** Transcript Auto-Generated**

Erwin 0:00
It’s a sad day in the truth about real estate investing world for Canadians, a highly leveraged group of landlords with hard money loans, heavy renovation investment strategy in tertiary markets. This group of landlords is seeking bankruptcy protection. I’ve included and I posted about this, posting about this on my social media last week and a half or so. That said, I’ve included links in the show notes from the appointed monitors website, where you can find all the court documents related to the bankruptcy protection hearings, articles in both CBC and the Globe and Mail. Fingers crossed that this all works out. But the article the articles from the monitor, mentioned how over 30% of portfolio is sitting empty. There’s over 600 units and over 200 units are sitting empty, across over 400 properties. Maybe I’m a small mining investor. Take note though I my my my ex wife and her family were in trades. So we only ever renovated one property at a time. As none of us likes neither cashflow or vacancy. Were just that cautious as it’s negative cash flow, it kills companies and investments. So yeah, we weren’t a fan of negative cash flow. This company is experiencing a liquidity crisis as they have no more cash to renovate. There’s 200 units that are sitting empty, as this company only has $100,000 in the bank, even though they borrowed $144 million across first mortgages, second mortgages and promissory notes, which means unsecured debt. But it’s also called a Yeah, it’s called promissory notes in the promissory notes adds up to $54 million from that’s included in that 140 $4 million owed. I spoken to a couple of insiders as well. But folks, you know the principles well or worked with them. Thank you to the fans of the show who’ve been sending me DMS as well. As folks know, I generally don’t shy away from public law, publicizing losses. But this is a fluid situation, I believe in innocent until proven guilty. There are many things I’d like to say. But I won’t get this little bit close to home. I know some of the principles or and I know people who’ve lost money. And yeah, I don’t like to see anyone lose money. And of course, I do not have all the details. I’m not involved. And no one will have all the details until this all is shaken up. One thing was for this for certain, though, is that many lenders have lending criteria that I have for things I would not lend to. For example, when I worked for a bank, they want to they wouldn’t give mortgages to Properties in small towns and or houses on septic tanks, fine. That’s their criteria. Covered mortgages. Covered home mortgage came on the show and they stated they do not lend to small towns, including and their threshold would be a population of 50,000 population. These landlords who are seeking creditor protection, they have a large part of the market share in small market Northern Ontario. They make up so much of the market. So to quote the Globe and Mail article they own they own almost 20 units to winter hit properties in the small town Timmons and to unwind that portfolio would take 14 Nine months for a controlled liquidation to exit the optimal portfolio and 23 months in Sioux Sainte Marie populations for those towns are about 42,070 3000 respectively. Just as important to note is those cities have barely grown as well. I actually actually check Stats Canada ensuite Sainte Marie, su Sainte Marie actually shrank in population in between 2016 and 2021. These are hardly markets I would consider for investment. That’s just me though. I’m for those who followed me for a while some of the listeners, you know, I am incredibly risk averse. Funny enough. I’ve been criticized for investing in small town Hamilton, Ontario, with an exploding population over 500,000. Plus, it’s a summer suburb of Ontario, Timmins of is a suburb of no one. The closest big city is suburbia, Sudbury, Ontario, which is 294 kilometers away. I can’t help but think of the book if you haven’t read it. That’s called the psychology of money by Morgan Housel. And the history of greed causing Highly successful people who try to go to a different level of richness, only to lose everything. Everyone knows Bernie Madoff for his Ponzi scheme, but did you know he had a legitimate brokerage firm? They were actually moneymakers and markets aren’t market makers, and he helped develop what is now the NASDAQ stock market. He also served as chairman of the board of directors for sec NASDAQ stock market. Then greed got a hold of him, and he started his own investment advisory service, the Ponzi, which was the Ponzi scheme, and the rest is history. Slow and steady, folks. Don’t get too greedy. Someone once told me their rights, be valid, be strategic and value focus like Warren Buffett. And speaking of Warren Buffett, I was reading about how the how the late Charlie Munger influenced Warren Buffett’s investment philosophy toward preferring to buy a wonderful company at a fair price rather than a fair company at a wonderful price. The philosophy underscores the importance of investing in high quality companies with durable competitive advantages, and strong future prospects. Even if their stock price might not seem like it seemed like a bargain at the time of purchase. This approach is aimed at ensuring long term value creation and capital appreciation, aligning with the overall strategy of value investing, but with a focus on the intrinsic, intrinsic qualities of the business rather than just price metrics. Now, everyone knows, not everyone, but I’ve shared I just got back from Austin, Texas. And from my research, it tops many top 10 lists for top places to invest in the USA. I’m looking to invest in wonderful single family houses in one of the top 10 Place top 10 places to invest in America, which is almost the opposite of investing in tertiary markets in Ontario that do not have population increase. So if you don’t, again, if you don’t believe me, go Google st Sioux Sainte Marie populations that can literally they shrink by 1.8% over the five year period of 2016 to 2021. This Saturday, I’ll be sharing my findings from my visit from us to Austin, what properties are looking at how I plan to grow my portfolio to cashflow $100,000 per year, that’s before taxes and that’s from rental income. Note this will take a couple of years to do. This is not not a get rich quick strategy at all. I’ll need around 20 properties to do so that cap in So on average, I need to cashflow about $5,000 per property. Know that these properties are in the 100,000 to $350,000 US dollar range, which is about the same cost as the basement suite conversion or garden suite. So you decide which you think is a better investment. I cannot wait to show all real estate investing Canadians what I consider to be the best investment for most Canadians most of the time. 100% ownership and control maintained under 10 times easier to scale than anything in Canada. All the benefits of being a landlord without with with fully outsource property management.

