Breaking New Ground

It’s not enough to know about the next big thing. We pride ourselves on identifying what’s about to be hot and advising our community of investors on seizing opportunities early. We looked beyond Canada’s five biggest cities and identified three midsize cities with strong investment potential. Can you guess what they are?

Key Points

  • Is Canadian Real Estate an attractive investment?
  • Traditionally, what major Canadian cities are great investments?
  • What midsize Canadian cities have the potential to be good alternative investments?
  • How do I get started?

For the past several years, Canada’s real estate market has become a booming industry exhibiting attractive returns. Real estate investment is an ideal way to park your capital to watch your investment grow. It’s also a fantastic way to create an income-generating source, typically offers higher returns than fixed income products like mutual funds, and is historically less volatile than the stock market. So, where should you start?

The real estate market changes rapidly. Fundscraper is a world-class leader in finding the next next big thing. Our experienced team identified the top three “groundbreaking” Canadian cities that show promising growth and investment potential. Here’s what we found, plus our tips on how to invest in real estate in Ontario and beyond.

Is Canadian Real Estate an Attractive Investment?

Canada’s housing prices are some of the highest in the world. Housing prices are high because demand is high, and demand is high because 1. Population growth is high and 2. Income from Canadian job opportunities is high. When a high number of people have a high income that allows them to purchase and invest in properties with high prices, those properties become even more valuable over time. Thus, Canadian real estate is an attractive investment.

Fundscraper is a world-class leader in finding the next next big trend in real estate investing. We can answer your questions about where and how to invest in real estate.

Traditionally, what major Canadian cities are great investments?

We examined five major Canadian cities and their key performance indicators such as population, GDP per capita, employment, income, and housing prices. We then applied these key performance indicators to alternative Canadian cities to identify the top three “groundbreaking” cities that showcase promising growth and investment potential.

First, we looked at the five most populous and economically producing cities in Canada: Toronto, Vancouver, Montreal, Calgary, and Edmonton. Not surprisingly, real estate demand is highest there — for now. Due to having less space available in these major cities, the higher average unit price paired with the smaller property sizes results in a much higher price per square foot and less space per dollar. This poses the question: What’s the next hottest place to invest in real estate?

The Fundscraper team identified three midsize Canadian cities with strong investment potential: Kelowna, Barrie, and Saskatoon.

How to invest RRSPs into private real estate

Once we have found something that is suitable for you, the next steps are setting up how you can acquire the private mortgage investment security with your current RRSP funds that are held by your bank or financial advisor. Those RRSP funds are likely tied up in mutual funds, exchange traded funds, and other RRSP eligible securities. We’ll help you with this process as much or as little as you need.

  1. Fund your investment. Liquidate a fraction of your RRSP holdings to the cash amount you need to make your new investment.
  2. Open a self-directed RRSP. Ask your financial institution (any Canadian chartered bank or trust company) to do this.
  3. Transfer your liquidated funds to your new account. You’ll complete a “transfer instruction” whereby your new financial institution will request that your current RRSP institution transfers the liquidated funds to your new self-directed RRSP account. Once all the forms are completed, they are filed with the originating institution instructing it to transfer your cash portion to your newly created self-directed RRSP account with the new financial institution.
  4. Wait for the funds to transfer. The transfer can take up to four weeks. In order to maintain RRSP eligibility, funds must move directly from one RRSP account to another. You cannot withdraw the funds yourself, take them to your financial institution, and deposit them.
  5. Invest your RRSPs into private real estate. Once the funds arrive in your self-directed RRSP account, tell the self-directed RRSP account to fund your investment in the private mortgage investment entity. You do that by way of delivering to the financial institution a “payment direction” — the financial institution has a standard form of payment direction that it will provide to you. The payment direction tells the financial institution to invest in the private mortgage investment entity for you through the newly created self-directed RRSP account for the amount set out in the direction.

Investing your RRSPs in private mortgages is easy! Nevertheless, it’s important to have your advisor orchestrate the process on your behalf, as there are moving pieces that have to be coordinated.

How do I get started?

