Laurel Simmons: Hi everyone. I'm Laurel Simmons, a co-founder of the REITE Club, and I'm here with Katherine Nelson Riley, our wonderful operations manager, and we're so happy that you're here to listen to this great episode that we have with Seth Ferguson today. Katherine, you and I have already spoken to Seth. What do you say?
Katherine Nelson-Riley: I just thought it he is just such a wealth of information and experience and he is all about coaching and bringing people through to make sure that they understand the differences between the smaller self-managing smaller units and getting people to understand that it's actually a far better investment opportunity and strategy to go with the larger deals and they're not as scary. He takes a scary out of it.
Laurel Simmons: Yeah, he really does. And I thought it was really cool when he talked about, the fact that just cuz you add a few more zeros to the end of the number really doesn't change anything. You still do your due diligence, you still do your planning. You have the people around you, you have your plan, you do your analysis and all the rest of it.
If you're gonna do that for a small unit, like maybe a single family home or there's a lot of risk, why not do it for. A hundred unit apartment building where there is much less risk depending on how you structure the financing. Now that's a whole other ballgame, but I think maybe we should go right to the the interview and let people hear what Seth had to say about that. What do you think?
Katherine Nelson-Riley: Absolutely. It was excellent. I think everybody's going to really learn a lot.
Laurel Simmons: And just before we go there, everyone go on to thereiteclub.com. Go there. There's so much information for you, videos and podcasts, all kinds of stuff. So please come and join our community and help us customize your life. Let's go Katherine to the interview.
Hello Seth and welcome to the REITE Club podcast. It's great to see you cuz I can see you right here. Most of our audiences listening to this. And just tell us where you are from, where you're sitting right now.
Seth Ferguson: Yeah, I actually live in Milton, Ontario, so just west of Toronto. And I grew up here and I've lived here ever since.
Laurel Simmons: Okay, great. And today's topic there's a number of things we can talk about, but you are the multi-family investment guy, aren't you? That's what you do, that's what you live and breathe and eat. I think you are so into multi-family real estate investing as a really cool hot topic.
Seth Ferguson: Yeah everything. It's basically from the time I wake up to when I go to bed my life is dominated by multifamily real estate these days, so it's it's nonstop action.
Laurel Simmons: And you are also putting a conference together about multifamily real estate investing. So we'll talk about that a little bit later, but let's get right into it. You and I were talking, or we were, the three of us were just talking before we started about 101 reasons why you should move. Maybe not should move, but. Also consider getting into multi-family residential investing. So let's talk about some of those reasons. Come on. Just give it to us.
Seth Ferguson: I'll give you an example for my own life. When I started off real estate investing, I was doing the smaller, single family homes, duplex conversions, condos, that kind of thing, and I found it challenging for a couple reasons. I think the big reason why people find it challenging is the financing aspect. So everybody knows they have to give an arm and a leg and their firstborn child just get a mortgage from a bank. Because with residential real estate, you have to qualify for the loan.
Like the bank doesn't care about the income produced by the property. They care about you. As a person borrowing the money. So that made scaling really hard. And also that the cash flow was very tight. Doing the single family portfolio stuff that was what I call equity rich, but cash flow poor.
I had all this equity built up in these properties, but I couldn't access it because my cash flow was so tight. I, to give you an example, with one duplex the drain out to the sewer, a tree root like went right. And I had to get it repaired and the repair was $8,000. Now, with this property, that was basically three years of positive cash flow gone up in a single day with a single repair.
Yeah, like equity's great and in the GTA, the Greater Toronto Area, we had seen great appreciation, but if you can't access the. What's the point? And cash flow is the lifeblood of real estate. If you don't have cash flow, you don't really have anything at all, because if you're not producing cash flow and the only way you're making money is through appreciation, that's not investing that speculation.
I went through a dramatic shift in terms of my thinking and then I discovered multi-family real. Commercial apartment buildings. And a couple advantages, just off the bat, economies of scale work in your favor. If you have a duplex and a tenant moves out, there goes 50% of your revenue gone overnight.
I don't know a single business that can survive that. Even with the fourplex, 25% of your revenue gone when attendant moves out. But if we're talking, let's say. Hundred unit apartment building and you have five vacant units. That's the cost of doing business. Your expense ratio per unit is a lot lower.