And I’ll have the show notes of the link to register in the show notes. So on today’s show, I invited my good friend Christian spool forward to discuss the sad truth about real estate investing in managing and recovering distressed assets, understanding the root causes and having protect proactive strategies. We discussed the risks of private lending the responsibilities of borrowers, Krishna has the unique perspective of having worked in a heavily securities regulated environment of mergers and acquisitions when he was the general manager working under one of Canada’s richest Canadians only to see what is so he was quite shocked to see the wild wild west that is retail real estate investing were some investors just you know thumbed their nose at the at the Securities Commissions openly violating securities laws in the way advertising and soliciting the public for capital, even offering guaranteed returns. The last time I heard the word guaranteed returns was from the owner of a now bankrupt investment company and he’s on the run from the cops. Christian being what what I consider one of the good guys in real estate. I thought he was ideal to text at 9:30am this morning, which come on the show for 10:30am to talk about losing money. Krishna is the owner of Olympus group where he invest his his and only his his family’s own money. He has no courses to sell nor coaching to sell. He’s not accepting op accepting OPM, other than banks. He just wants to help people. That’s why we get along so well. Krishna is also the Vice President of Oreo Ottawa real estate investing organization, a nonprofit member base educational organization group annual memberships only $127. I’m a member to Yeah, that’s annual, by the way, $127 for the year, I remember to and the value is unmatched. You can go to www dot o r e i o oreo.org/membership. And you can you can even go take assessment for yourself. Go attend the meeting for free. See if you like it. In my experience. The vibe in the room is wonderful. I’ve included some again I’ve included some links and resources in the show notes. So if you want more detail on the case I have a look there, I actually see Islamic ego for a little bit. I actually uploaded all the court documents, the CBC and the Globe and Mail article. And another article that that I can’t mention. All in the chat GPT as well. So actually built a bot to be an expert on this topic, so that I may ask questions and whatnot, and they actually helped me produce the show, so. So please take a chance to learn from history LSB doomed to repeat it. I’ve seen this all happened before back in 2008. During the financial crisis, folks, all this happened before and in the late 80s, during the Toronto real estate price, market collapse. And also please watch out for confidence artists. Note that con artists is actually short for competence artists. Be wary of people that are overly confident. You’ll notice I’m not competent at all and anything I say that’s why we stutter and slur. Anyways, please keep your investments safe, and enjoy the show.

Hello, Christian, what’s keeping you busy these days?

Christian 11:10
Are when I guess the thing that’s keeping us all busy is keeping up with all of the use of inappropriate use of borrowed money.

Erwin 11:20
Oh, yeah. And so we are speaking specifically today about the what it’s over 140 million and private mortgages? On a I don’t know, 600 over 600 units, mostly in northern Ontario that we’re talking about?

Christian 11:35
Yeah, well, that’s certainly one. All right. And it’s a bigger trend. Yes. Yeah. So that’s that’s one there. Yeah, there’s a friend of mine just sent me another one for somebody in Kitchener Waterloo that looks like it was a clear Ponzi scheme. Right. And charges of fraud are involved in that one as well. So, but there’s a lot of this going on,

Erwin 11:58
there’s a lot of this going on, like Greg Martell out in Vancouver, BC area, he’s on the run, apparently $300 billion is missing. This epic Alliance, which we have covered pretty extensively on the show, but previously, so a widespread problem, probably not worth Canadian. So we I tend to focus on Canadian news, but I’m sure they have issues in the States as well.

Christian 12:20
Oh, absolutely. I mean, but one of the big differences in the states is that, you know, the Securities and Exchange Commission, the SEC actually has quite a lot of teeth, and they you know, they also have the ability to, to bring in the FBI when necessary as well. So, you know, in my dealings with and I as you know, I used to do m&a stuff been in large corporate before getting into real estate. And the diligence, we always put around all securities related items was very significant. We had a lot of lawyers involved very high priced lawyers to deal with it. But my as

Erwin 12:59
you work for a publicly traded companies, right, correct. Yeah. So that’s why the diligence was the securities requirement was just like, at the highest level,

Christian 13:07
it really is. But it’s also that it will, you know, in my experience, the SEC in the US is far more diligent about these things, they do tests, right and verify things. You know, it’s not just on public complaint, but even if there is a public complaint, there’s a lot more diligence there, and they have the resources to do it. In Canada, as you know, our we have an overarching, you know, securities regulation framework at the federal level, but really, it’s all at the provincial level. So in Ontario, we have the Ontario Securities Commission, the OSC, BC has the BCSC, etc, right? And the resources of each of these provincial entities is not nearly as high as I wish they were to really start to crack down and what I think is hurting individuals.

