REI178: A Masterclass in Canadian Real Estate w/ Nick Hill and Dan Foch

23:37And so the difference I think is there's this gap now that's formed in the market where all of the small players in the real estate space, you're running the middle of real estate brokers or mortgage brokers, don't have the knowledge base to serve those, let's call them sub-institutional investors. You have institutions, your pension funds, all of your large asset holders, let's say they're 50 million plus on the asset and land size. And then you have people below, let's say$2 million. And typically your big five banks, big five commercial real estate brokerages, big five mortgage brokerages that are on the commercial debt side only serve that institutional plus category, 100 mil plus.

24:12So there's this missing middle, economic missing middle, where there's deals that are, we just say very simply, too big for the small guys, too small for the big guys. And Land Bank is really designed to... And you're seeing a lot of guys in real estate Twitter doing exceptionally good work in this space in small sub markets across the US. We want to do the same thing for the Canadian market, keeping in mind that the Canadian market, GDP-wise and population-wise, is smaller than California. We take California, if you could specialize in one area of that size and population, that's basically exactly what we want to do and what we are doing with LandBank and the Canadian market right now.

24:48That's super cool. Nick, you guys put out an episode that I really enjoyed listening to. It was 10 Lessons to Survive until 2025. Can you go into that, just your overall look at the market and what investors should be doing now to kind of prepare to prosper in the next three, four or five years? Yeah, for sure. I mean, look, the list episodes are always fun to do because I think people just love being able to be like, okay, if I do these five things, this will happen. We try to title everything obviously with a certain element of responsible clickbait. That's just the nature of the game we're in here.

25:23I think that episode aside, there's a few things that any and all real estate investors should be doing, especially the newer ones. And that's making sure that you, one, have the right power team and that you always have a mentor. One of the things we talked about in that episode and many others is people set goals. And they think those goals are written in stone when they're not. It's a moving target. And almost everything in real estate is a moving target. Looking at a deal five years ago and comparing it to something now doesn't make sense because you're in a different interest rate environment, you're in a different pricing environment.

25:59For instance, in Canada here, we now have a massive housing crisis because our government is allowing 500 ,000 immigrants to come in every year, which is wonderful, but we don't have anywhere there to put them. So what can real estate investors do to survive until 2025? It's basically looking at the rate environment that we're in right now, which is going one way in both America and in Canada. So how do we adapt to that rate environment? Well, one, you start to run your numbers differently. You start to look at deals differently, but you also are able to find more opportunities. So I think it really comes down to, again, like you've said a number of times, finding your niche and then within that niche, finding the power team to help you execute that.

26:46But exercise more prudence and be more strategic than you were in the last few years where anyone could go in and make money off of real estate. Now we're back in a time and a place where you need that knowledge. Stay as informed as possible, but at the same time, and this might be a bit of an oxymoron, stay as informed as possible, but block out all of that noise and really only focus on the things that you can control. You can't control interest rates. You can't control rising rents. You can't control falling home prices. What you can control is where you find deals, how you find deals, and the exit strategies that you build into those deals.

27:24Dan, anything to add to that? The only thing I would really want to add is that comes from one of the most famous and reputable. I think it was a summary of a lot of stuff that somebody put together in real estate Twitter, actually. I think it was Duke of Dirt or Real Estate Ranger or Real Estate Trent or one of those guys who basically summarized a lot of lessons that came from a very, very famous US real estate investor, Sam Zell. So again, a lot of the stuff we're doing is aggregating data, but a lot of it is also aggregating information from people, again, far smarter than us. How do we condense that information and just create value for the listeners?

27:55So that was a very fun episode. Do you guys have... I'm curious, do you have any real estate heroes? You mentioned Sam Zell. Do you have any others that are... I'm a huge Sam Zell fan. I read the subtle... What is it? Am I Being Too Subtle? I think it's called. Am I Being Too Subtle? Yeah. I really like Zeckendorf. I'm not sure if you've read that book, but if you're looking for an exceptionally good real estate read, Zeckendorf is probably my favorite real estate book. Yeah. And Nick, what about you? I got a lot of my early inspiration and I kind of, you know, years and years ago was flirting with this idea that now we're bringing to fruition is from the bigger pockets community, right?