Ease of management is a lot better when you're managing multiple units in a building rather than, 10. Houses all over the place. No I can't imagine dealing with a hundred different tax bills, but you can certainly manage a hundred units in on one property. The way you can bring in investor money into these deals is a lot better.
You can raise more capital, more efficiently. It, the type of debt you can get, interest only payments, especially to Canadian investors doesn't really exist. But when you hop over to the apartment building side, lenders actually wanna lend you money on apartment buildings because they know it's the most stable asset class out there.
I could go on for hours about all this kind of stuff, but the, those are just some cherry picked highlights on, the differences between residential investing and commercial multi-family.
Laurel Simmons: Let's talk a little bit though about the difference between. Small multi-family and large multi-family because there is a big difference.
You were talking about economies of scale. So as, as far as the financial institution is concerned, let's say a typical Canadian bank it's what about fi what five, maybe six units they start looking at as a commercial. Investment and things are slightly different when you go, as you said for commercial lending.
However, there is a big difference between having, say, a Sixplex or even a 10 plex and a hundred unit building or a 200 unit building, and I think a lot of people are really scared about going from the single family home into that really large building. So what do you have to say?
Seth Ferguson: I love this question because I'm going to give you a very opposite opinion to most other people.
Having done both, I can tell you that doing a larger deal is safer than doing a small deal. And let me tell you why. If somebody is just starting to dip their toe in and they're like, oh 50 units sounds really big. I would rather just get a fourplex or a sixplex, that's going be safer because the dollar value is smaller.
I'm going to question whether that is actually the case or not. Because if you think about it, if you're going with a really small deal, let's say a fourplex your cash flow is going to be really. The type of debt you're going to get for the property, like you have to sign and qualify for the loan, like you have unlimited risk at that point.
You probably have to self-manage it because the cash flow isn't there to buy professional management. You have all sorts of other reasons why. So when we compare that to a commercial apartment building, so let's say a 50 unit building, a hundred units it doesn't matter. You have. A lot better cash flow.
You have more wiggle room to make mistakes at that point. You make a mistake with the fourplex with no cash flow. Your toast. Yeah. Your cash flows gone for the, a year or three years. With an apartment building, you have stronger cash flow, so it gives you a little bit more wiggle room.
The cash flow also allows you To pay for management. The bigger you go, like with the a hundred units, you probably have onsite staff every single day. Who's going to do a better job? A property manager who visits the property once. A month or maybe once every two months to collect a check or staff who are onsite every single day nipping problems in the bud.
I would argue that commercial property is a lot better taken care of. The residents are better taken, better care of. Maintenance issues are dealt with because you have people there all the time whose job it is. They're not managing. A hundred different properties running around. They're there all the time.
And the type of debt you can get is better. Who let's say there's an issue with the deal with the fourplex A and it's a $400,000 mortgage. The banks wanna come after you and seizes all your assets because it's Because you have unlimited risk at that point. With the commercial apartment building, there's something called non-recourse debt, which means the bank can't come after your personal assets.
They don't have recourse. They will seize the asset. So that takes off some risk exposure from the actual investor. Plus, we have different ways of investing in larger apartment buildings. Most people with a fourplex or a duplex, they'll partner with somebody, they'll do the deal on their own. You.
Don't get me wrong, like partnerships are great, but there's a misconception out there that, hey, if I'm just providing the money and somebody's swinging a hammer, that's passive investing The lot doesn't see it that way. There's no such thing as passive investing in a partnership with a duplex.
Like all parties are active, which means they're assuming unlimited risk. With the commercial apartment building, the bigger you go, you can take advantage of different structures like syndication, which allows for true passive investing. A fund can acquire. So if I'm looking at doing a small deal for my first one or a larger deal, I would rather go with what's going to give me the most advantage, which is the larger deal I get.
I have professional management, I get better cash flow, I get better debt, I have better economies of scale. All of those things work in my favor at that point.
Katherine Nelson-Riley: That's awesome. And actually really enlightening because I didn't even realize that there were all those different options. And it does I know myself, I was just looking smaller.