Erwin 13:58
Yes, yes. And yeah, maybe that’s not the best format is to have provincially level security enforcement, you know, maybe a national map, but that’s, that’s not a well beyond the scope of this show. Whatever we’re wanting to cover was more some general things that we’re seeing, because all the problems with these with these I don’t know if it’s the right term. I want you to I want to say abuse, but a lot of people are gonna lose a lot of money. And in my opinion, there’s a lot of lessons that have not been learned throughout history. Like for example, there was a very large condominium in Toronto that went belly up back in the in the financial crisis of like 2007 2008 And the lesson I drew out of that was like they went under because they couldn’t handle the the amount of debt they had. And also mentors of mine like Tom Tom in the crowd today share regularly how their father, you know, bought a bought a house on assignment. If I don’t know if you remember back in like the late 80s, like people were like, when when there were no show houses, there was usually a, you know, like, like a temporary a temporary structure where people would buy houses for for pre construction. And then once in the market was so hot that once someone had their signed documents to buy a brand new build, they’d walk out the door, and there’d be people out there trying to buy that paper off them. Oh,

Christian 15:28
yeah. Yeah, absolutely. on assignment, I assume that’s why a lot of condo. Condo sales these days don’t allow for assignment before you take possession. There’s

Erwin 15:38
lots of reasons for that. But again, my point, though, is that there’s been through time through history where, you know, market got too hot people got in too deep.

Christian 15:46
That’s right. And and I guess the reason I was referencing the Securities Commissions is, you know, in the fact that we don’t have enough enforcement within within our provinces, is really that it starts to push back on the requirement or the need for individual investors to really do their due diligence on whatever they’re putting their money into. Because, you know, there, there is a little bit of a state regulatory safety net, but even if they, you know, invoke it, your money is still gone. It’s like regulation can come in and say, all it does is panic, you know, punish the bad people, but your money’s still gone. It could be invested itself into a Ponzi scheme. Yeah, the Ponzi guy probably go to jail, get some serious buy ins, etc. But your money’s still gone. Right?

Erwin 16:38
So it was by legacy, this advertiser stopped right away, like people who like break securities code violations within their promotion and marketing. It should be stopped right away. Yeah, 100% saying an ounce of prevention is worth a pound of cure. That’s

Christian 16:52
exactly right. So and we’ve certainly tried to get as you know, with Oreo, and I mentioned this before, we love Oreo, Brian, get, you know, Oreo, the Ottawa real estate investors organization, we wanted to get someone from the Ontario Securities Commission, because we take things like, you know, capital raise very seriously in terms of legal requirements. So we asked the OCC, if they’d like to join us, and I’ll still put the offer out there on the off chance that someone from the OCC is listening to this podcast, right? They might be one of your 17 listeners or one.

Erwin 17:26
Maybe someone knows somebody, nobody

Christian 17:28
knows. So we’d love to have them speak at Oreo. We’ve done some informal reach outs. And so far, they just say that they’re not interested. Not interested. No, no, not interested. Right.

Erwin 17:42
We’re interested, just we don’t have the time for it right now.

Christian 17:46
Yeah, no, it really just their replies came across as we’re not interested, right. Although it may be resource constrained, it’s hard to say which just the way I read the emails, but it’s exactly as you say, you know, you know, you know, an ounce of prevention is worth a pound of cure. So,

Erwin 18:06
so we’d certainly like that. Got them on the show as well. And to provide context, for example, like the fire department, the Prevention Unit, would generally will gladly come and speak on like, my platform, your platform. They are they focus heavily on it. They have departments that focus heavily on the education piece.

Christian 18:23
Yeah, absolutely, they do. And it’s well worth it. Some of the towns that I invest in have a formal fire prevention officer, and they literally have a list of buildings that they go through. So we get a call every year, it’s time for your annual check, especially in a multi unit buildings, annually, all of them, right. And it was a badge of honor. When during the pandemic, I called them up and it’s okay. Shall we do our annual inspection? They said, well, because of the pandemic, we were just, we can’t go and hit every building. So we have to do it as a shortlist. And if you’re not on that short list, right, and it was specifically and they say it was because so we never have issues with your building. We’re just focusing on the buildings, we normally have issues.

Erwin 19:12
And we’re talking about like life safety stuff. So it’s, you know, it’s great that they aren’t they do offer education, and they’re, in my experience, they’re generally completely open to folks booking an appointment coming in.

Christian 19:22
It’s a serious, it’s serious, right?

Erwin 19:25
securities laws, protecting the public.

Christian 19:29
Right, it is a serious issue. And that’s why I’d like the USC to come back and or actually come back and say that they’d love to speak. But I mean, it as you know, we have a really big crowd, so it’s actually quite useful.

Erwin 19:43
Exactly. It’s a great leverage point, just like the show, they can talk to 17 listeners immediately. get that word out there. We

Christian 19:49
all know are when you have far more than seven people.

Erwin 19:54
So I want to I don’t want to get into the life story that’s going right now not into detail because it is The life situation we don’t know how this is gonna work out. You know, I still believe in innocent till proven guilty, but there’s still some lessons that folks can can drive for this. For example, before recording, I was mentioning how in one of these cases, there’s a large allocation of properties in a small town called Timmins, Ontario. With a population. My Google was like, like 43 said returned, like 42,000 population. Versus I’ve had guests on this show, like Calvert mortgages, for example, which most people are familiar with. And they’ve, you know, they’ve set it on record, we avoid small towns with under 50,000 population. Here, we have an organization that owns a significant portion of the market. And they quote The Globe and Mail based on the run rate of that city in terms of real estate transactions, how many houses sell, to quote the Globe and Mail? Their number was it would take seven t months to unwind that portfolio? Yeah.