Your registered account savings are your nest egg. Be careful with how you employ and invest these funds. Work closely with reputable dealers to first determine whether investing in private mortgage securities is suitable for you and, if so, what the best private mortgage investment products are for you at the time you want to make the investment.

___ JACKIE EDITING___

The case for diversifying your investment portfolio

Too often, the traditional portfolio mix fails to achieve optimum performance because of the under-representation of direct real estate investing. Our thesis is simple: You’ll likely be more successful if you put more emphasis on solid direct real estate investing, while at the same time maintaining a high degree of safety.

Being risk averse is a good thing. We’re risk averse, too! Most people are naturally risk averse. We’re drawn to what we know and hesitant of what we don’t know. The average person knows more about traditional investments like stocks and bonds, so that’s where they put most of their money. But the investment environment, especially in the stock and bond markets, can be volatile. If you’re risk-averse, you should know that limiting your investments to only the public markets is one of the biggest investing risks of all.

Investing limited only to public markets risks the chance of devastation if the “bubble” precipitously bursts based on factors beyond our control, such as environmental disasters, inflation, or fluctuating interest rates. Common sense tells us to spread our money out into a diversity of pots, hoping the ups and downs will balance out and we will enjoy a somewhat stable, if unspectacular, return on our investments. As such, it’s a good idea to put a bigger emphasis on real estate investing.

Every investor’s goal should be to build a more perfect portfolio designed for maximum rewards and minimum risk.

Why is real estate an essential part of an investment portfolio?

Direct real estate investing fluctuates quite distinctly from other conventional asset groups like stocks and bonds. For instance, real estate is tangible and is what lawyers call an “immovable.” It’s not a substitute that should take the place of other assets in your portfolio, but rather an asset group all its own.

Unlike stocks and bonds, real estate trades privately based on local factors such as location, supply, demand, and investment lifespan. It is often scarce, particularly in growing areas, which translates to a history of appreciating value. In your portfolio, real estate investing is a channel to investments backed by real hard assets providing a regular income stream and long term growth coupled with the benefits of diversification.

You can enjoy superior performance and diversity at the same time. This is especially true if you’re maintaining and growing the value of your retirement portfolio. Smart real estate investing can only enhance the prospect of enjoying the benefits of things like reasonable leverage (typically as much as 4 or 5 times) and the miracle of compound interest over an extended period of time.

You can add real estate to your portfolio without actually buying property.

What are the benefits of real estate investment?

Meaningful real estate investing is essential for a well-rounded and successful investment package, and the benefits go well beyond diversification. The most obvious benefit of real estate investment is the financial one. Real estate earns attractive monthly returns and can provide a regular fixed income stream over a set time frame. Speaking of tangibility, that’s another benefit: Real estate is a hard permanent asset that can be easily securitized. It has value, and you can calculate that value at any given moment.

Take advantage of having solid real estate investing as a meaningful part of your portfolio. It’s a self-evident way to enjoy reasonable returns and balance out the vagaries and unpredictable fluctuations in public securities markets, both domestic and international. It’ll pay off in the long term while maintaining a high degree of safety.

Other benefits of real estate investment to note include:

  • The ability to take advantage of leverage
  • Tax deductions
  • A chance to create added value
  • An increased voice in the management of the asset

What is the 20% rule of investing?

Most of us never get a chance to participate directly in a major real estate project — usually grabbed up by big players, like private equity firms, banks, insurance companies, pension funds, and government institutions. We are mostly left to public mutual funds, real estate investment trusts (REITs), exchange traded funds (ETFs), and the like.

Consider the experience of and the lessons to be learned from the Yale University Endowment, which is one of the best performing investment portfolios in North America, having a current value in the range of $30 billion. The fund is known for its “20% rule” which recommends at least 20% be invested directly in private markets, such as real estate.

This invariably translates into significantly higher returns over time for a real estate investor over one who employs a more traditional allocation based in public markets. One can only conclude that it makes sense to piggyback onto a tried and true paradigm of real estate investing established by the major players.

Your investment portfolio can enjoy superior performance and diversity at the same time.