But now, like the light bulb's going off and let's look bigger. But you mentioned a syndication, what exactly is that syndication, what does that mean?
Seth Ferguson: Yeah. A syndication is a way of structuring a deal that allows investors, passive investors to pull their money together and invest it with somebody called a general partner.
So think of it this way, we have a whole bunch of it programmer programmers, lawyers, doctors, account. They have money. They want to invest it, but they don't have the. So they pull their funds together and then they invest that money with a general partner who has the track record, who has the experience, who has the team, who has the deal.
And that general partner will manage the deal to earn a return for the passive investors. And it's true passive investing because the limited partnership the pooled investors, they're protected by the law. So their risk is limited. That's why it's called unlimited partnership. So they're risking, let's say somebody invests a hundred grand.
Their a hundred grand is at risk, but their risk exposure doesn't go beyond that. It's the general partner who is incurring more risk depending on the type of debt use. So it could be unlimited risk, whereas it's if we were to do a duplex deal together, the deal goes belly up, all of our assets are on the line with the syndication. If you were a passive investor you're protected there. You're just risking your your initial capital.
Katherine Nelson-Riley: Okay. I didn't realize that. But then we also have that a much safer way to go for passive investing.
Seth Ferguson: Yeah, there's so many benefits to that cuz I, I'll tell you what, like most people who contact me they're interested in being the active party. They want to run their own deals. But when most people realize how much work it is, they quickly realize that it's much better to become a passive investor, and invest their money with somebody who's already doing. And that's what the syndication model does. That's what real estate funds do as well. They offer tremendous advantage to people to participate in these larger buildings.
Katherine Nelson-Riley: When you mentioned the funds, how does that work? And like the syndication versus the funds, how does that dovetail into each other or not.
Seth Ferguson: Yeah. Great. Great question. So a syndication, the best use case is on a deal by deal basis. So let's say for instance you came across an apartment building. It's a great deal. You know how to make money. You have to raise money for it, you would syndicate it because it, it's just for that specific deal. Now, let's say for an example, you have a lot of deal flow and you're able to go out and do 10 deals.
Like you have the track record, you have the experience, you have the deal flow. For that you can then, Raise, let's say, 20 million through a fund and then deploy that money across 10 different deals. So it's not the deal By deal scenario, you're raising money through the fund and the fund will then go out and acquire and divest of properties. So it more has a life of its own over a longer period of time.
Laurel Simmons: There's a lot of information there to unpack. If I was tomorrow I wake up, I say, okay, that's it, Laurel, you're going out, you're going to find a first of all, I'm gonna find a place, but I'm walking down the street and it's my lucky day. I see this amazing building. I know it's for sale. I wanna buy it. It has a hundred units. And what do I do? Like seriously, what do I do? What's my very first step? Because I don't know.
Seth Ferguson: We have a lot to do actually, and hopefully before you actually say, hey, I wanna buy this building. You've done a whole lot of homework up front, right? So in, in my process, we have to figure out, number one, what type of portfolio you want to build. We have to Find our market, like the market you're in, may not necessarily be the best investment markets. We have to do a lot of market research. We have to build your team first, and then we have to figure out how you're gonna structure the deals, how you're actually gonna raise the money.
Then we have to underwrite, know how to analyze the deals, how to make money, how to use the value levers to generate a profit, and then we have to create a deal flow. Which is, finding deals and analyzing them, and then also creating our investor funnel, our capital raising funnel. If we've done all of that stuff and you come across a great deal, great you know exactly what to do.
You know the market's good. You can raise the money, you're ready to rock and roll. If you haven't done all of that stuff, I would say let's pump on the brakes a little bit and let's go back to square one and start. From the very beginning and then work our way forward. Because what I found with some of our students is, if they try and rush they skip a couple steps that are really important.
We have to take them back again to the beginning and then restart. So I I would always suggest to people start from the beginning. Take your time, make sure it's done the right way, and you'll be much better off at the end with the end result.
Laurel Simmons: How long then does it take from the time you decide, say, I decided that tomorrow I want to really get into this multi-family, large, multi-family investing.
