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Healthy Real Estate Investing for Medical Professionals

Posted on by John J. Pizale, BSc, JD

1) INTRODUCTION – THE SHOEMAKER’S CHILDREN SYNDROME

The old adage that “the cobbler’s children have no shoes” too often is so true for many Medical Professionals. They are typically so busy caring for others that they, like the proverbial shoemaker, neglect their own welfare.

This paper is intended to be a prescription for the financial well being of Medical Professionals at large — in particular Physicians, Dentists, Chiropractors and Pharmacists. You may be practising, retired or navigating on how to get there successfully — never too early or late to start!

We will cover why your investment strategy should consider including a healthy dose of private real estate backed investing as part of your investment portfolio mix. It’s all about the holy trinity of real estate investing:

  • It is a hard permanent asset and can act as a hedge against inflation;
  • It can provide a stable income stream;
  • It can balance out volatility from wild fluctuations in the public securities markets.

2) SYMPTOMS

Medical Professionals all too well know the hazards of overwork, burnout, stress, depression, difficult patients and colleagues — on and on.

The last thing you need is needlessly to pile on the stress of financial planning and the challenges (and sometimes headaches) that go with it. The good news is that there are some simple tactics you can use to ensure your financial portfolio is adequately diversified.

Younger Medical Professionals are often starting behind the eight-ball (those who play billiards know that is not especially favourable!). Earning your credentials and licence to practise took several years of hard work and sacrifice, often resulting in sizable student loans and a late start to saving.

Some, but not all, more established Medical Professionals may already own homes and cottages, have management corporations and traditional investment portfolios, which may charge management fees regardless of performance and are subject to nerve wracking levels of volatility.

Yet, there is a good chance both the fresh faced and veteran Medical Professionals are too busy and undereducated in the fine tuning of finances to take the initiatives on their own that are so vital to financial wellbeing for them and their families.

The anecdotal record suggests that Medical Professionals are not always astute investors and often are the targets and victims of nefarious promoters and highly questionable schemes. Investopedia quotes Dr. Jim Dahle, a hockey playing emergency room doctor and blogger at the White Coat Investor, who says that the common reasons that most people struggle with money apply to doctors. These include “a lack of financial literacy, poor financial discipline and a lack of long-term perspective.” “In addition, there is a bit of a culture within academic medicine where you don’t talk about financial topics,” he says.

And so, if you are financially literate or not, read on to learn about a simple framework that anyone can adopt to achieve a more diversified investment portfolio which includes alternative assets and hopefully can generate a premium risk weighted return.

3) DIAGNOSIS — THE IMPERATIVE OF A PERSONAL WEALTH PLAN

Of course, we all need sufficient capital to support our desired lifestyles, now and in the future, and in many cases that of our loved ones. These are the so-called “necessaries of life”, the levels of which will be as varied as there are different Medical Professionals.

Someone said, “The best thing money can buy is financial freedom” — Easily said, not so easily accomplished. Financial security is not automatic. Its achievement necessitates careful planning and personal discipline.

Now that you have the benefit of a secure and steady flow of patients and customers with the prospect of solid earnings and some discretionary capital, what’s next?

Creating an investment portfolio that mimics your practice! A rich capital base that produces a steady flow of income with a future prospect of growth and surplus capital to spend! Real estate as an asset class mimics such attributes and can be a cornerstone of any such portfolio.”

as of 2022-11-16

Sources:

https://www.td.com/ca/en/personal-banking/personal-investing/products/gic/gic-rates-canada/

https://www.rbcdirectinvesting.com/pricing/gic-bond-rates.html

https://www.morningstar.ca/ca/report/fund/performance.aspx?t=0P0000Q34Y

Coming up with a sensible plan designed, not only to maintain your lifestyle and wealth, but grow it for your future that includes the critical element of real estate, will take a large number of Medical Professionals into some unfamiliar territory.

Nevertheless, it is all important to your financial health to adopt a personal wealth blueprint to build your fortune and future.

This, no doubt, is the time to seek the wise counsel of your lawyer, accountant, and/or independent investment manager, but before you do so, let me give you some food for thought about why your wealth plan should consider adding real estate secured investments.

4) REAL ESTATE — A GOOD IDEA

Most of us find it axiomatic that real estate is a good idea.

After all, Mark Twain, the late famed American author, long ago advised us to “Buy land, they’re not making it anymore”. This was repeated in spirit by Louis Glickman, the famed real estate investor and philanthropist, when he said “The best investment on earth is earth.”

From the moment we stopped being nomads and “staked” claim to property, we began trading real estate. It began with lands used for agricultural purposes where the intrinsic value of the asset was realized (“Hey, we can stop wandering, grow food, get strong, and beat off the nomads!”), to housing, to commercial uses. A good idea does not die and real estate investment has been around almost as long as we have!

It’s not hard to appreciate why owning an income-producing building can potentially generate long term uncorrelated premium returns, often acting as a hedge against inflation since rental rates often correspondingly increase as incomes and inflation increase.

5) THE BETTER MOUSETRAP — BUILD A MORE PERFECT PORTFOLIO

Sticking with investments in public stock market equities and fixed income securities is often unimaginative and open to vagaries of unexpected events beyond control that can subject your savings to volatile swings in value. In 2008 and more recently this year, this painful lesson was learned again by millions of investors around the globe. There is an investment bias that many amateur and seasoned investors possess: investing in stocks and bonds is all I have to do! These are only two asset classes. When assets are highly correlated within asset class as they are in both public stock and bonds, their prices tend to move in lockstep with one another, leaving those who hold them vulnerable to dramatic market swings. Without diversification outside these two public markets, investors can be in for a wild ride! This opens the case for diversification into private markets and alternative assets, like real estate.

Here’s how the wealthiest 1% invested, based upon data from one of the largest alternative asset managers, KKR Inc.:

Why not piggyback onto the tried and true paradigm of real estate investing strategies established by major players like endowment funds, pension funds, insurance companies, and high-net-worth and ultra-high-net-worth families.

Sources:  

  • https://www.investopedia.com
  • https://www.origininvestments.com
  • https://www.investments.yale.edu/about-the-yio

6) REAL ESTATE BACKED INVESTING AS AN ESSENTIAL AND UNIQUE INVESTMENT

We differentiate from vehicles like mortgage investment corporations (“MICs”), real estate investment trusts (“REITs”), mutual funds and the like, that pool any number of projects. By real estate secured investing we mean you select the individual projects one by one.