28:33I mean, those guys have such an immense amount of information that are over 700 episodes deep in their podcast, I think. So guys like the Brandon Turners of the world, he was always someone I really admired. And one of the reasons I think that Dan and I took this approach with the podcast up here is we really wanted to build out a community. And one of the things we're trying to do is to train and build a community of the next generation of real estate investors in this country. And I think we're actually in the early stages of doing that. And that's through building a community and providing that education, which we took from podcasts such as yourself, but BiggerPockets was a major inspiration.

29:12And I think there was a lot of Canadians that did listen to BiggerPockets that were looking for something like that in the Canadian space that didn't exist. We're more than happy to fill that nation and be the BiggerPockets of Canada, or as Dan Levinley put it, the smaller pockets. Dan, I wanted to talk more of a macro look and you're into data and trends. Talk to us about just kind of what you're looking at, what you're seeing, what's unfolding and whether the Canadian market or US market, what is keeping you up at night? Talk to us a little bit about what data that you're seeing that's of interest to you right now.

29:45Yeah. So I'll talk US market because I think it spills over into the Canadian market very much for our listeners as well. I mean, in the US market, rents are falling. I think Wall Street Journal put out a report a couple of weeks ago, or sorry, a couple of days ago that into January, the data points is the first time in five years that rents have fallen for six months in a row. So that is definitely going to be a challenge, I think, or a headwind against... If we look at the way real estate investors purchase property, they purchase in a lot of cases based on yield, and the income portion of the yield is falling right now.

30:18So we can't have the expectation that prices are going to materially go up. I don't know if they're going to materially go down. I think we've seen a lot of the market trying to, let's call it price in interest rate increases or rate hikes from the Fed. And so the market was very responsive. We have a very sophisticated market right now. The retail traders are exceptionally well-informed as a result of things like this, this podcast, Wall Street Bets, whatever it is, Reddit, Twitter, there's such a wealth of knowledge. And so the real estate market almost behaved the same way. It really, it almost overcorrected at the beginning.

30:48It priced in the future rate hikes that we were expecting from the Fed. So now that we're like a year later from when prices probably peaked in most markets in the US and in Canada. So February Q1 of 2022, prices likely peaked. Now we're looking at, okay, is inflation under control? No. So do we expect interest rates to come down anytime soon? No. Okay. So we know what the pricing environment looks like, the buying power environment looks like with this new normal of interest rates, and that's a reduced buying power. So prices aren't going to go up anytime soon unless rates come down and rates aren't going to come down unless inflation comes down.

31:19So we know that piece of the macro is set. We also have the headwind of rents coming down, but the biggest headwind from my perspective, when you talk about housing, which is the most accessible real estate investment for entry-level real estate investors that are going to buy houses, is affordability. And affordability, if you go on the Fed website, I think it's the St. Louis Fed or the Atlanta Fed who has the housing affordability chart. I think it's just HOAM, Housing Affordability Monitor, something like that. And it's a metric that basically shows the affordability on the average salary for somebody to purchase a home.

31:50That's the lowest. Housing affordability is the worst it's been since the great financial crisis or the run-up to the great financial crisis, global financial crisis of 2000. 2007 was the last time that it hit that number. Seeing that and being in that perspective tells me that's the major headwind. A lot of people think investors are going to floor the market, but we just said, okay, investors' price expectations are going to be going down as income and yields climb. Who's going to create the price floor in the market? It's ultimately going to be the expectation would be put on the end user to floor the housing market.

32:24And the reality is they are battling record low affordability or deadeningly low affordability. And so those are, from my perspective, the major headwinds for the real estate space. And I would just encourage people to take, we cover this in the very first episode on our podcast, the Canadian Real Estate Investor Podcast. And most credit cycles are very similar in Canada and the US. And so I would look at that. I would look at Ray Dalio's, how the economic machine works and think about, okay, let's assume that this is the unwinding of a credit cycle right now. And let's just make our decisions.

32:57It doesn't mean you don't have to invest. It doesn't mean you have to take a bearish mentality or be cynical about it. It just means that you have to invest responsibly because that can create a lot of downside risk, but it can also create a lot of opportunity. And then the other thing that I would think about is also these debt and political cycles. There's a political economic cycles. They also happen based on socioeconomic cycles or social cycles. And another book that I might suggest reading is The Fourth Turning, which they're actually updating. He's doing his new update of The Fourth Turning.

33:25I think it's coming out in the summer of this year. Definitely a very, very interesting time to be alive from my perspective if somebody is interested in economics, credit cycles, and all of those kinds of things. Yeah, I totally agree. The couple of things that stood out, the Ray Dalio video of understanding the economic cycle. I think it's about a half hour. You can watch it on YouTube. Definitely people should check that out. And The Fourth Turning, like you mentioned too, I did not realize he's coming out with a, it's a second edition or an updated version of the book. Is that what you said?