And typically, and because I may, maybe this isn't a fair question, but I'm gonna ask it anyway. How long typically would it take for me to go from okay, I wanna do this, making the decision to, going through all the processes, figuring it out, all the analysis, putting the team in place to actually getting to the point where I can make an offer on a on a building. I know there's many variables in there, but is it six months? Is it a year, two years? Is that a reasonable period of time?
Seth Ferguson: Yeah, it really depends. Like you said there are many variables there at play. And it also depends on where you're starting. There are some people who come in from a private equity background who have the connections, who can raise the money, who understand the structures.
They'll come in and have a much faster start because it's, they're already operating in that world. If somebody's coming in who has never done a real estate deal before, there's obviously a much steeper learning curve, and that's going to take longer because you should never do a deal and raise money from investors if you don't know what you're doing.
That's not the right thing to do. So obviously in that case you would have to partner with somebody who does have a track record and you would probably deal, do a deal together. That other partner would have the experience, they would know what they're doing and they would coach you along in the deal.
That's how I would suggest. You do it if you're starting from scratch. So yeah, there's people that come in and they'll start rocking and rolling four months in. There's people who take six months, a year and a half. It all really depends. But that, you're right, that is a impossible question to answer because everybody's different.
Laurel Simmons: I know everyone's different. And now I know that you teach people that you basically coach people through this process, correct?
Seth Ferguson: We've got a program that we run that basically takes somebody from scratch and brings them all the way through to successfully investing in their first apartment deal. That's what we focus on because I, my feeling is the first deal you do is gonna be the hardest deal , because you're basically building all the systems as you go. So we focus on getting somebody from generally speaking, they'll have real estate experience, but not in commercial multi-family. And then we'll work with them all the way through to getting their deal.
Laurel Simmons: And it's like any real estate deal, the first one you do is the hardest. It's always the hardest, right? You're learning so much and it's like you're the deer caught in the headlights. It's oh my God, what's happening now?
Seth Ferguson: Yeah there is a learning curve, but you know what, it's not as not as bad as you think. Like I remember when I first started doing single family homes I was very ignorant of what it took to do an apartment deal. Like I, I knew nothing. I thought you had to be ultra rich or you had to be a big life insurance company to buy an apartment building. I didn't know what I didn't know at the time. But but as I got myself more and more, it's not a big transition. A lot of people are really intimidated.
They're like, oh, I'll just start small. I'll work my way up. If I could go back in time, in the time machine, I would tell myself to skip the residential investing and go right into commercial, knowing what I know now. So it's not, the learning curve is there, but it's not as intimidating as people.
Laurel Simmons: One of the things that I've heard about the larger apartment buildings and correct me if this is wrong, because this is out there in the ether so to speak, is that, When you get into those larger apartment buildings, you really are up against the really big guys like the the teachers unions and all the rest of, but in terms of going after those cash flowing buildings, true, not true, maybe.
Seth Ferguson: It really depends. Like you have to find your niche or your niche depending on which side of the country you're on. It's real estate's very local. Would would a large would, does BlackRock care about the 75 unit building in your hometown? Maybe not. Probably not.
They're looking at a five. Unit portfolio at that point. Yeah, once we get into the a hundred units plus our, that's in institutional quality assets and institutions will compete for those assets. Any investors starting out and that's why we go back to square one.
What type of portfolio do you want to build? I know people who have built a great portfolio working in that mom and pop niche. So they're, they hover in that 50 to 75 unit range. and they do really well with it. That's a little bit smaller than the institutions want to go for, but you're still dealing with some more sophisticated investors than somebody who owns a 15 unit building.
That's the niche they play in. I'm also good friends with people who buy 500 unit buildings at a time. And of course at that point you're dealing with very sophisticated buyers and sellers and brokers and everybody's on a different level. Yeah, the answer to your question, Yeah, you could be competing against big people, but if that's your business, You have to figure that out.
There are also challenges with going smaller. If you're dealing with a 30 unit building and it's a mom and pop owner, chances are you don't have the right numbers for the T 12. You're not gonna get all the information you need. It's gonna be a less educated seller. So you have all of these challenges too. Every niche at every class, at, every every class of. Has its pros and its cons. Ju just like any other part of real estate.