A decent level of real estate focused investing, whether in land or buildings, in your portfolio can mitigate volatile market swings.

I will tell you why.

Real estate, for the most part, fluctuates quite distinctly from other conventional asset groups, like stocks and bonds. It has unique features. For instance,

  • Real estate is tangible and is what lawyers call an “immovable”. In other words, you can kick it.
  • It is often scarce, particularly in growing areas and provides an opportunity for appreciation in value over time.
  • Real estate is a hard asset with a potential income stream. It can allow for reasonable leverage and the miracle of compound interest.

7) THE PRESCRIPTION — THE DIAGNOSIS

“A simple fact that is hard to learn is that the time to save money is when you have some.” Joe Moore, American TV personality.

So called “best investors” like pension funds allocate 9 to 10%(*) of their entire investment package to real estate investing. Benchmark returns, with and without real estate, make a compelling argument for including real estate investing in your portfolio. See the previous sources for the Yale University Endowment Fund.

*source: https://www.wealthmanagement.com/investment-strategies/pension-funds-eye-higher-real-estate-allocations

Meaningful real estate investing can be a prescription for a healthy, well-rounded and diversified investment package designed for today’s Medical Professionals.

Medical Professionals who invest wisely in real estate type securities for the long term can enjoy an excellent diagnosis for their financial health.

8) CALLING ALL MEDICAL PROFESSIONALS — MAKE FUNDSCRAPER YOUR ALLY.

You may hear from naysayers who dispute the prudence of real estate investing, at least by those among us who might be considered neophytes who don’t know any better. Their position basically distills down to the proposition that most people, including those whose main pursuit is in the medical arena, do not have the requisite knowledge, time, or expertise. While this is cause to be cautious, Fundscraper Capital provides a seamless online solution. We will professionally handle the search, due diligence and financial analyses to aid you to assess and make decisions with the relevant data points at your fingertips and then work with you to complete your investment in compliance with relevant laws and regulations.

Simply put, let Fundscraper help you diversify your portfolio with real estate backed investing by doing the heavy lifting.

If you are more comfortable, we are quite happy to liaise with any of your trusted advisors or investment managers. Please feel free to link them to this paper and invite them to connect with us to explore how we can collaborate on your behalf.

a. Background

It is important that you feel you are in trustworthy and capable hands and not have to worry about an unreliable sponsor or nefarious investment scheme. Governments everywhere are being proactive in enacting consumer protection legislation and strict regulations are the order of the day.

Fundscraper Capital Inc. is on the leading edge of online investing. It is an exempt market dealer registered with the Ontario Securities Commission in the Province of Ontario, and equivalent regulating authorities in other Canadian jurisdictions.

Further it is registered as a mortgage brokerage with and comes under the jurisdiction of the Financial Services Regulatory Authority of Ontario.

b. Online Platform and Technology

Fundscraper is an online platform that facilitates direct private investments by qualified investors into an array of real estate backed projects and investments sponsored by proven developers and owners. You select individual projects that interest you and invest directly, rather than through a conglomeration.

Fundscraper’s cutting edge technology uses best of practice compliance standards and introduces investors to real estate investing opportunities usually reserved for institutions or deep pocketed and well-heeled, connected investors. There is a high degree of comfort, not to be underestimated, in knowing exactly what you invest into, a unique experience you do not often get when investing in private markets.

c. More than a Platform

Fundscraper is far more than an online platform.

Our team is comprised of dedicated and experienced industry experts in all facets of Fundscraper’s business.

Transparency and trust are priorities. While we do not charge for or provide investment advice per se, we put forward the pros and cons of the real estate investing opportunities listed on our website, so you can make an informed decision on which to choose.

We take substantial steps to ensure that a given investment is suitable for you. We go to great lengths to observe the regulatory rules related to “Know Your Client” (KYC) and “Know Your Product” (KYP). We have a concierge service which makes a knowledgeable, registered representative available to assist you in things you need to know to take advantage of Fundscraper’s platform for real estate investing. Being part of the select “white lab coat body of Med Pros” will entitle you to “white gloves treatment” from Fundscraper.

d. Attractive Net Returns

Fundscraper opens up select investments to a large group of qualified individual Canadian investors as established by legislation, the general intent of which is, among other things, to make real estate investing more accessible to qualified investors.

As a generalized bare bones overview only, typically these qualified investors (including their spouses) fall into the following classifications.

  1. Accredited Investors — high net worth, of at least $1 million in net financial assets or $5 million in net assets, or sustained annual income of $200,000.
  2. Eligible Investors — with an offering memorandum, $400,000 in net assets or at least $75,000 of sustained annual income.
  3. Minimum Amount Investors — corporate investment of at least $150,000 in a single investment.
  4. Permitted Client — high net worth, of at least $5 million in net financial assets, ability to waive suitability.

The precise criteria for each of these categories as defined by applicable securities laws is somewhat complex and beyond the scope of this paper. Fundscraper is standing by to help you determine where you and/or your spouse fit in.

e. Conventional Wisdom

John Kenneth Galbraith, the late acclaimed Canadian born American economist is widely acknowledged to be the father of the phrase “conventional wisdom”.

It is that precise sense of conventional wisdom combined with old fashioned common sense that dictate that you consider diversifying your investment portfolio.

Fundscraper can make diversification into real estate happen for you. Keep in mind:

  • We humanize digital investing with state of the art technology and open up private markets not usually available to a vast majority of investors.
  • You will have a real concierge desk responsible to help you at every step in the real estate investing process.
  • It isn’t hard to invest in real estate the Fundscraper way – we are primarily online and digital, but also can provide white glove services.
  • We do a lot of the work to make sure you are able to make an informed decision on what the risks and rewards are when investing.
  • Our highly experienced team underwrites and vets each deal based upon our collective management team’s experience of decades working with institutional investors.
  • We have successfully processed some $500,000,000 of transactions.
  • Fundscraper is licenced by and complies with strict governmental laws and regulations, in particular those of the Ontario Securities Commission and the Financial Services Regulatory Authority of Ontario.
  • Our systems and people will help you determine your status as an investor qualified to participate in our select real estate investing opportunities under applicable securities laws and regulations.
  • We are dedicated to building a long term relationship with all our clients and helping you to achieve your real estate investing goals through a diversified portfolio with real estate at the forefront.
  • We are a community of real estate people standing by to welcome you to the neighbourhood.
  • We standby at your direction to work with your trusted advisors and wealth managers.