33:55Yeah. So basically in The Fourth Turning, which is like, I remember reading chapter six today because he wrote that book in 94, sometime in the late 90s. And it's chilling because he nails a couple of things that happened, the current conflict with Russia, literally states Russia and an adjacent neighbor. These are things that would happen during a fourth turning period. He talks about a global pandemic. It's really eerie to read this. But I guess the fourth turning, based on his forecast, is to have happened or be happening right now and should be ending. You should be getting into that rebuilding phase, the first turning within the near future, which makes me feel hopeful because sometimes things do feel a little bit grim right now.

34:34I guess he's releasing an updated book of sort of what that first turning would look like. And I'm really interested to read it. He's been doing sort of like a bit of a PR circle now and stuff like that. Yeah. Probably now that we're having this conversation, it'll start showing up in your reticular activation system and you'll start seeing it everywhere. But I'm really looking forward to that book. Yeah, that's cool. So the fourth turning, just for people that don't know, that's kind of the end of a political and economic cycle, correct? And we're in that right now. And the first turning would be like the start of something new and fresh and creative.

35:06Is that right? Do you say that's a decent way to explain it? Yeah. And basically the way that it's structured, totally, yeah, you nailed it. And so the way that they kind of structure it based on what he describes is it's basically the result of whatever generation is ruling the world at this time. So right now the most elder generation would be baby boomers. And so the world is sort of a function of the values that they hold based on the way that they were raised. And then as they start to die off, just based on natural causes or old age, then the new generation starts to take over. So I guess it would be your Gen Xs.

35:40And they hold a different set of values. And the way that the whole thing cycles, the turnings are based on what the culmination of society is doing as a result of these different, they call them saculums, I think, which is a quarter of a hundred years or 20 year cycles. And it's just really interesting to think about. I mean, there's really no way to verify whether or not this is true, but it all really resonates. When you're reading the book, I just remember nodding my head. I'm like, oh, this is all very, very true. So yeah, I mean, right now it's handing over from one generation to another and seeing this new faith in institutions because the end of the fourth turning is people start to lose faith in institutions, which you can see.

36:15You start to see a lot of widening of socioeconomic gaps, wealth disparity, political extremes starting to evolve, and all of these things, all of the boxes that he mentions, and he mentioned these 20 years ago, really get checked. And so I'm interested to see what he thinks is next as well. That is fascinating stuff. The whole demographics and all of the movements and changes that come from that is fascinating. I'm really going to keep an eye out for that next book and I'll look forward to it. Do you guys see this current market wherein do you feel like there's a lot of opportunities coming up for, let's say, like the millennial, you mentioned the millennial generation, Gen X a little bit.

36:52Do you feel like baby boomers have had, they've lived through a great time era. Do you feel like those opportunities are going to come around for millennials? Yeah, I do. Absolutely. So I would say, I mean, baby boomers had a relatively easy, like if you even just look at, I'm not trying to by any means say like certain things that they went through were easy, but economically there's evidence that it was simpler for them to succeed financially than it was for subsequent generations. And then at the end of all of that, they kind of created this world in which interest rates have basically been on a steady decline for the past 20 years, say for the global financial crisis, and then thereafter, basically on a downtrend since then.

37:31And so we've really created this extremely credit dependent world. And now they're kind of exiting that world. They were able to amass a ton of capital, have a ton of equity as a result of this declining interest rate environment. And now all of a sudden, they hand off the economy to the younger generations in this kind of really messed up state where you have far too much money in circulation. M2 money supply is really creating, I guess, a challenging world for the financial system. But also, you have all of these new, very sophisticated financial instruments and a very credit dependent. You have a high household indebtedness, at least in Canada.

38:05US isn't so bad. You guys kind of solved your problem. You learned your lesson after the global financial crisis. But yeah, I think it's going to create a lot of opportunity for us. But it also comes with learning a new way of thinking because we are entering a new tide changer. This is almost like a sea change. This is really a new... You have to be willing to enter into a new way of thinking around interest rates, around stress testing properties, around how to make money. We have to think cash flow first. Can we rely on capital appreciation the way we were able to for the past 20 years? And I think whoever is leading the thought experiment or the thought leadership in that way of what this new investment, real estate investment world ends up looking like, I think if they make the right decisions and if you form the correct market thesis on kind of how the macro is going to play out over the next 20-year cycle, which is really the timeline that you should be trying to hold real estate assets, there's a ton of opportunity, probably equal opportunity to what baby boomers who bought at the onset of this 20-year interest rate decline had.

