Daniel: One thing about these folks, they have an incredible business in Toronto, but not just around, over there. They have a really cool group. Make sure that you point out how people Volition, how they can find you guys and how they can go to your events, downtown Toronto. I think that you're the only people who run a club similar to this downtown Toronto. Make sure you tell them about that.
I run a really cool club and they want to talk to you about it, because every time we talk to people about Toronto, they go out. While we invited these people here because they are from Toronto. They do it very well. A lot of people working with them do extremely well. How do they do that? Let's find out, Ming and Edward.
Edward: My name is Edward and I'm with my colleague here, Ming. And we're part of Volition. Who is Volition Ming? Why don't we start with that?
Ming: Sure. Two of us up here, we're basically like the property brothers. We do, I like to think a little better looking, maybe a little shorter. But we're basically like the property brothers. We do the real estate buying as well as a lot of the construction and renovation on these properties. I like to think of us as like the Asian property brothers. I bumped up the image. Who are we? We're investors first and foremost. We know a number of people in the room here.
We've been investing for a long time. Always talking about our personal achievements. It all sounds like bragging, but we have about 25 million personal holdings over 50 doors in Toronto. I think the most important part is we pride ourselves in helping others like this group here today. We've invested, that's quite an outer date number, but it's closer to about 180 million now for our clients. We do four things. We do advisory, stuff like this, coming on stage teaching people, we do realty where we actually help find and invest properties for clients.
We do renovations because oftentimes when you want to do a secondary suite or you want to do a triplex or quad, you're gonna need to execute on renovations. That's actually a very difficult thing. I'm sure anybody who's gone through the process before knows it can be an absolute nightmare dealing with contractors. We do that. Lastly, we do property management to help basically keep our clients from having to worry about managing their properties. We take that responsibility on ourselves.
Many organizations have a mission statement. We have a mission image. When we started investing, it was tough. It was not easy. We didn't understand the power of a network. We didn't get ourselves properly educated. What we wanted to do when we started was this, we wanted to be the eraser and people's real estate investment journey. We went to basically cut through and help people out as they invest.
We're talking today about the number one myth of investing in Toronto. That myth is that you can't cash flow in Toronto. I hear her laughing already. A big spoiler here, obviously you can cash flow in Toronto. I'd have nothing to talk about today, but you can't cash flow in Toronto. But what I really want to do is dive into the importance of cash flow. What is cash flow? Exactly. When is it important to you? What risks does cash flow will actually represent?
This is how I like to think of the investor. We all start out like a good friend Homer here and at the very base, when it comes to investing, we understand buy low, sell high. Everybody does, right? Like even people who don't understand anything about real estate investing, this is where they start to buy low, sell high.
Anytime somebody comes to you and says, hey how's the market doing? Is it the right time to buy a property? You know that they've got their head in this. They're thinking about timing, the market, they're thinking about, this is now the right time to buy, and they're not thinking about time in the market. I'm sure you've heard it many times before. It's not timing the market's about time in the market to build wealth, but I'm sure everybody in this room knows more than that.
A lot of people get here, you get some education, you read some books, you go on some forums and you learn about. You're like, oh my God, this casual thing. Awesome. That's all I want now. A lot of times investors, this is where they get stuck. They focus on cash flow and they understand that it's a good concept to understand, but they become solely focused on it at the detriment of looking at the holistic investing picture.
This is where we want to get you guys today. Understanding the role of cash flow. How it lets you hold a property for the long term so you can build real wealth. How does cash flow indicate risk in a property? When is cash flow actually important in your real estate investing journey? No surprise here. We all know the properties in Toronto are quite expensive, but the question is why is Toronto expensive? Why is cash flow lower in Toronto? I want to make sure that as we're going through this process. We're separating cost, expensive, cheap, whatever it happens to be from value, from return, because a lot of people equate expensive with poor return.
Let me give you an example. You spend $10,000 on a watch. This is an expensive watch, right? You can buy a watch for 20 bucks. You spend $10,000 on a cheap car. Now, which one's providing you good value? $10,000 watch might be a collectible watch. It might have great investment return over a period of time.
The $10,000 car may be full of deferred maintenance. Maybe that's going to be a money pit for you. They're both $10,000, still a lot of money, but there's different value that you're getting out of that $10,000, depending on where you're putting it. Why is it the case? Why is it that Toronto is expensive?
