [00:12:18] That comes down to just running the numbers. I cannot tell you how many times that we’ve gone to conferences, we’ve gone to different meetings of real estate investors, and we start chatting with them about their properties and their cash flow and what’s going on in their portfolio, and they are not accounting for all the numbers. They’re missing property management fees because they happen to property manage themselves. And what happens when you don’t want to property manage? They don’t account for repairs and maintenance, they don’t have any kind of emergency fund, they’re missing a significant chunk of their budget in their portfolio, and that’s going to come back to haunt them. So run your numbers really hard, probably more conservative than you would like to, but then you know your portfolio is going to perform for you.

Jessilyn Persson: [00:13:12] I think we keep about a three month float in our account to cover any unexpected costs, so that we’re not scrambling at the last minute on how we’re going to come up with money. It’s a comfortable, peaceful place to be to know that if a furnace or an appliance goes, it’s like, we’ll go buy one, get it fixed, but the bank account for our rentals is going to cover that cost. It’s not coming out of any other expense from us.

Brian Persson: [00:13:40] An easy solution right up front is to buy multiple units. That’s why multifamily is a great investment if you can get into it, if you can find partners and buy multifamily, a larger building. Say you have eight units, one of them can be vacant, but you still have seven other units collecting rent. Even in our portfolio where we have suited basements, if the upstairs or downstairs goes vacant, then one of the others is probably covering most of the expenses and we’re not hurt too much.

Jessilyn Persson: [00:14:11] Exactly, and we have multiple properties. Even if we did have half of one of our properties go vacant, the other half will cover it. But worst case, we still have other properties that are bringing in money that’s going to still cover costs.

Brian Persson: [00:14:25] The higher the multiple of units that you can achieve, the better your portfolio will be because you will always have something rented. Not to rag on condos, but if you have a single condo and it goes vacant, you have exactly zero income from that condo.

Jessilyn Persson: [00:14:44] Absolutely, you need to replace that tenant at a very speedy timeframe to cover your costs.

Brian Persson: [00:14:50] Work hard to get that tenant back in place.

Jessilyn Persson: [00:14:52] The third takeaway is to have a clear exit strategy. I know this is something we talk about a lot more as we’re building bigger goals and looking at different ideas for our family and where we want to be. And realizing, what if we want to exit certain parts of our portfolio in 10, 20 years? What does that look like? We hadn’t really planned for that, and it can be an extremely large tax hit if we were to suddenly be like, we’re done, we’re going to go sell four houses tomorrow. No, that would just eat away at almost all the profit we made because ‘tax man’ is going to come get his dime. So have a clear exit strategy in place for your properties. Whether it’s because of market volatility, whether it’s because you changed your lifestyle or you’re looking to retire. However that looks, you want to start with the end in mind.

Brian Persson: [00:15:49] Before you even buy your property, you want to know at least plan B, plan C. You want to have a couple plans to get out of that property. You want to have a couple plans to mitigate something inside of the property if you need to. Say you have to sell early because you have some life changes going on, what are you going to do? What do you have in place that can help you prevent those big tax bills if you have to unexpectedly sell? And how are you going to exit? What is plan A? What is the ultimate way that you want to exit out of that property? A lot of people just buy property, rent it and hope for the best at the end, and they don’t think about how they’re going to get out of that property and recoup their money.

Jessilyn Persson: [00:16:39] Part of the exit strategy is knowing the right time and the wrong time to sell. It’s not necessarily just from a tax advantage, but it’s also from making money on your property. For example, we had our first condo we bought and we eventually sold it at much less than what we bought it for. We obviously didn’t plan that, but the market took a downturn and condos in our area took an extreme downturn. The property itself was having a negative impact on our overall portfolio, so we decided to sell it. Sure, we still made 5% or 6% overall on it, but we took a huge hit on the sale. But had we planned the exit before we bought it, I’m not sure we would have bought that property or sold it when we did.

Brian Persson: [00:17:24] In that particular property, it was definitely our worst investment that we ever made inside of real estate. But at the same time, we still made 5% or 6%. It wasn’t stellar in any sense by real estate investment standards, but it does show the power of real estate. That you can take a loss as long as you perform the way real estate should work properly. Even in the worst circumstances, you can probably still eke out some profit there. And in that particular condos case, what we had decided was that the market here in Edmonton had no future looking aspect of positivity to it, and we figured it would be 5 or 10 years before the property prices came back up on condos. We decided to pull what money we could out of that condo and put it to work with our smarter, more experienced brains behind that money and perform on that money rather than trying to hold on to it for another five years and maybe make some more money out of it.