39:06So I would say, yeah, absolutely. I'm expecting probably the next two to three years will be literally once in a lifetime investment opportunities for our generation. I'd just like to add to that quickly. There's that quote in M, hard times create strong men, strong men create good times, good times create weak men, weak men create hard times. I think based off of the cycle conversations that you two just had, which I agree and that are fascinating, the long wave stuff, we're at a point where we have created hard times, but through that, we can become better people. If you look at the last recession, you look at guys like Sam Zell or even Grant Cardone, that's really where they made their fortune.

39:45If things had continued on the trajectory that they were on over the last few years, the millennial investor would have an extraordinarily hard time getting in and likely in some markets never be able to. I completely agree. I think that we're going into a whole new world here where the game is going to be, the rules have changed and we're playing a new game. The millennial investor nowadays is also more equipped from a knowledge standpoint than any other generation before. So utilize that knowledge, figure out how to apply it. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message.

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43:36That's theinvestorspodcast.com slash TIP-finance. All right, back to the show. Do you guys have any just kind of broad strategies that you're doing to prepare for this or things you would recommend for younger investors to get ready for these opportunities? Anything that come to mind real quick? Big thing is just like being liquid, deleveraging, like trying to, you know, I mean, it's all just regular personal finance stuff, I think, but it's really easy to think you're a rocket surgeon in a 20 year bull run, right? Maybe there's an interruption for you in the States, but like, you know, I mean, think about the lead up to the global financial crisis where everybody thought they were a genius and could make money buying real estate because the equity was increasing by 10, 20, 30 % a year.

44:21It's been like that in the equity space and in the real estate investing space on a slower pace or scale, a smaller magnitude, but for the last, since the global financial crisis, basically. And so I think the big thing I would say is like, start thinking smart, stop thinking that the economy is just going to grow infinitely because we are really entering a very, very weird time for the global financial system. We're seeing onshoring, we're seeing conflict, we're seeing changes in the interest rate environment, we're seeing changes in fiscal and monetary policy. I mean, again, I would really liken real estate and almost anything in the world right now to very much being a stock picker's market.

44:57Right now, the market might be in a bull run or it might be sideways, but if you pick the right racehorse, if you bet on the right racehorse, you're going to win and you can win big. If you pick the right real estate asset, if you have the right investment thesis and really, really formulate that, I can't tell you what it is. I might just outperform the average and that might be okay for me. But somebody listening to this might be like, I think that this certain asset in this certain location is going to be the perfect investment for this exact reason. And they nail it and they will completely outperform anything that anybody on this show could do.

45:30And right now we actually have the opportunity to do that. Whereas the past little while, it was like everything did well, but there was no really huge outlier returns. There was no anomalies. There was no life-changing money really available other than basically through leverage or taking excessive risk. And a lot of that, and I'll wrap this one up because I'm rambling a little bit, but a lot of that came from my perspective, the disparity that we saw as a result of this gap between wealth or the upper and lower middle class and the erasure of the middle class. And people started to feel this feeling of desperation.

46:00They had to take big risks. They had to make those you know, those YOLOs, the Wall Street bets moves in order to get from the lower to the upper class. And so this financial desperation evolved. And I think that hopefully we're seeing a normalization, a healing of the market, a healthier market where people can actually get rewarded for being smart, making good, responsible decision, investment decisions. Yeah. It's fascinating times we're living in. Nick, did you have a little bit to add to that? You know, obviously I completely agree with Dan. I'd say the most important thing you can do right now is exercise patience.

46:30Be more strategic than ever before. Add a couple points to every one of your numbers. Add another month for your construction schedule. Under promise and over deliver to yourself and remain hyper-focused. Don't get stuck in that analysis paralysis. You say to yourself, Patrick, you can spend a decade learning, but you will never get that practical knowledge that you do on your first deal, whether it goes good or bad. And it will go good if you have the right people around you and if you've done your due diligence. So front load as much of that work as possible. And my number one thing in everything and every business I've ever started is go find a mentor, find people that are doing what you want to do.