This is like the, oh my God moment. Is Toronto or any other major urban center actually less risky and that's actually why we're getting less. Let's talk about the four areas of risk to really dive into this a little more, because I think a lot of people, when they talk about risk, it's like a gut feeling thing.
My background is in finance. You try to articulate that gut feeling into actual metrics. Here, a lot of you are already familiar with these four areas of risk, but let's go through them really quickly here. The first area of risk that we talk about is tenants. This is the risk of having a bad tenant. And any of you guys, who've been real estate investors for a while, know what it's like to have a bad tenant. It's not only impactful to your finances, but it is a soul sucking experience. Like you go to the LTB and it is miserable. I hate it, but it is a big risk to your business because it means that your cash flow could disappear. If you have a tenant who's just not paying.
Next thing here is market risk. This is exposure to changes in the market. We're talking about things like changes in commodity price, software, lumber, oil. When that happens, what happens to your investment portfolio? When new regulations come in for mortgage rules, how does that impact your portfolio? How resilient is your portfolio to market risk and what are you doing to mitigate it?
The next thing is property risk. This is a risk inherent to the property. We're talking about the location of the property. We're talking about the actual building itself.
The last thing is investor risk. Those are the risks that you bring to the table. Now you may be mitigating that risk and you're definitely mitigating. And by coming to events like this and being part of the REITE club, but this is a risk that comes with maybe lack of knowledge. Let's focus on tenant risk here.
Ontario is actually quite different from the rest of Canada. If I'm looking at investing, let's say in Alberta, they've got pretty fair tenant loss. You don't pay you're out and it doesn't take months and months, but here in Ontario, you know how it is. You've got a tenant who's bad or it's causing problems. It can take months until the tenants are out. I've had tenants which have taken over six months to evict.
In Ontario, in particular, our tenant risk is higher. When we're creating our business models to be effective in Ontario, we really need to care about our tenants and our tenant profile and get that right in the start, as opposed to having to deal with it later. Who are our best tenants? Those of you who are more sophisticated investors have heard this a million times. It's millennials, right? Young professionals, paid, good jobs. They tend to work in major urban centers.
There's few tenants, a few millennials who are like, I want to live, work and play in Timbuktu or wherever it happens to be. They all want to come to major urban centers to live their lives. Most importantly though, they don't like to commit. They're willing and very different from my generation. I'm a gen X-er. I know I look maybe 20 years younger, but they don't want to commute. Commuting was part of my life. It's just a given 40 minute drive to wherever to get into work, but a millennial is willing to pay more or live in a smaller space for the convenience. This is really important for us.
When we start talking about a property risk later. Why do we like millennials? They pay their rent. They're well-paid, they pay for nice places and nice finishes. They take care of their place. Most importantly, as Ontario investors they're transient. Why do I like people who are moving out every two or three years? That's right. This is a smart group.
We can raise rents and we don't want to raise rents through renovations or some of these other awful things that are out there. We want natural attrition. If you're investing in a place like Toronto, if you haven't been able to turn over your tenants, you're missing out a like 10% to 15% year over year rent increases that we've been seeing in the market. It's really important not to get a life in a place like Toronto.
Next thing is market risk. Market risk is, how resilient is your investment to changes fluctuations in the market in major urban centers? They are more resilient because they have more diverse economies, more diverse job bases. Everything tech to medical, to, startups, whatever it happens to be, you can find them in major urban centers. This is where talent tends to pool.
Edward: To that point, I think right now, Toronto, we're ranked number four as the biggest tech hub in North America. That's a big deal because tech jobs pay very well. It's only growing.
Ming: What does this mean? Great economy leads to immigration. People moving for jobs leads to population growth. But in the context of our presentation today, it leads to lower cap rates. Does everybody here know what capitalization rates are? Does everybody here know that capitalization rates are actually a function of risk. If you're a commercial investor and you're looking at a 10 cap versus a five cap, It's not just return. It's actually a risk of my return.
We'll get into that a little bit more afterwards, but here's some data showing what happened. The last time we had a market change and by market changes, influences outside of real estate and what happened to real estate itself. When we're talking about Toronto and investable areas in Toronto, we're always talking about the downtown core for us. It meets all our fundamentals.
It's where millennials want to be our primary customer. It's got infrastructure. Close to jobs, all these kinds of things. If you're familiar with Toronto, these are the downtown neighborhoods that we refer to, and this is what we're actually happening now. I know from where you guys are saying, it's a bunch of lines.