How do I get started?

If you’re new to real estate investing, the idea of adding such a large asset to your portfolio may seem intimidating. But it’s easier and more attainable than you might think.

Playbook Vol. 2 – 5+1 Ls of Location: A Winning Way to Look at Location When Investing in Real Property

In another article, I shared with you some crucial insights that I have gained from analyzing and investing in prime real estate opportunities for more than a decade. In authoring “The Modern Playbook for Super Successful Real Estate Investing,” I drew on professional football as a metaphor with its on-field success rooted in scouting, leadership, and expert play-calling. Since then, star quarterback and master play caller Tom Brady has further proven my point with a seventh Super Bowl victory. Not to be ignored is a new generation of star play callers led by Josh Allen of the Buffalo Bills and Patrick Mahomes of the Kansas City Chiefs. 

Many members of Fundscraper’s investment community are interested in learning more about the thorough and comprehensive thinking behind my key “Go-To Plays.” And so, I have authored Volume 2 of the Playbook, delving into the more technical ins and outs of real estate’s big L: Location.

There’s more to assessing the location of an investment property than the literal physical location of the land. I’ll walk you through assessing the value and quality of a location based on the 5 Ls: LIQUIDITY, LEASEABILITY, LEVERAGABILITY, LENGTH OF TIME, and LOT DIMENSIONS.

The 5 + 1 L’s of Assessing Location

  1. Liquidity
  2. Leasability
  3. Leveragability
  4. Longevity 
  5. Lot Dimensions

+ Loss – Learn to Lose a Lot or a Little

1. Liquidity

Liquidity is a measure of how fast the asset can be liquidated or converted into cash. Indirect indicators of liquidity can be measured by transaction volumes compared to other sub-markets, or by looking at comparable properties within the same asset class and how long they remained on the market before a sale (i.e. “days on market”). Understanding the liquidity of the property or location can help you assess the demand/supply dynamic of the local area sub-market and, from a defensive cash flow perspective, determine how much excess class and interest reserve should be held. In order to avoid selling an asset at an inopportune time, you need staying power. The duration of staying power you need to hold the asset is a direct function of the liquidity of the asset.

Some will say how fast you can convert into cash is a function of price, but for argument’s sake, you want to understand liquidity when the price is at fair market value.

Keep in mind, just because a location may appear to be great, it doesn’t automatically mean it’s also liquid. Illiquid locations are not a bad thing, though it depends on your time horizon and cash needs in a downside scenario. Some investors who have time use the strategy of investing in illiquid markets, hoping for the longer term growth of the asset.

Summary indicators of liquidity:

  • Days on market
  • Sales to listing ratio
  • Absorption rate

2. Leaseability

The value of a property is in its ability to generate cash flow over the long term (an article about Discounted Cash Flow will be posted here). To determine how leasable a property is (i.e it’s “Leasability”), first consider the turnover of the typical tenants in the area (vacancy rates or occupation rates).

If you can lease it, excellent! You’re successfully extracting the largest source of return from holding real estate: the money earned from its rental income. If you cannot lease it, you’re effectively banking on the ability to sell at a higher value at some point in time in the future. And guess what? The best way to drive up the value of an asset is to maximize its income potential.

The underpinning behind this is how much capital expenditures (renovations, capital improvements) you as the investor will have to further invest in the asset to attract the appropriate tenants. This is a cost you should certainly incorporate into your projected return calculation that will likely impact the purchase price of the asset at initial acquisition.

How marketable a property is in attracting high value leases is also a function of capital spend in improving the asset. For example, having a bank as a tenant is great. But you’ll have to ensure the space can accommodate a bank vault with walls made of 3 feet of concrete. That is not a cheap build and can at times be an expensive improvement.