Start Investing in Real Estate Backed Investments Today

Explore the investments available on Fundscraper.

Start Investing

Calling all Accounting Professionals – Growing Your own Wealth and That of Your Clients With Real Estate Investing

Posted on by John J. Pizale, BSc, JD

1. SOME HISTORY

First, a bit of the history of Accounting – one that is thousands of years old. Its ancient roots go back to Mesopotamia and weave through societies in India, Egypt, the Roman Empire, the countries of the United Kingdom, America and on and on.

 Early Accounting emerged from bartering and trade and was essentially a bookkeeping exercise. In the 15th Century Venice was a major centre of trade and commerce and it was there that the mathematician monk, Luca Pacioli, did the spade work for modern Accounting. His treatise, while not an invention in itself, was a digest of scholarly work to that time and which laid the footings for today’s methods of recording financial data and ultimately the birth of a proud profession.

 Through the era of colonialism, with the development of creatures called corporations and today’s global world of free and open markets, Accounting Professionals continue to be indispensable. They are the successors and gatekeepers to long tested and honourable traditions.

2. THE ACCOUNTING PROFESSIONAL’S UNIQUE PROFILE AND ROLE

Members of the Accounting Profession occupy a unique and well deserved respected place in Western Society’s business community. Enviably, they are regarded as knowledgeable and trustworthy in all things financial.

Your clients invariably rely on you for tax, insurance, estate planning and business advice. You mostly deal with people with sufficient assets and their tax returns are invariably a good place to start. Issues of corporate structure, family succession, tax drag, dividends and profits (never losses!) are some of the everyday topics you face in advising your individual clients.

 Not to be forgotten, is the role Accounting Professionals play as investment advisors. Unlike some wealth managers, you do not earn commissions and have the advantage of dispensing independent counsel.

All in all, when it comes to financial affairs, Accounting Professionals are the quintessential confidantes. 

3. WEALTH ACCUMULATION THROUGH REAL ESTATE BACKED INVESTING

Most Accounting Professionals have more than a rudimentary understanding of the intricacies of the real estate industry. So this paper is not intended to cover what for most of you are redundant subjects. Suffice it to say:
  • Real Estate is a hard permanent asset (you can kick it) – as such, there are potential tax benefits through depreciation and other interest expense deductions for investment property;
  • Diversification of your portfolio with Real Estate backed investing will potentially balance out the vagaries and unpredictable fluctuations in public securities markets – since private real estate is not publicly traded on a stock exchange, valuations are generally based upon appraisals, which can impact the correlation with public stocks and bond indexes;
  • Real Estate can provide a regular fixed income steam over a set time frame – if the contracted rental rates are adjustable for inflation, then it can serve as a meaningful hedge against inflation; and
  • Real Estate secured Investing, when managed well, will ideally pay off in the long term and at the same time maintain premium risk weighted returns that can combine benefits of capital appreciation and income.

4. HYPOTHESIS

Recognizing the intersection between the two disciplines of Accounting and Financial Planning, Accounting Professionals are ideally positioned to quarterback the entire investment playbook for themselves and their clients; including liaison with other experts i.e. bankers, asset managers, stock brokers and lawyers.

You all know about the golden rules of Accounting, those Generally, Accepted Accounting Principles (“GAAP”) which form the cornerstones of the authoritative standards by which Accounting Professionals conduct their affairs.

Let’s add a new one – Help create wealth by helping clients consider diversifying their investment portfolios with Real Estate Backed Investments!”

CALLING ALL ACCOUNTING PROFESSIONALS – MAKE FUNDSCRAPER YOUR ALLY

Accounting Professionals are skilled with numbers, but remember the arithmetic often tells only part of the story. Strategic investing requires more and that’s where Fundscraper comes in. As the late famed American broadcaster, Paul Harvey, might  say – Fundscraper will tell you the “rest of the story”. And so let Fundscraper help you and your clients strategize wealth creation strategies with attractive real estate investments.

Please visit Fundscraper’s website at www.fundscraper.com for the full story.

In the meantime, consider the following:

  • Fundscraper opens up private opportunities for qualified investors not typically available to the vast majority of investors;
  • With Fundscraper you will be in capable and trustworthy hands. It is an Exempt Market Dealer and registered Mortgage Broker licenced by the Ontario Securities Commission (“OSC”) and the Financial Services Regulatory Authority of Ontario (“FSRA”) respectively;
  • Fundscraper uses cutting edge technology to facilitate online Real Estate focused Investing;
  • Fundscraper’s team is comprised of experienced experts in all facets of its business, who underwrite the deals with a level of care and sophistication based off of decades of institutional experience; and
  • You and your clients can access key underwriting information and make informed decisions with Fundscraper doing the heavy lifting. A real concierge desk will help Fundscraper users at every step of the way.

MAKE FUNDSCRAPER AN ALLY NOW!

Sign up at www.fundscraper.com with no obligation and receive Fundscraper’s newsletter and regular updates on available investments.

Start Investing in Real Estate Backed Investments Today

Explore the investments available on Fundscraper.

Start Investing

A Glossary of Real Estate Related Acronyms

Posted on by John J. Pizale, BSc, JD

Acronyms are a sort of abbreviation using initials and there are virtually hundreds of thousands. Our compendium is a short list of many of those most closely associated with real estate. 

AML – Anti Money Laundering

AMV – Affordable Market Value

APR – Annual Percentage Rate

ATF – Anti Terrorist Funding

ARM – Adjustable Rate Mortgage

AUM – Assets under Management 

BPO – Broker Price Opinion

CCO – Chief Compliance Officer in an EMD

CFE – Crowdfunding Exemption

CIM – Confidential Information Memorandum 

CMHC – Canada Mortgage and Housing Corporation 

COFI – Cost of Funds Index 

CRA – Canada Revenue Agency 

CSA – Canadian Securities Administrators 

DD – Due Diligence

DICO – Deposit Insurance Corporation of Ontario

EBIDA – Earnings Before Interest, Depreciation, and Amortization

EBIDTA – Earnings Before Interest, Depreciation, Taxes and Amortization.