Let me just go through this. In 2017, middle of 2017, what you're seeing here is that peak and then change has happened. Introduced foreign buyers stocks, boom, market dropped and mortgage qualification rules came in, changed around that time as well. There was an impact, but you can see it was a little short lived by the time we get to mid 2018.
Many of those neighborhoods had improved already in value, and we're not using average sale prices here. Average sale price by the way, useless metric. If I transact. $2 million mansions. My average sale price is going to be higher. If I transact a whole ton of condos that month, my average sale price is going to be lower. Average sale price doesn't tell me anything. What actually is a good metric?
If you guys are looking to attract your properties, it's something called the home price index. The home price index tracks, like for like properties over a period of time. We're looking at, in this case three and four bedroom, single family homes. There's a whole bunch of condos sold that month. It doesn't mean that your house is worth any less and vice versa. What is this big downturn everybody's talking about in Toronto? It's everywhere else. It's all around Toronto that has seen these impacts.
Places like Vaughan, Richmond hill, Markham, and even the outskirts of Toronto neighborhoods like Scarborough, Willowdale. This is what we're seeing here. This is the doom and gloom headlines, and this is where it's been coming from. We saw the peak in 2017, the market came down 10%, 15%, 20% of those areas and is only now starting to recover. We're seeing a bit of recovery in maybe Aurora, Stouffville, a couple of those places that the market's down. It doesn't have the investment fundamentals that the Corps has.
There's no infrastructure out there. The people who are renting and buying to have buying out in these areas, they're always in the core. When you buy prime property, you pay for it upfront. But when the market changes, it sticks with you. Your value is retained a lot better. And we talk a little bit about cap rates as well.
Edward: If I could buy a property with a 5% or 10% cap rate, which one would I buy? Obviously, 10%.
Ming: All things being equal. No, it's a trick question actually. Everything isn't equal. If you're seeing different cap rates, let's say you're in the same neighborhood. You're looking at house A and then down the block is house B at 10% cap, house A is at 5% cap. There's a reason that they're being offered at 10% cap. You may not have figured it out yet, but there's a reason that property is at a higher cap. Same with markets. If you're looking at an entire market where everything is 5% cap and you go to another market where everything's 10%.
There's a reason. You might not know what that reason is right away, but your job as a sophisticated investor is to find that out, maybe its dependency on a single industry and that industry is in decline. Maybe their fundamentals aren't there, their infrastructure falling apart, right? That's your job at the end of the day, we're not smarter than the market. I'm not smarter than the market. Use the information, getting from the market to help you make an educated decision on your investment. Next one here is property risk.
Edward: Why do we like investing in urban centers? Urban centers have all the fundamentals like Ming has reiterated many times. As soon as the presentation, we had mass transit, usually in the urban centers. We have areas that gentrify year after year for example, areas that were considered unlivable for most people like region park, Moss park, South Parkdale. Haven't seen insane growth due to the city 's massive planned projects, and also just the city wanting to grow and get better. Having more people come in and condo developers and I guess developers in general just wanting to improve the city.
In the core where most of the jobs are always in the core as you move out further and further from the city, because more and more suburbs, less and less urban centers, most of the tech industry is moving to the core, same with finance, insurance, et cetera. This equates to having the best tenant profile. That was one of the major risks that we see in Toronto. To dispel the myths of Toronto, not be able to cash flow because we've been talking. I think that's the number one myth that we have in this room right now.
Last month we closed on a property. We purchased it for $1,240,000, that is eight bedrooms and four washrooms. It was a fourplex. With this property cashflow in Toronto as a cash flows very well. I'm just going to break it down for you. The monthly rents were around $7,600 and this is what we're renting out. One unit for 2,800 for a three bedroom.
There was a one bedroom in the basement and another bed or a bachelor pad. If you want to break out into the nitty gritties and talk about the monthly expenses and the mortgage pay down, we're expecting around a thousand dollars in monthly expenses because the tenants are paying the hydro. It is a legal fourplex. The monthly mortgage payments are roughly $4,200.
Every monthly cash flow for this property was $2,300 to $2,400 a month, which is quite good. However, Toronto is also a major urban center. I would say you have different means of actually increasing your cash flow apart from smaller areas where you're investing less infrastructure, less attraction for tourism, et cetera.
This landlord was a little more hands-on. They provide cleaning services twice a month and rent each room out for 1450. We're grossing close to $10,000 in rent for this property. Our monthly cash flow for this property was around 4,000. I know our rent, I know the rules right now for Airbnb short-term rentals. We're not going down for that. We're going for executive rentals, one bedroom, large bedrooms, and nice urban areas where people want to live.