Laurel Simmons: What would you say is the biggest. The biggest fear that real estate investors have in getting into the larger residential units?
Seth Ferguson: Yeah I would say generally, and of course I'm speaking generally here because I get so many different answers, but it's whenever we add extra zeros to the end of a number, people get intimidated.
But it's just numbers at that. If somebody can underwrite or analyze a 15 unit building with the right instruction, they can analyze a 250 unit building. It's not that much different. But for whatever reason, whenever you have a couple extra zeros at the end of the no, I, or at the end of the price, or you're dealing with 150 units rather than 10 people tend to get intimidated.
Usually it's a fact that they haven't they haven't been taught a system, they don't have a process to follow. But as, as long as you have a process, a repeatable system that you use on every single deal that intimidation factor goes away cuz you know exactly what you have to do, in what order, when to do it while you're doing it.
Laurel Simmons: Yeah. I think that to your point, the, that there's so much information there and you use the term n o I think if as an investor you don't realize that NOI means and it's your
Seth Ferguson: Net Operating Income.
Laurel Simmons: Yes. Thank you. Net operating. I literally went outta my head as I was opening my mouth. I can't believe that. Anyway. , that's pretty funny. Then you've got some more work to do because there are things that are really critical and net operating income is just absolutely important for any size.
Seth Ferguson: Yeah. And especially when we get into commercial assets because the value is derived from the net operating income the property produces. With the residential house, we use what's called the comparable approach, which means if three houses on the street sold for a million dollars and your house is the same as the all the other ones, your house is worth a million bucks. But with a commercial valuation. We use the n o Y and what's called a cap rate, a capitalization rate.
It's basically asking yourself how much is a buyer willing to pay for each dollar of n o I produced? And this is the whole business plan of. Commercial assets we want to drive the n y up, so we want to increase the revenue the property's producing and optimize or decrease the expenses to produce a greater net operating income, which will then increase the value of the asset.
Because with apartment buildings, yeah, we're buying real estate, but I like to say we're actually buying a business that just happens to be tied to real estate, and all businesses are valued by the income they. Period. So we have to think about commercial assets, commercial real estate in that vein. Whenever we're acquiring an apart an apartment building, we have two value levers we use.
We have physical improvements, how we're going to physically improve the property to improve our no I, and then operational improvements. How can we optimize the property through systems management to also increase the n NOI and reduce or optimize our expenses? That's how you make money in apartments.
Katherine Nelson-Riley: You've mentioned a when we were talking beforehand about a value add strategy. So is this the level or is this the timing for that to come in as you're doing all the NOIs and everything? Like how are we going to get that sophisticated, not only the sophisticated investor, but the sophisticated renter.
Seth Ferguson: There's four main investment strategies when it comes to commercial real estate. In multifamily. You've got core core plus core value add, and opportunistic. Core and core. Plus, you're basically buying the best assets in the best location, not doing very much work.
You're basically sitting on it, waiting for the market to to improve or to increase opportunistic. You're acquiring assets that are in trouble. Those, that's riskier. To do value add is a good middle ground where you're buying assets that are cash flowing most of the time.
But there are improvements that can be made. So maybe the kitchens need work, the exterior needs work, the pool deck needs to be resurfaced. Maybe we can add amenities. And then on the rent side we're looking. Prop properties where the units are under rented, so maybe they have a vacancy issue, maybe the rents are under market.
In a nutshell, the value add strategy is all about taking an underperforming asset. So something that's operating below market norms. Acquiring it, improving it through physical and operational improvements increasing the noi and then we will sell the asset. So basically it's like a flip for a house, but over a much longer timeframe with a lot more units. That's the best way to think about it.
Laurel Simmons: That makes a lot of sense. All right, Seth, you, we could talk about this for hours and hours, but it is now time for the lightning round and this is where we ask you four questions. They're not trick questions. They're not hard questions. We just ask you to respond as quickly as you can with the the first answer that comes off the top of your head. I'm gonna start with question number one. What's the most important piece of advice that you've ever received about real estate investing?
Seth Ferguson: You said these weren't hard questions. Now this one's a hard one. Honestly the most important piece of advice would be the bigger deals are easier, do bigger deals.