EGI – Effective Gross Income

EMD – Exempt Market Dealer

FICO – Fair Issac Co. (credit score)

FINTRAC – Financial Transactions and Reports Analysis Centre of Canada (money laundering and terrorism)

FMV – Fair Market Value

FS – Fundscraper 

FSCO – Financial Services Commission of Ontario (part of Ministry of Finance

FSRA – Financial Services Regulatory Authority of Ontario 

GDS  – Gross Debt Service

GP – General Partner

IIF – Investor Information Form

IIROC – Investment Industry Regulatory Organization Canada

IRR – Internal Rate of Return

ISDA – International Swaps & Derivatives Association

KYC – Know your Client

KYP – Know your Product

LP – Limited Partnership

LTC – Loan to Cost

LTV – Loan to Value

MI – Mortgage Insurance

MIC – Mortgage Investment Corporation

MLS – Multiple Listing Service

OM – Offering Memorandum

OME – Offering Memorandum Exemption

OSC – Ontario Securities Commission

OSFI – Office of the Superintendent of Financial Institutions

PITI – Principal, Interest, Taxes, and Insurance

PM – Portfolio Manager

PN – Promissory Note

PPM – Policy & Procedure Manual

REIT – Real Estate Investment Trust

ROI – Return on Investment

TDS – Total Debt Service

TVM – Time Value of Money

UDP – Ultimate Designated Person in an EMD

VC – Venture Capitalist

Start Investing in Real Estate Backed Investments Today

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Why The Wealthy Favour Real Estate Investing

Posted on by John J. Pizale, BSc, JD

Table of Contents 

  1. Introduction
  2. The traditional investment portfolio misses the mark
  3. The case for diversifying your investment portfolio
  4. Real estate as an essential part of your investments
  5. Invest like a big player — the 20% rule
  6. How to pursue real estate investing as an individual
  7. Summary
  8. The last word — make Fundscraper your ally

1. Introduction

Most of us might find it self evident that real estate investing is a good idea. After all, Mark Twain, the late famed American author, long ago advised us to “Buy land, they’re not making it anymore”. 

Interestingly, the New York Times recently reported that the Mark Twain Historical Centre has mildly disputed the attribution of this often quoted advice to Twain. My guess is that it probably can be sourced to an over zealous real agent unwittingly dispensing sage counsel in order to boost their commissioned income!

Of course, there are naysayers who dispute the evident wisdom of real estate investing, at least by those among us who might be considered neophytes who don’t have much real estate investing experience.

So let’s have a closer look at why wealthy investors will consider including a good dose of real estate, whether by way of equity or mortgages, in their portfolios. 

My goal is not so much to convince readers that real estate, in itself, is a good bet, but rather to make the case for diversification of their portfolios to include a meaningful segment of direct real estate holdings.

We will cover fundamental roles private real estate plays in a diversified investment portfolio:

  • It is a hard permanent asset that can moderate risk and enhance your net worth through potential capital appreciation;
  • It can provide fixed predictable returns through potential rental income of interest income; 
  • It will balance out unexpected wild fluctuations in public securities markets which in a worst case scenario could without notice crush the paper value of your public securities portfolio at any given time; and
  • It is a source of additional benefits you won’t receive by only investing in stocks or bonds.

2. The traditional investment portfolio misses the mark

For the most part, financial professionals, wealth managers and often well-meaning friends recommend a pathway to balancing your investments — likely something along the lines of 60% in public stock market equities and 40% in public fixed income securities.

The idea is to mitigate risk through prudent asset allocation in various classes — stocks, fixed income (bonds) and cash.

Too often, the traditional portfolio mix fails to achieve optimum diversification because of the under-representation of alternative assets such as real estate backed investing.

3. The case for diversifying your investment portfolio

 Our thesis is that overall you can better diversify by adding solid real estate secured investing, at the same time reducing your correlation to public markets volatility.

Most of us are naturally risk averse. 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. 

Needless to say, the investment environment, especially in the stock and bond markets, can be volatile. There have been historically high and low returns in the last few years. Investing limited only to public markets always risks the chance of devastation if an “asset bubble” precipitously bursts. This can be brought on unexpectedly by major events beyond our control or ability to predict, for instance: 

  • world tensions and conflicts;
  • environmental disasters;
  • widespread technological advances or miscues;
  • fluctuating interest rates;
  • galloping inflation; and
  • changing investment preferences of major institutional investors.

As to holding cash, trading in commodities or speculating in domestic and foreign currencies, all have short and long term risks, the nuances of which are generally only understood by a select group of expert investors and sophisticated professionals.

4. Real estate as an essential part of diversifying your investments

Real estate investing for the most part fluctuates quite distinctly from other conventional asset groups, like stocks and bonds. It has unique features. For instance, real estate is tangible and is what lawyers call an “immovable”. 

By way of an aside and as a matter of general interest, in feudal times and for ages because few people could then read and write, the only recognized method of conveying land was by the gesture of actually handing over a piece of the dirt or the landscape to the new owner. This method of acquiring an interest in land, called “feoffment”, has long since been supplanted by conveyances founded in statutes — for example written and registered deeds and mortgages. Despite the obsolescence of the feoffment ritual, the notion of intrinsic permanent value of real estate remains embedded in our collective psyche. And so, a centuries old real estate investment strategy continues and thrives in today’s modern times. 

Back to the discussion.

Unlike stocks and bonds real estate trades privately based on local factors such as:

  • location (including comparable property values);
  • supply;
  • demand; and 
  • investment lifespan. 

It is often scarce, particularly in growing areas, which translates to supply challenges and appreciating value. In your portfolio, real estate investing is a channel to investments backed by real hard assets that can provide a regular income stream and long term growth coupled with the benefits of diversification. Other benefits to note include:

  • the ability to take advantage of leverage;
  • tax deductions; 
  • a chance to create added value; and 
  • an increased voice or insight into the management of the asset. 

There is no reason not to be able to enjoy superior diversification and potential performance at the same time. 

Real estate investment for women, particularly, can practically be very important for their portfolios.  On average, women simply live longer than men!  The need to maintain and grow the value of a retirement portfolio is a pragmatic concern. Good real estate investing can only enhance the prospect of enjoying the benefits of things like reasonable leverage and the miracle of compound interest over an extended period of time, while protecting against the volatility and vagaries of other classes of investment and vice versa. 

5. Invest like a big player — the 20% rule

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. 