Christian 20:56
Yeah. So concentrated, obvious, concentrated,

Erwin 21:00
and, and I think it worked. It serves it may be need to mention it as like, the turns in these situations are in such difficult situations. Yeah. So in these communities are not happy at all, like the mayors of some of these cities have stepped up and said, like this, this, this is terrible for the city, terrible for tenants. And this is a terrible look for all of us investors. It

Christian 21:25
sure is, it’s just that no good comes from this right. Other than maybe the lessons learned.

Erwin 21:32
We all we all share some of this collective pain. Like I personally haven’t know anyone personally involved in any of this. Anyone who’s lying to them. But still, I’m sad for the community. Yeah,

Christian 21:43
yeah, no, no, absolutely. But I think we need to get to the lessons learned on on something like this as well. And I kind of look at it from the aspect of the lender and the borrower. And, you know, there’s proper underwriting principles we need to talk about from a lender’s perspective. And there’s the accountability as a borrower. So as you know, I run a very ethical practice, and I try to make sure that others that I had, that I can influence run an ethical way of doing things. And our responsibilities of borrower is is paramount, right? I mean, first thing, obviously, is reputational damage, right? Especially in this online world that we have, you can’t really hide very well, oh,

Erwin 22:32
no, people are actually stuff I’m seeing on social media. People’s dirty laundry being aired. It’s not good.

Christian 22:41
It’s not right. But as borrowers, we have to be very responsible with the money that we get, we have to have a clear understanding of how we’re going to repay any money that’s borrowed, we have to ensure that like, certainly, anytime I borrow money, right? It’s not just that I have an intent to pay it back. I have a plan on how I’m going to pay it. Right. And I tend to run a very conservative operation. So last thing I want is to be not just because of my reputational damage, but I personally, and I know not everybody’s like this, but personally, I don’t want to be in a situation where I have to tell somebody, I can’t pay them back. I can’t, I don’t like it for myself. I don’t like it for the lender, even if there is a you know, and we’ll get to the lender in a second, right. But even if the lender has assumed a certain level of risk associated with the interest rate, right, I still don’t want to be in a position where they’re out of money because of me. Right? So. So as borrowers, it’s it’s a hell of a lot more than just a promise or a desire or an intention to pay back. It is very much about having clear plans, right from the moment you take this debt on to the moment you give it back that you have a solid plan, not a hope and a prayer. Right. So

Erwin 24:07
let’s just stick into a solid plan means for example, like I was having a conversation with a client, so actually know so I do know someone who has invested with one of these parties where I don’t know what level of concerns sorry, I don’t know if their first second or a promissory note position. But I made the suggestion to her like, Are you are you getting ready to take over the property? And then her response was take over the property. What do you mean? So myself if I’d personally met it said it many times on this show, I’m not smart enough. Not? doesn’t it’s not within my risk appetite to be a private lender? Because I know Plan B is I have to take over the property at some at some level. So if you’re a promissory note investor, for example, which I’ve never be, that means that the make the first mortgage and the second word is true. take over the property. So I’m driving up the Timmins or Sudbury and dealing With the conversion process, whatever it is right now either exiting or finishing or whatever it is, and that is beyond my, my, my appetite for risk and effort.

Christian 25:11
Or even worse, like if you have an opportunity to be able to take over, right, that might be the better plan and go into a power sale or foreclosure, especially in a market like right now. Yes, right, where you may not be able to get the best return out of it. Because if it’s if it’s been devalued, you know, the first mortgage or may be kept hold, but the second mortgage or the and certainly the unsecured prom notes, are probably going to be in a world of hurt, right? After all the admin fees, the reduction in price to sell it off, et cetera. So yeah, I mean, there’s there’s a lot of exits, right. But if people are just relying on power sale, or foreclosures as a way to secure to recover the money that they’ve loaned or loaned out on a property. That’s not necessarily the best exit. So what you’re saying is spot on, which is that, you know, aside from foreclosure and parasail, you might have to seriously consider taking over the property. And

Erwin 26:12
then people need to understand that that means you in fact, cell phone, promissory opposition, I have to pay the first mortgage, and pay the second mortgage as well. That’s right, what what I was when I went into an investment for positive cash flow reasons, I now have significant money going out the door. Yeah. In and in the news, I think was globe mail, both CBC and globe mail also mentioned that there’s over 200 of these properties, your units are vacant. So there is no rental income coming in for over 30% of the portfolio. Yeah. All right. So so this is, so if you’re, unfortunately, if you’re, if your private land position is on one of these vacant properties, there’s no money coming in. Yeah. Right. And that’s formula for a failing business. It

Christian 27:01
is, and fortunately for them, is we have laws associated with creditor protection, right, and the ability to restructure things. So in the States, it’s referred to as a chapter 11. Type seven people are probably more familiar with it in that context. But it gives you a chance to get your house in order to see if there’s a way to resolve things properly, rather than it becomes a wild west with all the different lenders. So at least I’ve got that piece of it. And, you know, hopefully they can restructure their way out of it doesn’t look to be perfectly honest. But you know, that that’s a mechanism that that’s, that’s sitting there and that that works. But you were talking about, you know, as a borrower, right, you know, what kinds of processes we need to put in place. And I think that’s really worth discussing, before we get to the lender side. So as a borrower, I mean, I’ll give you my view of it. And what we do is that, you know, one, we have a solid plan for execution. So it’s not a, you know, I see some people say, Oh, I’m going to do a flip. This is my entry price. This is my ARV, this is the discount I need. And then I just execute, well execute on what you need a plan that takes you right to the finish line, in terms of being able to execute. So that’s thing one. And the second piece is you need a risk management plan. So if you are planning to do a project, I don’t know about you, or when but personally, I’ve never had a project go exactly to plan. And