47:07And this could be for the person that's buying their first house, their 10th house, or their apartment building. Go find someone that has five apartment buildings and start asking them how they did it. There's a great value investor, Monish Prabry. I'm not sure if you guys are familiar with him, but he wrote a book called he calls it just cloning. And same thing that you just mentioned, Nick, just find somebody that's doing what you're doing. You don't need to be a rocket scientist in any of this stuff. Find somebody that's already done it and just replicate it. It's not always as simple as that, but it certainly helps.

47:40So I wanted to wrap up here, guys. I really appreciate you guys being on the show and sharing what you're up to. For our listeners that want to learn more about you, your podcast, what's the best way for them to do that? For anybody who's looking for exposure to the Canadian real estate market and likes the kind of stuff that we're saying. We have a show called the Canadian Real Estate Investor Podcast. It's twice a week, Tuesdays and Fridays, and really data-driven approach to investing in real estate. And honestly, in the Canadian market, so a lot of the principal stuff that we do, the fundamental stuff is probably very similar to the US and it's harder actually to do well in Canada because our real estate is so overpriced.

48:15So if you can succeed in our market, you probably can succeed exceptionally well in the US market. So that's called the Canadian Real Estate Investor Podcast is available on all platforms. I'm pretty active on real estate, Twitter, Instagram, TikTok, I'm trying to pick up as well. YouTube, I haven't really done exceptionally well, but I have a very unique last name. It's actually a famous French name and the most expensive real estate in the world is actually on this street, Foch Avenue in Paris, the main street in Paris, but Daniel Foch. So if you just Google it, F-O-C-H, you should be able to find me.

48:40It'll probably just Google will give you the platform that it thinks you're most likely to click on. So that's probably the easiest place to start for me. Great. And how about you, Nick? Same thing for me, you know, try to be as active as I can, not as active as Dan, because he is a machine when it comes to content. But yeah, you can find me at my buddy, Nick, you know, you add me and we're automatically friends. That's Instagram, Twitter, and I'd be on the same YouTube channel as Dan. And then yeah, go check out the podcast. It's available wherever you listen to podcasts. And a lot of the, I know, you know, a lot of your audiences, obviously in America, what we do is Canadian focus, but we do talk a lot about fundamentals and strategies and real estate principles that are kind of evergreen and that could be applied whether you're buying real estate in Switzerland, Costa Rica, Ohio, or Toronto.

49:26Also, we have a central bank in Canada, but it just follows what your central bank does because the Fed rules the world right now. We basically talk about Powell and the Fed more than we talk about what's actually going on in Canada. So we touch on US macro and global macro a lot too. Yeah. And I was just saying that I really would encourage our listeners to check it out. You've got a lot of great episodes that I enjoyed. And it's like you said, there's a lot of applicability, both in Canada and the US that apply. Guys, I really wanted to thank you for your time and appreciate you guys being on the show and also for having me and doing the interview.

49:58Yeah. Likewise. Really appreciate it. This is an awesome conversation. Hey, everybody. I just wanted to make a quick postscript here in regard to a comment that Dan made about a real estate hero of his book that he mentioned called Zeckendorf. The book is called Zeckendorf, Z-E-C-K-E-N-D-O-R-F. Its subtitle is The Autobiography of the Man Who Played a Real-Life Game of Monopoly and Won. This is a book that Sam Zell said any real estate investor needs to read. He implores investors to read the Zeckendorf book. I picked it up after Dan mentioned it. I'd never heard of it. It's a fascinating read.

50:35It's a page-turner. I hadn't come across a book like this in terms of a biography since Titan, the John D. Rockefeller story that Ron Chernow wrote. Really a great book. I highly recommend it for anyone that is just interested and in need of a good read. The book starts with William Zeckendorf's early life, his start in the real estate business, moving on to a bunch of his notable projects and successes, his first development in New York's Upper East Side, the construction of Century City Complex in Los Angeles. The guy just had amazing perseverance, vision, and was an incredible innovator in the real estate space.

51:11It also just talks about how he strategized about things, how he thought about things, how he dealt with setbacks financially, legal battles, etc. It's just an incredible story about his approach to real estate development. The guy wasn't content simply to just build buildings. He really sought to create entire communities and thought about the quality of life for everybody that lived in an area. incredible master at assembling the right team of architects and contractors and engineers to bring his vision to life, really paints a picture on how to do that, that I found incredibly interesting and applicable to some of my very small projects.

51:47But highly encourage all of you guys just to check out the book Zeckendorf that Dan recommended in the interview. Okay, folks, that's all I had for today's episode. I hope you enjoyed the show and I'll see you back here real soon. Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by the Investors Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional.

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