In fact these well-informed institutional investors typically employ a direct real estate investing strategy. Typical allocations can range from 9% to 15%(*) of their entire investment portfolio.

*source:  https://www.wealthmanagement.com/investment-strategies/pension-funds-eye-higher-real-estate-allocations

Benchmark returns with and without real estate make a compelling argument for the inclusion of real estate investing. 

 

Sources:

  • https://www.td.com/ca/en/personal-banking/personal-investing/products/gic/gic-rates-canada/
  • https://www.rbcdirectinvesting.com/pricing/gic-bond-rates.html
  • https://www.morningstar.ca/ca/report/fund/performance.aspx?t=0P0000Q34Y

In that regard, 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 often known for its “20% rule” which at its peak allocated approximately 20% in private markets, including real estate.

Sources:

  • https://www.investopedia.com
  • https://www.origininvestments.com
  • https://www.investments.yale.edu/about-the-yio

This invariably translates into potential premium risk adjusted 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. 

6. How to pursue real estate investing as an individual

How can a smart, modern investor get in on the real estate investing action, especially since going on your own may require prohibitive amounts of capital?

Besides buying a home or taking on a private mortgage, there are any number of vehicles designed on a broad platform to facilitate an individual’s ability to put money into real estate — whether it’s equity or debt. You can in fact add real estate to your portfolio without actually buying property.

In Canada, we have mortgage investment corporations (commonly called “MICs”), mortgage trusts, limited partnerships, real estate mutual funds and the like. Generally these are all set up so that their investors share in any number of projects. This means returns are not necessarily fixed and depend on the performance of a pool of assets. 

Yet, once you decide to add real estate investing to your portfolio, putting your plan into action brings with it a number of challenges — Where are the opportunities? Do they make sense? Is the asset mix right or over-concentrated? Is a direct investment better than a pooled one? etc., etc., etc.

This is precisely when you need a trusted party to step in and guide you in the right direction for real estate investing.

7. Summary

 Meaningful real estate investing is essential to consider in developing a well-rounded and successful investment package. 

Here’s a recap of why:

  • Real estate is a hard permanent asset that can be securitized;
  • Real estate backed investing can balance out the vagaries and unpredictable fluctuations in public securities markets, both domestic and international;
  • Real estate can provide a regular fixed income stream over a set time frame; and
  • Real estate investing, when managed well, can ideally pay off in the long term and at the same time maintain premium risk weighted returns that can combine benefits of capital appreciation and income.

8. The last word — make Fundscraper your ally

You may hear from a small minority of commentators that there are reasons to avoid direct real estate investing as part of your portfolio. 

These basically distill down to the proposition that most people do not have the requisite knowledge or expertise. Individual challenges include assessing such things as:

  • financial implications;
  • neighborhood dynamics;
  • data analysis; 
  • types of opportunities and comparable properties;
  • property management skills;
  • leverage;
  • cash sufficiency; and
  • physical inspections.

While many of these are valid reasons for an individual to be cautious, Fundscraper Capital provides the ultimate solution for your real estate investing knowledge. We will professionally handle the search, due diligence, and financial analysis to aid you to assess and make decisions with the salient data points at your fingertips and can assist with the completion of your investment in compliance with applicable laws and regulations. 

Start Investing in Real Estate Backed Investments Today

Explore the investments available on Fundscraper.

Start Investing

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

Posted on by Luan Ha

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

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What is an Accredited Investor in Canada?

Posted on by Luan Ha

Before we define accredited investors, it is important for you to understand what the exempt market is. The exempt market is where securities are sold (under prospectus exemptions) without the protections that come with a prospectus. A prospectus is a document that outlines info about a security and the company or issuer that is offering it. 

There are a number of prospectus exemptions and each one has its own rules as to who can sell and buy securities under these exemptions. One of these exemptions is the Accredited Investor Exemption. As an accredited investor, one gains access to a wide network of private investment opportunities with significant upside potential. So how do you determine if you are an Accredited Investor or eligible to invest in the exempt market under the other exemptions? 

The Ontario Securities Commissions or the National Instrument or NI 45 106 set the descriptions of an accredited investor in Ontario and other provincial securities commissions throughout Canada. These rules created advantages to investing in large-scale investments which are the driving forces of Canada’s future economic growth. To help you, we’ve outlined the qualifications for the individual Accredited Investor below. You may qualify as an accredited investor in Canada if you meet at least ONE of the criteria below:

Income

  • Your net income before taxes exceeded $200,000 in both of the last two years and you expect to maintain at least the same level of income this year; OR
  • Your net income before taxes, combined with that of a spouse, exceeded $300,000 in both of the last two years and you expect to maintain at least the same level  income this year;

Financial Assets

  • You alone or together with a spouse, own financial assets worth more than $1 million before taxes but net of related liabilities.

Cash, or certain investments such as public equity or bonds, would be considered liquid/financial assets.

Net Assets

  • You, who alone or together with a spouse, have net assets of at least $5,000,000;

This criteria requires that an individual have net assets that count for at least $5 million, with liabilities subtracted. This means that an investor with $4.5 million in real estate and $500,000 in cash may be considered an accredited investor.

Investment Opportunities for Accredited and Non-Accredited Investors

Exempt market securities offer investors more choice of products to help them achieve their financial goals, but they should be aware that there are many risks associated with investing in the exempt market. 

Real Estate Investment Corporations 

A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping centers, hotels and commercial forests. Some REITs engage in financing real estate.To learn more about Private REITs click here. 

Mortgage Investment Corporations

Mortgage investment corporations or MICs allow investors to pool their money and provide loans to individuals and companies that were turned down by conventional institutions including banks, credit unions, and big lending companies usually at a slightly higher rate with varying loan periods. At least 50% of its assets should be in physical real estate, most of which include high-yield, residential mortgages.

One of the most appealing elements of participating in a MIC includes the typically stable and robust dividend rate that they provide to their shareholders while providing participating shareholders with mitigated risk through diversification. To learn more about MICs click here. 

Investing with Fundscraper

As Canada’s leading private real estate investment marketplace, Fundscraper has customized investments to potentially match your desired income and investment targets. 

Our goal is to help everyday investors access a world of new wealth that has historically been available to only a small portion of the population. Our easy-to-access online platform allows you to start investing in real estate backed securities with as little as $5000. 