Erwin 28:41
never, never, never happens. Always over budget over time. Yeah,

Christian 28:46
and with real estate, there’s a lot of moving parts, it’s, you know, that things just go wrong. Like it things you just can’t explain, right, sometimes, you know, like cost of goods goes up, for example, or labor shifts, or unavailability or anything can go wrong. So that’s where risk management plan comes in. And it’s really about trying to identify what you think can go wrong, the probability of it going wrong, the severity, ie, what’s the impact of your project, if it does go wrong, and for the top ones, the ones that are, you know, high severity and likely to happen. In fact, if it’s, if it’s going to be severe when it gets you and that can, it’s very likely that it’s going to happen, it put a plan, it’s part of your base plan. Right? But if it’s, you know, moderate probability and you know, moderate severity, you might say, I’ll put a contingency plan. So if this happens, this is what I’ll do. You know, and maybe the smaller stuff like low probability, low impact it just, you know, just put that in the general contingency bucket. But not only do you sleep better at night, but you also have a you know, a fairly clear you know, rather than just having a broad contingency bucket, you have plans with backup plans that allow you to get to the finish line. And, you know, I learned that as a, you know, used to run development teams right in, in the software industry as a product and technology industry. And so that’s always what I did, I had plans, but then I had plan B, plan C, Plan D,

Erwin 30:22
redundancies, you know, my

Christian 30:24
stuff almost always delivered on time, right, because I had those contingency plans, right. But it’s the same around real estate. So you gotta have that the third element would be your capital plan. So looking at it beyond just this one project, what we do is we’re taking a look at all the assets we have, we figure out where we have opportunity, because we’re self capitalized. So I don’t take external investors, but it scales to people who are taking external investors. So

Erwin 30:54
I just want to spell that point out. So you’re investing between your own cash and, you know, different debt instruments that are generally cheaper debt than what we’re talking about, with these folks out there doing with private debt.

Christian 31:09
Alright, so I do use, I do use debt vehicles, right, mostly from institutional lenders. But I don’t take equity partners. And so that’s what I mean by self capitalized is yes, of course, I do take lending products, but it’s, but I don’t take equity investors. But equity investors, you know, are can be part of your capital plan. So, you know, if I take a look at it in the simple ecosystem, where I don’t take in equity investors, I have assets, and I need to be able to extract capital from them over time. And then that capital is not just used for acquisitions, but it’s also used for contingency. So let’s take the scenario that we were talking about here is that, you know, a lot of people make the assumption that the value of the property is always going to go up, no. Less than half of any time. The other assumption that they make is that interest rates are gonna stay within their normal range. Yeah,

Erwin 32:10
we’ve had we’ve had emergency rates for how long? Exactly right. So it felt normal to them. But if understand like they were these these massive cuts were done for emergency reasons, like at different periods of time. Yeah,

Christian 32:23
absolutely. So so let’s talk about that capital plan for a second. So we’ll talk about in a really simple context, I take on a mortgage, fixed rate, you know, and this is particularly true in the commercial side. So if you have taken a commercial loan, and you start off, and you’ve got a five year term on that loan, what happens after five years, right? You go back now to the lender, right? Possibly the same lender, maybe different lender, but even if it is the same lender, and you say, I want to do another five year term? Well, they’re going to underwrite your property, again, from scratch as if it was a brand new loan. They’re not going back and saying, oh, yeah, we’ll just extend the term don’t worry about it. Because their audit, like residential,

Erwin 33:10
or usually, they don’t do anything. Correct.

Christian 33:14
Right. So in residential, they get a bit of a pest, but you still need to think about it because situations can change. Bank policies can change, lots of things can change. So when I take on that initial debt, I’m thinking about how I’m going to D leverage it. By the time I get to the the end of that term, let’s use five years. So I’ll be thinking about, Okay, well, can I increase the NOI the net operating income, so that I can increase the overall asset value, so that way, if I need to, let’s say, interest rates go up, right, then if interest rates go up, then the debt coverage ratio gets hit by that, right, which means that your total loan to value of your debt, it gets pushed down. And we’ve seen that, for example, you know, back to three years ago, people were getting maybe as high as 85% loan to value with CMHC. Back and right now, if you were to underwrite those same properties, you might only be getting about 55 to 65% loan to value. So if the property hasn’t changed in value very much, at the end of that five year term, the bank is going to say, yeah, we’ll extend the loan too. But you’re gonna have to put some money into this, you’re gonna have to put some equity in. So if you don’t have any of that extra cash, you’ve now got a really bad situation, right? Where you owe the bank money back on that first loan, because they’re not going to extend the same level of credit. So that’s why I was made sure that that the beginning I have a plan to figure out how I’m going to exit so either I’m going to, you know, increase my principal repayments, which is always the worst case from my perspective, right? I don’t like doing that. Or I increase the value of the product pretty, but any way that I look at it, I’m trying to figure out how do I D leverage that property at the end of the five year term. If I don’t have a credible way of deleveraging, at year five, then maybe I’ll take a seven year term, or even a 10 year term, I’ve done someone 10. So not highly stabilized assets. Because guaranteed over well, guaranteed is a relative word, but highly likely, by this, it’s guaranteed. But over at the end of 10 years, the likelihood of my ability to D leverage that asset is actually really very good in one shape or another. So that’s, you know, at a simple level, apart from a capital plan, sometimes you can’t, but you do need to take a look at it at your portfolio wide. And you have to have this continuous thing of when am I doing refinances? When am I loans coming due? How much equity do I have here? What if interest rates go up? And I have to, you know, drop a bunch of equity into these, you know, maturing loans, where am I going to get that money from? So when something happens, you know, if I get two years down the road, and let’s say interest rates are as high as they are right now, right? In fact, as high as they were six months ago, right to be at the real peak, then, you know, at that situation, I’ve got two choices. If I built up the equity, right, then at least I’m protected as I do a renewal because now the increased noi, the increased asset value means that I have the debt coverage ratio to maintain at least the old loan, and maybe squeeze out a little bit more. But if the interest rates come down, well, now I’m in a situation where I can, you know, go in and do a refinance, and take some equity out and generate new working capital for new projects, new acquisitions, all that kind of stuff. So there’s no downside to having a capital plan. Right? It just keeps things predictable, right?