  • NOI / CAP Rate: you can hope for cap rates to compress, but you’re best off if the asset NOI can be increased over time.
    • Rent per square foot
    • Net effective rent
    • Occupancy rate
    • Vacancy rate

3. Leveragability

Real estate is one of the most capital intensive asset classes, so assessing the ability for you to use the asset to borrow and provide adequate security or collateral is an important indicator of value (i.e it’s “Leveragability”). It is important to strike the right balance between debt and equity and in doing so to use assets for maximum advantage. The willingness of banks or other lenders to finance the property is often based on the amount of leverage and is a solid indicator of the asset’s cash flow or capacity to generate cash flow. If an asset attracts only one bank (generally the most conservative lenders) to provide financing and leverage against a property, whereas another asset has four banks lined up to provide financing, then it’s probably a good location!

Banks in general will be more comfortable in lending based on these standard metrics:

  • DSCR (debt service coverage ratio): the ratio of how much cash flow the property generates relative to how much of that cash flow is spent on servicing debt.
  • LTV (loan-to-value): One way to look at the LTV is assessing if there is enough cushion to return your principal in a sale event. This is a simple calculation: (Total Debt registered on the property) / (Total appraised value of the property (as-is state or at future completion)) = Equity value.
  • LTC (loan-to-cost): I like looking at the LTC metric because it is an indicator of alignment with the borrower, as it is a measure of skin in the game by the borrower and is a good measure of leveragability during the development process but before completion of the asset.

4. Longevity

It’s the ultimate master play: Plan for the long term. Consider the length of time it will take to earn your return (ie. the “Longevity”) I am a proponent of long term investing, especially with land and building. Looking at the super long term returns of real estate, you’ll notice that most of your return is derived from the cash flow you are able to extract from the real estate (reference the Schulich study), i.e. rental income, as opposed to the portion of your return coming from capital gains. Remember, the emphasis is on INCOME and cash flow! So if you hypothetically held your real estate for 50–75 years, and you sold it, the return from the income every year is likely more than the return from just the gain on the appreciation of the real estate.

Looking beyond the short term will help you highlight important longer term factors that will impact the potential demand for the surrounding area. Does it require significant CapEx to maintain the duration of active use? Does the market area and community or municipal government have long term investments planned to improve the underlying infrastructure, and thus drive further economic or population growth and employment into the area?

5. Lot Dimensions

By lot dimensions, I mean the size of the land and the design and configuration of any buildings and improvements, existing or planned. For example, here’s a rough sketch of a low-mid rise building section accommodating an angular plane. Notice how the top floor steps back from the lower level floors. There are a variety of reasons why developers implement an angular plane, but it has a direct impact on potential density of the site and design.

That’s an example of needing to have sufficient depth of lot in the context of low-mid rise buildings.

High rise buildings are an entirely different topic, but according to the City of Toronto’s urban high rise design guidelines, the floor plate of the high rise tower is capped at 750 sqm. The podium however, can be much larger. How many floors is the podium? Anywhere from 4–6 floors. How much is one floor? Anywhere from 1–2 floors. How much is one floor? Depends on if it is commercial heights or residential heights. How do you measure the heights? Depends on floor to ceiling or floor to floor…

  • As you can see, it gets complicated. But these details don’t really drive the overall investment decision.
  • The bottom line? Pick a strategy and stick with it. But it has to be a strategy.

6. Loss – Learn to Lose a Lot or Little

Always plan for the extreme downside, don’t forget to do your due diligence.

When the odds are in a franchise quarterback’s favour, he doesn’t get comfortable or lazy; he still memorizes every play and executes every move according to plan, as practised. Even if all these variables to a good location line up, you should still cover yourself and do your diligence on other aspects of the investment.

One important thing you can do is play out the worst case scenario and ensure you can survive and carry the investment for a meaningful amount of time under those circumstances. And you definitely do not want to sell at the wrong time, so do what it takes to protect yourself and avoid the scenario of having to liquidate prematurely, including reducing your debt burden and/or bringing on capital partners. For more information, read “Ways to Diversify Your Real Estate Holdings.”

This leads us to the final principle around the 5 L’s of assessing location.You can’t always pick the winners; no recent Super Bowl champs are undefeated. You cannot expect to always win, and prices don’t just move in one direction. You must manage the downside, or risk mitigating such that you do NOT lose it all.