Our team has helped process more than $475M (as of June 30, 2022) in investor capital into high value real estate-secured investments. Join today. It’s time to get your money working for you to produce real results and enjoy the benefits of investing in real estate.  

4 Benefits of a Private REIT

Posted on by Luan Ha

What is a Private REIT?

A Private Real Estate Investment Trust or REIT is a tax-efficient vehicle that gives people exposure to a diversified portfolio of income producing properties. Essentially, that means a REIT is a type of investment that allows almost anyone to invest in real estate and indirectly own or finance properties. 

Unlike a public REIT, private REITs are sold to investors through specialized dealers in the exempt market like Fundscraper. Private REITs are not traded on a public stock exchange and not required to file a prospectus with the Securities Exchange Commission. 

Additionally, there are transfer, redemption, and resale restrictions on those units. Thus, private REITs are not as liquid or transparent as publicly traded REITs on stock exchanges.

REITs are companies that own real estate assets like apartment buildings, office buildings, and shopping centres. When you invest in a REIT, you pool your money with other investors (known as ‘unitholders’) to become a part owner of the trust vehicle. 

As a unit holder, you are entitled to the cash distributions derived from cash flow generated from the trust’s holdings of real estate.

The Difference Between REIT and Real Estate Private Equity

A private REIT offers Real Estate Private Equity and Land Development Limited Partnerships. These are both securities that are offered in the exempt market and distributed primarily by way of an offering memorandum (OM). 

They may only be purchased by certain investors who qualify for exemption (e.g. accredited investor exemption, eligible investor under the offering memorandum exemption, etc.). 

For example, to qualify as an accredited investor, one of the conditions is that your income must be more than $200,000 per year, or a joint salary of $300,000, in each of the past two years and expected to reasonably keep the same level of income. 

Under these exemptions, individuals can invest in asset classes traditionally dominated by institutional investors like hedge funds and the ultra-wealthy. 

A land development limited partnership (LP) is a security offered to investors to provide them with the opportunity to invest in land development projects versus how a Private REIT enables investors to access a portfolio of income producing properties. Thus, how it works and the risks involved are very different. 

To see if you are eligible to invest in private REITs, sign up for a free account today and fill out our quick questionnaire to determine your investor eligibility. 

The Private REIT Structure

Let’s break down how the private REIT structure in Canada works. The REIT’s assets can be directly owned by the REIT or through a “special purpose vehicle” (SPV) or through a holding company (holdco) that, in turn, holds such SPVs.

SPV

A SPV is a company in which either a REIT or holdco, holds or proposes to hold, an equity stake or interest of at least 50%. The SPV holds at least 80% of its assets, directly in properties, and is not allowed to invest in any other SPVs nor engage in any activity, other than holding and developing a property and any incidental activity relating to such holding or development.

Holdco

A holdco is a company or or an limited liability partnership in which the REIT holds or proposes to hold an equity stake or interest of at least 50% and which, in turn, has made investments in other SPV(s), which ultimately hold the real estate property or properties.

The holdco does not engage in any other activity other than holding of the underlying SPV(s), holding of real estate or properties and any other activities pertaining to and incidental to such holdings.

4 Benefits of a Private REIT in Canada

Every real estate investment has its own set of risks. While reviewing private REIT offers, here are some of the important pros and cons to consider.

Pros
Stable and Tax Efficient Income
Private REITs can potentially offer target total returns ranging from 10-13% and cash yields from Most private REIT investments are relatively well diversified depending on their portfolio size and aim to provide reliable distributions:

One of the many government tax regulations requires REITs to pay out 90% of income to unitholders. In return, they’re generally exempt from paying corporate taxes on their earnings.

This helps distributions ‘flow through’ to investors and are only taxed once at the individual level instead of twice in typical corporate investment structures.

This flow through makes investing in private REITs tax efficient and beneficial for investors.
Diversification
If your investment portfolio consists of only stocks and bonds, you’re missing out on critical diversification from real estate investments.

Private REITs in particular have low correlation to the stock market and can be a hedge against inflation.
No Property Management
We often consider real estate a passive form of investing. However, if you buy a property and rent it out to a negligent tenant, it can be a huge time suck managing delinquent tenants.

Private REITs help you avoid being a property manager altogether with professional asset and property management.
Cons
Illiquidity
You can exit your holdings of a public REIT at any time (so long as the market is open), but it’s not that simple to liquidate your holdings of a private REIT.

Many private REITs are ‘closed funds,’ meaning you can’t sell or redeem units without penalty until a specific amount of time has passed – often a few years in the future or you have no ability to redeem units at all.

If you view real estate as a long term investment and don’t need your initial funds back in the short term, this might not be an issue. But if you foresee needing access to your funds, private REITs may not be the right choice for you at this time.
Lack of Control
Some investors prefer to have more control over their investments. Unlike when you buy a home and rent it out, as a unitholder of a REIT, you will have no say in what properties the REIT invests in and where they’re located.

While you don’t get to scope out the property first, you rely on the trustees and professional management will steer the course adequately.

Related to the above liquidity restrictions, you may not be able to control when you are able to redeem or sell your units.
Property and Asset Class Specific Risks
REITs tend to specialize in a specific type of property or asset class, such as an office building REIT will focus primarily on owning and acquiring office assets.

Each type of property has risks associated with it and is susceptible to different economic conditions, so it helps when your management team can focus on the same type of asset class across the whole portfolio.

If you’re interested in reviewing a private REIT list, download our Private REIT comparison chart here, which outlines all the available private REITs in our marketplace. 

How to Start a Private REIT in Canada

Are you looking at how to start a private REIT in Canada? Starting a private REIT is no walk in the park. Companies owning or financing real estate must meet a number of organizational, operational, distribution and compliance requirements to qualify as a real estate investment trust (REIT). 

These rules govern issues such as dividend distributions and the composition of a company’s assets. Starting a REIT is not simple but professional help is always available. 

Fundscraper is your trusted capital, compliance and technology dealer. 

As an Exempt Market Dealer (EMD), we help investors, issuers, private lenders, mortgage brokers, and mortgage syndicators navigate the complex legal landscape, and remain compliant with Canadian Securities Laws.

If you need any assistance with REITs in Canada, check out our Investment Marketplace or contact us today for more information.

What is a REIT in Canada?