Erwin 36:57
Which makes me wonder about the capital plan of some of these other investor investment groups. Because again, we have sorry, we actually have court documents stating that this one group had over 200 units sitting vacant. Yeah, like, and then I’ve said on the show many times, like I, my ex wife was married during the trades. So I’ve had first hand experience. I’ve done many, many renovation projects myself, and just seeing how there is generally a shortage of labor, good quality people to you know, do renovations, my model has always been one or two properties that are vacant at a time at the most. I’m in a pretty big market. I’m in Hamilton, right? Population of Hamilton’s over 500 million Sorry, sorry. 500,000, Elton, proper as population 500,000, I have a significant pool of resources to draw from here, we’re talking about like small towns, how can you possibly staff some of these were basements, we conversions, which is a major renovation, you staff that team in a small town.

Christian 38:05
That’s, that’s right. Now, a lot of those vacancies, if they’re legitimately being done as part of a repositioning project, etc, is actually going to go on your balance sheet anyway, meaning that it’s not coming from your cash flow, and you have to take all that vacancy in that loss basically has to get refinanced out at the end. And that has to be part of the plan, whether they did that in this case, or not, who’s to say, I don’t have that level of privilege in their information, but that’s where it needs to be. But if you’re just running it generally, and you just have vacancy rates, because you’re not managing it, right? That’s the direct impact of cash flow, and your ability to sustain the debt that you have associated properties.

Erwin 38:47
For most just to have one unit vacant is quite a pain. So let me back up, like for example, so like, there’s lots of condo investors out there, for example, if any one of them you know, these columns are like six $800,000. And it’s only one rent for if that turns not paying rent for months or months. Like that’s quite devastating to most. Yeah, and we’re talking about 200 units.

Christian 39:11
Now, to be fair, if it’s 200 units out of,

Erwin 39:13
you know, 600 something, or it’s a 30% vacancy, but

Christian 39:20
30% vacancy is hard for anybody to absorb, right. And that’s, that doesn’t. Again, you know, if if those two inner units are part of a full repositioning project, right, fair enough, right? But if it’s not, then a 30%, or 33% vacancy is pretty brutal. But

Erwin 39:38
just think, how long can we get through repositioning? 200 units, especially

Christian 39:44
if a lot of them are in the same town, there’s only so many trades you’re gonna bring in from other towns.

Erwin 39:49
Exactly. My point, my overall point is, it’s okay for folks to go slow and steady. Yeah, slow and steady, you know, ya

Christian 39:57
know, exactly, exactly. And just that Plants, right? Like, this isn’t a off, you know, there’s a lot of money involved. So

Erwin 40:06
100 or 140 million in mortgages, for them,

Christian 40:10
but even for the individual investor, right, you’re talking about a lot of money, it’s not inconsequential. And you don’t want to be shooting from the hip, you really want to think through what you’re doing, and how you’re going to make the money. Like, you know, me, when I when I buy something, my plan is deterministic. You know, I’m not just guessing or speculating and thinking that, you know, my property is going to go up, I know precisely how I’m going to make my money. Now, there’s going to be some variances on that, because you can’t predict everything in life. But, you know, I predict the COVID. But it’s very predictable. It’s a business case. For me, I know precisely what outcome I’m expecting. And I managed to it, though, but so you don’t want to be shooting from the hip on this stuff at all. And, you know, I see a lot of people too, that are in the camp of, well, I’m gonna buy this and it’s gonna be negative cashflow. Right, but that’s okay, I’m gonna make my money up later, while how. So negative cash flow can work. But you have to have a well defined business case, that’s going to tell you exactly how you’re going to exit, and that on that exit, it’s going to generate enough cash flow, either from the sale or refinance, it’s more than offset all the losses you were taking previously. But here’s the one thing that I know is operating a business and an investment business, is that in the large scale of things, negative cash flow keeps you from scaling. It really does. So can an individual project be negative cash flow? Absolutely, because it’s tied to a business case? If your portfolio, right, and if you’re owning three, four properties, and they’re all negative cash flow, you can’t sustain that for very long, your income job can only cover so much. Right? So, but I still see people do it.