One of my favorite quotes from Sun Tzu, the ancient Chinese wartime political strategist philosopher and in his own right “quarterback”, is about managing the downside so you don’t collapse entirely:

Those who win well, don’t engage in wars;

Those who engage in wars well, avoid battles;

Those who avoid battles well, lose well;

Those who lose well, don’t lose it all.

The modern equivalent of this is to diversify, and to monitor your concentration.

The Bottom Line 

My 5 + 1 L’s are merely general guidelines for a winning way to assess the quality of a location. There are many other variables that matter as well: proximity to transit, walk score, surrounding retail amenities, availability of good educational institutions and community facilities, probability of realizing on the financial forecasts, market mechanics, competition, regulatory changes and policy, neighborhood demographics, government investment, etc.

It’s never too late to get into the game for the first time, modernize your strategy, or score more points.

While my updated Playbook is a great tool, our team here at Fundscraper is always around to assist with coaching and help you assess opportunities best suited for you.

Fundscraper uses leading edge technology to make it easy for qualified Canadians to invest in private real estate offerings using our proprietary platform. We are breaking down the barriers where historically, only the wealthiest few were able to participate.

We continue to revolutionize how people invest in real estate and, along with our investor community and issuer clients, do it based on data-driven investment decisions. Fundscraper does the heavy lifting for you, but at the same time leaves it to you to decide which investments to choose.

Start Investing in Real Estate Backed Investments Today

Explore the investments available on Fundscraper.

Playbook Vol. 3 – How Not to Invest in Real Estate

How Not To Invest in Real Estate

I’ve gained many crucial insights from more than a decade of analyzing and investing in prime real estate opportunities. When I put together the “Modern Playbook for Super Successful Real Estate Investing”, my goal was to arm you with “go-to plays” designed for success. Now, I want to follow up with what NOT to do.

These days, the number one thing people ask me is what NOT to do. For every investing “do,” there’s also a “don’t.” My professional football metaphor works here as well: There are certain things that lead teams to success, and certain things they must avoid if they want to win. Every winning team has a strategy for success – it takes discipline, dedication, and discomfort to reap the rewards of a winning strategy. In addition to knowing what works, it is also important to know what doesn’t work.

As the Fundscraper investor community is interested in learning more about what not to do, I decided to compile Volume 3 to the Playbook delving into the don’ts of investing in real estate. If Volume 1 of the playbook explains how to invest in real estate, Volume 3 tackles how NOT to invest in real estate.

These are 5+1 rules that set broad parameters and help investors insulate their portfolios from the bad apples. At Fundscraper, we follow these rules and that’s how we have helped our investors achieve an average return in excess of 7-10.0% over the last three years.

1. Don’t rely on only one metric. Define your baseline

Don’t rely on only one metric. Define your baseline and look for correlating data variables to reduce your own or others’ biases on that single metric

Sometimes investors are too attracted to one metric, often the rate of return. Risk and return go hand and hand so when looking for corresponding data points that provide more context for a rate of return, assess the additional risk metrics that drive why the return is higher.  Risk in this context is the potential for principal erosion or losses to occur.

For example, if you see a mortgage paying a high interest rate of 16%, look at the: 

(i) Loan-to-value (LTV) ratio

(ii) Local employment trends, employment drivers (industrial sectors), 

(iii) Population growth, income growth

The loan to value ratio (include link to reference the LTV definition in our dictionary guide) is a measure of indebtedness against the total value of the asset.  The higher the ratio, the higher the indebtedness and thus, the higher the risks! The higher return metric should provide the investor with a premium sufficient to compensate for this higher risk.  

Another example:

If a rent roll shows very high rental rates, over and above market rates;

Look for the components of what determines a typical rental rate in a lease:

(i) Lease Term

(ii) Tenant inducements or cash incentives

(iii) Gross, base, percent rent, and net rents as well as common area maintenance (CAM) or other allocated costs such as Taxes, Maintenance and Insurance (TMI).

A very high rental rate but a very short lease term doesn’t really provide the stability of rental income one would expect from an investment property. Similarly, understand the components of the rental rate and whether or not that rate includes CAM, TMI or other components that might not be predictable, such as percentage rents.  