Katherine Nelson-Riley: That's a good one. If you could tell your 18 year old self something, what would it be?
Seth Ferguson: Don't buy a house. Invest in apartments.
Laurel Simmons: Okay. Then question number three. What's your favorite type of reading? Is it fiction, nonfiction?
Seth Ferguson: Yeah I would say I'm a huge historical fiction fan. And I would say, most favorite book ever is The Count of Monte Christo by Alexandro Duma.
Laurel Simmons: Cool. I've read that one.
Seth Ferguson: The most perfect piece of storytelling according to Robert Louis Stevenson .
Katherine Nelson-Riley: That's been a long time since I've read that. Now that you've said it, I was looking for just some reading and maybe I'll pull that one out.
Seth Ferguson: It's like 1700 pages, so it's quite the project.
Katherine Nelson-Riley: Yeah. But that's okay. A little bit here and a little bit there. Isn't that how you bite it off and, yeah, exactly. Yeah. So last lightning round question for you. What is the one attribute that has made you successful?
Seth Ferguson: I would say boldness. I have some core values that I try and live by and boldness is number one because I wanna do things that other people are either afraid to do or they're unsure about how to do it. I want to do things differently and the multi-family conference is a perfect ex example of that.
Katherine Nelson-Riley: That was our next question is to ask you about the multi-family conference, cuz you started that in the middle of a pandemic for heaven's sakes. Talk about being bold .
Seth Ferguson: Yeah. That was that was pretty crazy. I did not expect COVID to last as long as it did but you're right. Yeah. That do you guys know the story about how it. No. My, my now fiance and I lockdown had just hit, so we were in a condo and the streets were deserted, like it was crazy. And we were at her place watching Shark Tank and I turned to her and I said, you know what?
I'm gonna have Kevin O'Leary speak at a real estate conference. And she looked at me and she's no way, whatever. And sure enough, like a couple days later I had Kevin O'Leary confirmed for a real estate conference. And that turned into the multi-family conference. Yeah it was interesting.
There you go.
Laurel Simmons: The bold win, right? Yeah. Yeah. You gotta do it. You gotta do it. Okay, Seth, where can people, what's the best way for people to reach you?
Seth Ferguson: Yeah we've got a couple different ways. My YouTube channel, we have hundreds and hundreds of free videos on YouTube, so just go to youtube.com/seth Ferguson.
And the next best way, honestly, is get a ticket to the Multifamily conference coming up. You go to multifamily conference.ca and I'll definitely be there schmoozing with everybody. And we're expecting about 3000 investors there. So it's the country's largest real estate investing conference.
Laurel Simmons: That sounds wonderful. Thank you very much. I think, Katherine, that we'll be having him back, right? Because Seth is just absolutely a fountain of knowledge. Thank you so much. It was really eye opening.
Seth Ferguson: It was my pleasure.
Katherine Nelson-Riley: Thank you very much, Seth, and we'll see you at the Multifamily show and we look forward to hearing how some of your students and some of the success stories with them as well.
Seth Ferguson: Yeah it'll be fun. Now I have to explain to my fiance what I hung out with two beautiful ladies for the past hour.
Katherine Nelson-Riley: Thank you.
Laurel Simmons: Bye. There it is, Katherine . He's pretty amazing, isn't he?
Katherine Nelson-Riley: Absolutely. I know that this is only a half an hour podcast, but realistically I could have listened to him for at least another hour or so and we'll definitely have to have him back.
Laurel Simmons: Oh yeah. He knows so much. And I hope people will contact him. I hope they go to his website. I hope they go to or at least look at going to the the conference about multi-family units and how you invest in them. Because you know what the thing is, even if you don't end up investing in the multi-family building, residential building, you're gonna learn so much that we'll apply to so many other things. When you go to those things, there's never a loss there. You're always gonna learn something.
Katherine Nelson-Riley: Absolutely. And the networking's phenomen. The people that you meet, the information that you garner and you glean and maybe you'll be introduced to something that you never realized was actually a perfect strategy for you that you might not have considered before.
Laurel Simmons: Yeah, exactly. So until next time, folks, customize your life. Have a great week, and come on back and listen to our next podcast next week. Bye for now.