Posted on by Luan Ha

If you’re considering real estate investment strategies such as direct property ownership and buying residential or commercial real estate properties, or you’re an experienced investor looking for further portfolio diversification, it’s a great time to consider alternatives such as  investing in Real Estate Investment Trusts, or REITs. 

REITs are an alternative way to invest into a portfolio of income producing real estate managed by real estate professionals. Investing in REITs can provide investors with regular cash flow in the form of distributions and potential for the underlying real estate owned by the REIT to appreciate in value. 

With the relatively recent popularization of REITs, it’s now possible to invest in a large portfolio of real estate assets that give you similar benefits as direct investing and property ownership.

If you’re a Canadian investor or looking into how to invest in a REIT in Canada, this article will answer important questions such as “What is a REIT?” and “How does a REIT work in Canada?”

What is a REIT and How Does it Work?

So what is a REIT and how does it work in Canada? A REIT is a tax-efficient vehicle that gives people exposure to a diversified portfolio of income producing properties. 

Essentially, that means a REIT is a type of investment that allows almost anyone to tap into the real estate market and indirectly own or finance properties.

REITs are companies that own real estate properties like apartment buildings, office buildings, and shopping centres. 

When you invest in a REIT, you pool your money with other investors (known as ‘unitholders’) to become a part owner of the trust vehicle. As a unitholder, you’re entitled to the cash distributions derived from cash flow generated from the trust’s holdings of real estate.

Every month, you’ll receive passive income via distributions made by the trust, generated from the income such as rental income earned from the properties. You don’t have to be anyone’s landlord or make any property visits; just leave it to the professional management teams that manage the trust. The REIT portfolio is managed professionally, with the managers appointed by the trustees of the trust.

Investing in a REIT can allow you to invest with less capital upfront than purchasing a property outright, thus broadening the access for individuals to own larger assets that are more geographically diverse.

How to Buy a REIT

Buying REITs is different from buying and selling stocks. There are different types of REITs, such as Equity REITs where the majority of income is derived from collecting rent or property sales or Mortgage REITs where income comes from loan interest payments. 

There are also publicly traded and private REITs. Public REIT units can be bought pretty much like shares of any other stock listed in the stock market. They can be bought as REIT mutual funds or exchange-traded funds (ETFs) through a broker.

Private REITs are sold to investors through specialized dealers in the exempt market like Fundscraper. Private REITs are not traded on a stock exchange, so there are transfer, redemption, and resale restrictions on those units. Thus, private investments are not as liquid as publicly traded investments.

Everyone’s investment preferences are different, but one of the main reasons investors prefer private REITs to public REITs is how their value is determined and the perceived stability of unit prices given typical lower correlation with the public capital markets. 

The value of a private REIT is generally based on the intrinsic and appraised value of the properties they hold, whereas the value of a public REIT unit may be severely impacted by the volatility of the public stock market. It will go up and down based on market events and may not be driven by the underlying value of the properties the REIT holds in its portfolio.

There also may be a liquidity premium for being traded on a public exchange, or vice versa, a liquidity discount for units of a non-traded REIT. 

Private REIT investments historically have a less volatile unit price, in part because units are not publicly traded. Most private REITs calculate and update their unit prices monthly or quarterly, whereas public REIT units values are real time based upon the unit price movement on the stock market.

Private REITs are a smart decision for some investors, but they’re not for everyone. Ultimately, it’s up to you to decide what investments are suited to your needs. 

Fundscraper can help you evaluate private REIT opportunities posted on its platform and make suitability suggestions based on your income, goals, and risk appetite. Empowering investors to grow their wealth in real estate is our passion. We offer an experienced management team, rigorous due diligence process, and first-class service.

Investing in a REIT in Canada

REITs overall are relatively new. The first publicly traded REITs in Canada were formed in the early 1990’s.

Nobody expects you to have developed an expertise in how to value a REIT. That’s what we’re here to assist you with! Fundscraper is licensed as an exempt market dealer with the Ontario Securities Commission and various other provincial regulators across the country. We have certain duties to you, and we take our jobs very seriously.

It’s our duty to assess whether an investment through our platform is suitable for you. We arm you with knowledge, help highlight what key considerations can impact your decision, and empower you to make decisions that meet your own personal investor profile given various key risk factors.

If you are looking to evaluate a REIT, a great place to start is by looking for a firm that has a track record and is licensed by a regulatory body, like a securities commission. You should ask to review all the relevant documents, any offering memorandum, financial statements, and always always seek professional advice from your accountants, lawyers, or other financial advisors.

Here are a few basic things to start looking at when evaluating a private REIT. 

  • Acquisitions and Dispositions: Is the REIT growing their portfolio? Are they shrinking? Neither one of these is inherently good or bad, but it’s important to make note of and understand why they took those actions and how the REIT is executing on its growth strategy.
  • Operating Margins: How are the operating margins performing compared against the peer group? Is management operating the portfolio efficiently relative to the competition? Operating margins is generally calculated as the Net Operating Income divided by the Gross Revenues.  
  • Distribution Yields (distribution per unit $ / price per unit): What they are paying out as distributions as a percent of the unit price is important to review over the course of time to be able to benchmark the comparative performance against other investment opportunities.

    This metric is very tricky since a lower distribution yield might mean units are fairly priced and a high distribution yield might indicate a discounted unit price.  It is important to see a consistent distribution on a total dollar basis (the numerator) and to understand why the unit price (denominator) is fairly valued or perceived to be riskier and thus discounted. 
  • Growth Strategy and Management Track Record: Has the management team executed well on prior strategic plans and does the management team adequately assess and address the risks of such strategic plans or objectives?

    Growth strategies don’t always have to be related to external acquisitions. Many private REITs implement value-add strategies to consistently upgrade assets, find new sources of ancillary income thus driving up rental income or make operations more efficient to reduce expenses.  

 

Download our Beginner’s Guide to Private REITs

A real estate investment trust, or REIT, is a company that makes investments in income-producing real estate. Investors who want to access real estate can, in turn, buy units of a REIT and through that share ownership effectively add the real estate owned by the REIT to their investment portfolios.
Download Free Guide

How to Start a REIT: Getting the Help You Need

Are you interested in learning how to start a REIT in Canada? Companies owning or financing real estate must meet a number of organizational, operational, distribution and compliance requirements to qualify as a real estate investment trust (REIT). These rules govern issues such as dividend income distributions and the composition of a company’s assets. Setting up a REIT is not simple but professional help is always available. 