Jessilyn Persson: [00:18:34] That was our property that had the condo fees that were higher than our mortgage. The fact that we’re paying, I don’t know how many hundreds of dollars just on condo fees, for a tiny, not well kept condo, that didn’t help it. But that was a huge lesson for us. That was one of our ‘learning condos’. While we only made 5% or 6%, we also gained on the experience from having to place tenants in it, and what it was like to have a rental property and what it takes to manage it. Okay, this was not a good area we picked. All these wonderful learning lessons we got for sure count for some.

Brian Persson: [00:19:15] There was value in that condo regardless because we did get a lot of experience. But was it a good monetary investment? It was definitely not the best.

Jessilyn Persson: [00:19:25] What helps when it comes to market volatility with real estate is to have a diversified portfolio with your long term investment horizon that can help mitigate the risk. We had suited properties, single family homes, condos, we reevaluated that and realized that condos were not for us, and same with single family. We really streamlined into suited properties, and that’s our golden goose, if you will. But we’re also diversifying into multifamilies. We have looked through the whole strategy on that, not just for the buy, but the exit and what it’s going to give us for return and time on our money. We also diversify into the exempt market, which is backed by real estate. Not only are they different investments that yield different returns, but there’s different exit strategies based on some of those and different workloads. If we want less work in the future, we know that we need either a property manager or we need to downsize our physical properties. Whereas in the exempt market, we can keep up with those because we’re just investing, there’s no management workload on our side. Then we’re also starting to look at 10, 20 years, if we want to scale back our work, what does it look like for our kids? It’s like, we don’t want to sell too many up front and then take a big tax hit. So we need to start planning that exit strategy. It’s like, are we going to put it in their name, assign some of it to them? Do they want it? Obviously they’re still a little too young to have that conversation with us, but we’re starting to think about it and look at our options so that we know what to do when it comes time for us. To be like, we want to do more travel, less work. Let’s be prepared for that.

Brian Persson: [00:21:10] You say they’re too young, but also, our nine year old is planning on buying his first property already.

Jessilyn Persson: [00:21:17] He is planning and he is making money for his down payment, but he is still too young to qualify legally.

Brian Persson: [00:21:25] You know what? There’s a thing called joint ventures. He can joint venture with Mummy and Daddy if he wants to. It is interesting to see, our kids are embedded in the real estate investment environment. And already at 9 years old and 11 years old, are thinking ten years into the future and what their properties are going to look like and how they’re going to perform with their properties and what they’re going to do with their money. At nine years old he’s already, in a way, planning his buy and his exit based on osmosis from being in the household.

Jessilyn Persson: [00:22:05] On one hand, I think we’re really smart parents for immersing our kids in this to view it. But on the other hand I’m sitting there going, what did we get ourselves into? We got our 9 and 11 year olds planning to buy property, to rent it out so they can make money while they live at home and go to college. I’m like, hmm.

Brian Persson: [00:22:23] The full scope of their business plan isn’t quite there yet.

Jessilyn Persson: [00:22:28] It’s there for them, I think they’re making all the money. To recap our takeaways, the first one is to have a plan B and C. Always have a backup and contingency plan. Takeaway number two, budget for the unexpected. The unexpected will hit, make sure you’re prepared for it. And the third one, have a clear exit strategy so you know what’s going to happen when it’s going to happen, and that the ‘tax man’ doesn’t come and take half of all your hard earnings. Thanks so much for tuning in, listen for more real estate investing stories on the next episode of the Life by Design podcast.

Brian Persson: [00:23:02] Before you go, don’t forget to visit discoverlifebydesign.ca to take our quiz and discover what type of real estate investor you are. We release new episodes every two weeks, so be sure to hit that subscribe button on your favorite podcast app. Thank you for joining us on this journey to create your life by design.

Jessilyn Persson: [00:23:21] Thanks again for listening, it’s been a pleasure being with you today. We’re Jessilyn and Brian, and we’ll see you next time.