If you guys really want to get to the nitty gritties of the numbers, because see the yearly returns. The early returns we have on this property, because Toronto has been appreciating so much. And because this property is cash going quite well, we are actually seeing outperform most other areas that we have invested in before.
Ming: I want to make it clear, like I'm not knocking anywhere else. Oh, for sure. We're not saying that you can't make money in any city. It really comes down to being an expert there. If you don't know the difference between Moss park, Regent park, and High park. You think they're all nice parks. Don't invest in Toronto, like you need to be an expert wherever it is that you're investing. That actually brings me to investor risk. This is the risk that you bring to the table. But what I want to really highlight about this is your team. I don't know how much this gets talked about.
When you're a real estate investor, you are essentially the CEO of your own little company. Everybody that you work with is an employee of your company. They all get paid the same. If you've got a real estate agent, you're on the buy side, they're getting paid by the seller. Why would you work with anybody? But the best, they're all the same price. This goes for anybody that you're working with in real estate.
If you want to learn about JVs, talk to experts. You want fantastic lawyers. We have fantastic lawyers in the room. Use the best people because the best people give you the best advice and you're able to execute. Last thing I want to touch on today is the multiplier effect and the role of cash flow. Earlier Brady talked about the multiplier effect very briefly. This is the same idea, but I want to focus on the cash flow component.
This is a model here. Let's say you have $500,000 investment, 20% down. $400,000 mortgage, a hundred thousand dollar down payment. How magically the numbers work out, you get $0 cash flow, $2,000 rent, $1,500 in mortgage, $500 in expenses, pointy areas, $0, the cashflow at 5% growth hold onto property, 5% growth in four years time we refund.
This is not a novel concept to a lot of people in the room, but we're still at $0 cashflow. We take that money out. We go buy another one. Isn't it nice? The numbers work out perfectly. $121,000 You get in your refinance just happens 20% down for properties at the time is $121,000. We keep doing it. We take money. We let it grow again, for another four years, we take money out. We go buy another two, $0 cashflow still. in a 12 year period now we've got eight properties.
What we like to call the great weight you hold onto those properties for a while, maybe five, six years. And you let the LTVs build up in those properties to 50% still at $0 cashflow. Now, at this point in time, we've got half our properties with our equity in it, the other half owned by the bank at 50% LTV. We can divest. We take half those properties. We sell them off and we buy the rest of our properties. We own free and clear.
I know a lot of you in the room who are more sophisticated are like, man, that's tough. You got a mortgage qualification. I got taxed and yes, I completely agree. This is to demonstrate a point about cash flow. We're free and clear now. What does, where does that leave us? It leaves us at a portfolio value of 4.8 million and an annual cash flow, but 144,000 now, because we've paid off those mortgages.
This is when cash flow is important, because I would say if you're able to get a property that has $200 in cash flow a month right now, Let's say you're able to increase it to 600 bucks a month also. Great but is it going to make a damn difference in your life? It's not, it really won't make a difference.
If you're able to buy a property with three X, four X cash flows right now, it doesn't when you quit your job. Now, when you invest that money at the end to pay down those mortgages and you have properties free and clear, that's really when cash flows and. I'm not saying that cashflow is unimportant, don't buy cashflow negative properties, please do not do that. Just don't make it the single and foremost deciding factor when buying a property.
Hopefully today we've helped you see beyond the myth of cash flow, that cashflow is really there to help your property. Hold it for the long term to help you take the bumps that happen along the way, leaky roofs, the collapsed foundations. I was talking to a gentleman earlier about that, helps you weather the storm, but in the beginning, doesn't really impact your life. It's at the end, once you build up enough capital, the one true myth is investing in Toronto is really difficult.
That's why there's only a handful of people who do it. Like in this room here. I said earlier, work with experts. Come talk to us. If you have any questions, it doesn't mean it's impossible though. It just means you need to have a good team to access. There's tons of other myths. This was actually going to be the top five myths about investing in Toronto.
It became the number one myth of investing in Toronto. But please feel free to come talk to us. We're just at the booth over that side of the room. We'd love to help dispel the myths about Toronto investing. We also offer a free consultation to look at your investment portfolio. If anybody in the room is interested and we always like to end with this slide. You can do it. Thank you very much. .
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