Erwin 42:03
And that’s like, they make a general statement that a lot of people who are getting into heavy financial trouble these days, they they’re following more models, investment models, business models of high leverage, like, for example, again, like the one case that we’re talking about, it’s 100%, loan to value for a second, first mortgages, second mortgages and promissory notes. So from the outside looking in, it doesn’t look like the principals have any skin in the game.

Christian 42:31
Correct. And then if it’s, if it’s an individual project in a broader portfolio that’s otherwise, you know, at a good debt to asset ratio, yeah, well, yeah, then fine, right, like, as long as you have a business case to back it up and use tracker to execute. But if your entire portfolio is at 100%, leverage, right, that’s a house of cards. You know, you’re just not going to survive it.

Erwin 43:01
I don’t know what kind of disclosures were, if they were all properly made. But this was never something I would get into. But the point I was trying to get to is that if anyone is taking a course, or coached by someone that preaches such massive over leverage, yeah, you may want to consider something else. Yeah.

Christian 43:19
I completely agree. It leaves people so vulnerable. At the end of the day, can you do no money down deals? Sure. You can, right, like there’s ways to do it. But in most cases, and what people are, are teaching people on those is to put you in such a highly leveraged position, that if the economy burps, right, you could be completely destroyed.

Erwin 43:43
Right. And you have no wiggle room? No,

Christian 43:47
there’s no wiggle room at all, and no worse

Erwin 43:50
if you quit your job to become a full time investor. Yeah, you’ve given up six figure income.

Christian 43:59
Yeah, yeah. It’s it’s it’s not pretty and it’s not necessary there. There are other ways to do this stuff. And, you know, when you’re first starting out your first couple of doors, I know that’s, that’s a bit tougher, right? And you do you need to take some risks, etc. But, again, risk doesn’t mean no plan, right? Risk means something that you can quantify and put a plan around so that you have a way to get through it. But if you’re just speculating, right, I don’t 100% leverage, right. Yeah, it’s just it really won’t end well, in most cases. But we should probably talk about the lender side a little bit. Sure. Yeah. And so the lender side. You know, you and I have talked about this many times, is really a lot of people don’t necessarily know how to do underwriting properly as a lender.

Erwin 44:55
Well, this bankruptcy is going on. I disagree. If you’re gaining any new listeners understand I can be extremely sarcastic. But yeah, nothing was wrong here.

Christian 45:07
A second there, you did it with such a straight face or when,

Erwin 45:12
for this, this amount of this amount of leverage in small towns was such a complicated business model, right? Something was not Something doesn’t smell right.

Christian 45:23
Well, underwriting is a complex process. Right. And, you know, you were telling me once that actually, just before this call, people, you know, saying, Well, you know, I, I’ve loaned money out at 18%. And I’ve been doing this for several years, and this will come through and, you know, I’m devastated right, that this happened, it will not if you underwrite these things properly, you expect some losses in your portfolio. So the, you know, the way to think about it is, the first part of an underwriting is really what you’re alluding to, which is due diligence, right, making sure that who you’re going to loan money out to is credible, that the project is credible, that there’s a clear exit plan, that you know, exactly how the money is coming back to you. I won’t loan money to people who will, you know, I don’t believe have a solid plan to get the money back to me. Does the lender I want that money to come back? No, it doesn’t say I don’t loan to high risk individuals I do. Right. But in those situations, I’m looking at the quality of the borrower, and I’m thinking, Okay, well, if I were to have, you know, 10 of these guys, or 100 of these guys, what would be the probability of default, okay, and I’m expecting that out of 100, maybe 10 of them will default, or 20 of them might default. So I’m prepared, you know, and expecting that some of these loans might not do well, right, and that I might have to invoke a foreclosure, or in the case of prominence, and yeah, I have done prom notes, right, written prom notes, but I can assure you that I’m underwriting it with the expectation that sometimes there may be a loss. Therefore, the compensation that I get back, be it in the form of a lender fee, be it in the form of the interest rate, whatever it is, is taken into account that a certain portion of those loans are going to default. Now, it’s never pretty if it’s your first one,

Erwin 47:29
all your eggs in one basket, but yeah, right,

Christian 47:32
but at certain portion of them are not going to come back. And that’s just a reality of life, or what your diligence is. So you have to set your compensation be at an interest rate or be at a lender fee, whatever it is, and combination, that is going to ensure that over the long run, you’re going to get a certain rate of return, and you should have an expectation of what your blended rate of return is going to be. And you should expect that sometimes these loans aren’t going to make it and therefore the ones that do make it are going to help cover the losses that you had on the other side. And that’s part of you know, it’s a bit of an actuarial science. So if you’re really good at math, it’s helpful.

Erwin 48:14
That’s another subject.

Christian 48:18
But the expectation should be there. Right? It’s

Erwin 48:23
as part of a diversified portfolio. Yeah, yeah. doesn’t believe me, just like a visa stock. Lots of unsecured debt and made a really good business out of it.