Fundscraper is your trusted capital, compliance and technology dealer. As an Exempt Market Dealer (EMD), we help investors, issuers, private lenders, mortgage brokers, and mortgage syndicators navigate the complex legal landscape, and remain compliant with Canadian Securities Laws.

Need any assistance with REITs in Canada? Talk to us today.

Impact of Rising Interest Rates on Private Lending Webinar

Posted on by brendan chin

Given the current economic climate, with the Canadian government attempting to curb inflation, many investors are wondering what the impact of rising interest rates will be on private lending. In this webinar, we spoke with subject matter expert, Roger Allison, CEO and founder of Nest Capital to discuss a variety of topics related to the current lending environment. These include:

0:00 Introduction
1:12 What type of opportunities are there right now?
2:52 How does the current lending environment affect Nest Capital’s mortgage lending activities?  
5:21 Will private mortgage interest rates increase at renewal?8:25 How is the current lending environment affecting credit quality, underwriting criteria and investor yield targets?

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The contents hereof are for educational, informational and illustrative purposes only and may change in the future. Copyright in such content is owned by Fundscraper Capital Inc. (“FCI”) and no user may sell, republish, modify, or distribute all or any part thereof without written permission. The views expressed by any speaker, author or participant, are their personal views and not those of FCI, an Exempt Market Dealer, registered with the Ontario Securities Commission (and equivalent regulators across other Canadian jurisdictions), or its affiliates. Any content is not intended to provide, and should not be relied on for investment, tax, legal or accounting advice. Nothing in any presentation shall be construed as a recommendation or offer to sell, or a solicitation of an offer to buy any securities. The information presented may consist of investment opportunities that include projections and forecasts based upon information, including forward-looking assumptions and estimates. There can be no assurance or guarantee whatsoever that this information is accurate, complete or fair and any projections and forecasts  will be achieved. Historical performance is not necessarily indicative or a guarantee of future results and investments may be illiquid. You should refer to the offering documents contained within each investment opportunity for full details including risks relating to such opportunities. All securities involve speculation and a degree of risk and could result in partial or total loss of your investment. In addition, you should consult with your investment advisor and other professionals, including legal and tax, before making any investment. FCI may be a “related” issuer (as such term is defined in National Instrument 33-105—Underwriting Conflicts) of a party offering securities mentioned in this presentation and in some cases may receive a referral fee or other compensation therefrom.

Are Canadian Real Estate Prices Too Expensive?

Posted on by Luan Ha

Are Real Estate Prices Too High in Canada? Assessing Affordability in the Great White North

It’s one of the most common questions our investors and clients ask us: Are Canadian real estate prices too high? We put together a report to give an in-depth analysis with data and insights from our management team.

Key Points

  • How do Canada’s price to income ratios compare to other markets?
  • How does Canada’s population growth compare to other markets?
  • How does employment quality among Canada’s foreign-born population compare to other markets?
  • How does Canada’s household disposable income compare to other markets?
  • How do Canadians’ ability to sustain higher levels of debt compare to other markets?
  • How do Canadians borrow in the face of tighter Schedule A bank restrictions?
  • How can I learn more about private real estate investing?

Our community of investors asks us all the time: Are Canadian house prices too high? Is Canadian real estate pricing too expensive? These questions don’t have simple yes or no answers, so we put together a report on assessing affordability based on a number of factors to hopefully provide additional insight. Here, we outline indicative data that might point to some of the reasons why major urban centres in Canada still show a positive price trend, based on how certain factors compare to other markets.

How do Canada’s price to income ratios compare to other markets?

A good place to start when assessing affordability is the price-to-income ratio. The price to income ratio is the ratio between the price of a home and the annual household income in a particular area. Based on OECD data, when compared internationally, Canada may not appear to be an expensive real estate market. However, when compared to the G7 countries, Canada is currently the highest — in both price to income ratios and nominal housing prices.

How does Canada’s population growth compare to other markets?

Canada receives about 300,000 – 400,000 new permanent immigrants annually, making it the fourth-largest inflow in the OECD in absolute terms. This number is only expected to increase as the Canadian government raises the annual immigration intake, recently announcing a target of over 400,000 new permanent immigrants per year in the 2021-2023 Immigration Levels Plan. Overall, Canada has an annual population growth rate of 1.1% (0.35% in the USA), the 8th highest in the OECD.

More than 21.0% of Canada’s population is foreign-born — one of the highest in the OECD. For context, the USA has a foreign-born population of 13.6%.

How does employment quality among Canada’s foreign-born population compare to other markets?

Population growth attracts high-quality immigration, which makes up 70% of Canada’s population growth. Canada attracts quality immigrants, with approximately 60% falling under the ‘economic category’ admissions — these are people selected based upon their ability to establish themselves financially and economically.

In absolute terms, more than 69,700 people who became permanent residents of Canada in 2016 were ‘work’ or ‘economic category’ admissions. 

This increases the demand for housing from a productive segment of the population.

How does Canada’s household disposable income compare to other markets?

Canada has one of the highest growth rates in disposable income, driven primarily by high quality immigration equalling approximately 70% of the population growth.  Canada’s immigration is unique since over 60% fall under the ‘economic category’ admissions – people selected for their ability to become economically established. However, it is also important to assess household debt as a percentage of net disposable income, and Canada does not have the highest in the OECD.

How do Canadians’ ability to sustain higher levels of debt compare to other markets?

Generally speaking, the higher one’s education level, the more likely they are to remain productively employed and earn a stable income stream. Thus, the more likely they are to be able to sustain higher levels of household debt or have higher levels of savings. More than 64.4% of Canadians aged 25-34 and 50.0% aged 55-64 have a post-secondary education. Both age groups are the second-highest proportion in the OECD, just behind South Korea and Russia, respectively.

How do Canadians borrow in the face of tighter Schedule bank A restrictions? 

Financial policies determined by OSFI have been very proactive at managing household indebtedness, including higher down payment requirements, stringent stress tests for borrowers, and higher ratio tests to pre-qualify borrowers for mortgages. As Schedule A banks tighten restrictions, this creates opportunities for private lenders to offer financing solutions to a segment of borrowers that seems to be increasing in borrower quality given tighter and tighter restrictions. The above chart shows the impact of credit tightening and borrower loan quality.

 

References

 

How can I learn more about Canadian real estate markets and investing in private real estate?

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