Tenant inducements are inducements typically found in commercial leases where landlords provide a lump-sum cash incentive to assist the retailer with the costs of locating to the retail unit.  As you can imagine, the larger the inducement, the easier it is for the tenant to pay a higher rental rate, but this doesn’t always serve to provide a higher return to the landlord.  The tenant inducement expense can be amortized over the life of the lease, but if the tenant can no longer pay a high rent for the entire duration of the lease, then that tenant inducement expense may never be recoverable.  High churning tenants should not receive high tenant inducements.

Have alternative baseline metrics for relative comparisons:

  • LTC vs LTV
  • Public REIT yields vs Private REIT yield
    • Payout ratios and leverage ratios

2. Don’t use leverage if you don’t have corresponding income.

  • From the lender’s perspective this is called the debt service coverage ratio (DSCR)
  • Tool calculator

You have to assume the worst case scenario and assess whether or not you can continue holding your investment or the asset can sustain itself with its own cash flow.  If too much leverage is utilized, and too little income is available to support it, then the asset is at risk of being lost to its lenders. 

Lenders assess the ability for borrowers to pay based upon a debt service coverage ratio, meaning, how well the borrower’s income can cover or pay for the periodic debt payments.  So if a borrower’s asset income is $150.00 / month, and the debt payments are $75.00 / month, then the DSCR is $150.00 / $75.00 = 2.0x. Somewhat adequate to cover at least the debt payments.  As an investor, you should look to ensure the residual excess cash can cover the costs of operating the asset as well.

3. Don’t assume the market by itself will drive asset values up

Have a value add strategy 

  • Renovation plan
  • Capital Expenditure (CAPEX) investment plan
  • Income growth plan

An asset that doesn’t provide the opportunity to add value through active management gives you additional avenues to increase asset value and correspondingly, more room to absorb potential value swings driven by the market. 

Buy low, sell high; is now, Buy low, add value, sell higher. 

If you don’t have the opportunity to add value, the risk is buying too high a price point, if the market doesn’t go in the direction you want it to, then you expose yourself to additional risks.

4. Don’t rely on only one exit strategy

Have multiple exit strategies either through a refinancing, buyout, sale, sub-division, etc.

5. Don’t focus on the short term

In fact, ignore the short term. If you have to focus on the short term, don’t get in the game.

  • Focus on the long term as real estate capital values take time to increase.
  • Focus on the income capacity of the assets.
  • Returns from real estate over the course of history, are mainly from the income extraction, not through capital gains. So you should expect to invest that way since that will be how your returns will be achieved.

6. Don’t forget to ask “why” at least 3 times to substantiate the trend or direction

  • Why does this investment make sense?
  • Why will the market continue to go in the trend you are seeing?
  • Why will growth continue?

And don’t be too optimistic.

Look at the sponsor’s / borrower’s various data points:

  • Track record
  • Mgmt. quality
  • Scoring sheet

Don’t forget about the don’ts.

Don’t invest beyond your risk tolerance. As in football, don’t always go for the touchdown pass or throw a Hail Mary pass. Consistent short yardage gains are likely to pay off. 

While my updated Playbook is a great tool, let Fundscraper do the coaching to help you select the winning opportunities best suited for you.

Fundscraper uses leading edge technology to make it easy for most Canadians to invest in private real estate offerings using our online platform. We are breaking down the barriers where only the wealthiest few were able to participate historically.

We continue to revolutionize how people invest into real estate and, along with our investor community and issuer clients, do it based upon data-driven investment decisions. Fundscraper does the heavy lifting for you, but at the same time leaves it to you to decide which investments to choose.

Start Investing in Real Estate Backed Investments Today

Explore the investments available on Fundscraper.

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The Modern Investor's Playbook
to Super Successful Investing

Become a master of real estate investing! This playbook has inside industry knowledge that you can use to help generate passive income! Discover tactics used by the savviest investors, how to diversify, maximize your returns and avoid mistakes. It’s everything you need to know to invest like a pro.

Start investing with Fundscraper today.