Christian 48:34
That’s right, they don’t lose money, but take a look at their interest rates, their interest rates are running at 2021 2223, whatever percent minus 29. But yeah, it depends on the card. Right. And, and the quality of the bore, where maybe

Erwin 48:50
they keep trying to throw more debt at me all the time. So knowing absolutely,

Christian 48:53
they want you to spend more and hopefully not make a monthly payment so they can charge you interest and fit

Erwin 48:58
exactly, exactly with some people’s business models. But I’m not I’m not but so actually, that’s a good, that’s a good point is this is getting collecting over and they’re very, very good at collecting over 20% interest. And then it’s not just that to because they’d be charged back and then every every new money and also they charge on as well. Versus No, the promissory note money that we’re seeing in the market is like 17% Right, like, you know, part of the problem with me ever doing private private lending, especially promissory note as you know, I might be more interested in getting credit card interest rates because I don’t feel right about giving someone unsecured money so they can go pay down their their Visa, MasterCard.

Christian 49:41
What’s the exit plan?

Erwin 49:43
That’s that’s a part of the point as well. So there’s so even just like on a personal level, like a lot of people are getting promissory notes from like friends and family. Like I it’s not like I have a policy I don’t lend to family or friends. All right. So people need to appreciate that. So say someone you’ve lent a promissory note money to. And they’ve gone quiet, mortgage mortgage, the notes mature, they’ve gone quiet, they’re not paying you back. These things ruin relationships.

Christian 50:14
It really can. And it’s a good point. I’m always hesitant to do it, but I will do it. And for very specific criteria, right? So you know, especially with with lenders, but you don’t want to get into a situation is why did you loan money to Billy, but you didn’t? You know, you’re not loaning money to me.

Erwin 50:34
That’s even worse. Oh, yeah. Yes. Get the collars on both of them.

Christian 50:41
Yeah, but I might loan money to Billy because Billy needs a second mortgage to complete a project that I know, you know, conclusively is going to complete. And he has a track record. And I can easily explain it to the rest of my family that that is there. Now I have the advantage that my family is not very big.

Erwin 51:02
Picture network is big.

Christian 51:04
Yeah, yeah, that’s true. And so you know, certainly with friends, I don’t, I’ve never loaned to friends. And I think it’s probably because like you have a bias against doing it. I don’t want to destroy your friendship over money. But it will happen. It will happen, because,

Erwin 51:24
for example, the 300 lenders on on these projects will likely hate the principles involved. You know, it’s so people need to understand that as well. If you’re going to if you’re, if you’re going to take people’s money, whatever vehicle it is new lucid, understand that will change the relationship going forward. It sure will. Absolutely. And just for the money, they will like you, they will like you lots, right? No, there was no money. You lose the money. You’re not getting Christmas cards ever again.

Christian 51:52
People don’t care. Right. And we’ve seen some actors out there that that I just question whether they have any ethics at all, they seem to have no concern about borrowing money from people taking money from people without any plan of being able to return it. Right. Right, then they’re not even bothered by the fact that they couldn’t return the money. Right? Yeah. And you know who these people

Erwin 52:19
are? Right. The sad part is, there’s lots of them out there promoting stuff with ads, whatever. The real, you know, I talked offline about, you know, we think other people are gonna be train wrecks as well. And I feel good, I feel sorry for the people that’ll be involved. But, you know, we’re not the LSC, we have no means to, we’re not we’re not we don’t have the resources to judge them again, like we have our own lives and own businesses are run. So people need to really do their own due diligence. Actually, I need to add a piece about that as well. You mentioned about like, the credibility of someone. So for example, one of my standards is again, just because I have you know, I’ve been around a long time. My standard is that someone has been through a full cycle before. And a lot of these people who are going under have not. So I have a question why these people were trusted, right? I mean, I know you feel cycle me like you had to like 2007 was really late. Yeah, it was not that bad, right, in terms of a correction. But again, credit disappeared. So that was that was painful for many, especially anyone who’s like flipping or trying to return they couldn’t refi. Right. So again, I knew that from that, like credit can disappear. If credit disappears at any point in time. We are so screwed, no different than like Ellie’s people who are who are who have business models, reliant on CMHC is anything for their for their exit for the refinance, whatever. So you’re, you know, I think everyone should like you’re relying on government for your exits. Right. All right, right there, right, there is a slight challenge. But again, my point is, though, is that I would never invest with someone who hasn’t been through a full cycle. So I cannot believe the amount of money that these folks were given, like, any folks, any folks out there?

Christian 53:56
Well, I think part of it is that, you know, if we’re trying to become armchair psychologists around this, is, we get people who are caught up in the real estate frenzy. They feel that, you know, they’re bowled over and over again, that you can’t lose money in real estate,

Erwin 54:14
oh, I can show you a million

Christian 54:17
secured against an asset, you know, in a lot of people don’t understand that. Second, mortgages are not risk free. Even first mortgages are not completely risk free, depending on the loan to value. And then, you know, there’s all this in it. I think there’s a lot of FOMO right? So, you know, because of all this people feel that if I’m not getting involved in this stuff, that I’m not making the best returns that I possibly could, which of course is a false narrative. And then there’s a lot of people there that have, you know, either I would call it manufactured credibility, right, but they’re out there. They’re talking I was gonna say that they have some credibility or manufacture credibility but knowing in all the cases, they if you have credibility, you know, people will listen to you, and you’ll be giving them sage advice. So I’d say manufactured credibility where they said, Well, if this person thinks it’s okay, right, then it must be okay. Right? And if you know not to pick on anyone specifically, right, but if if, if a broker that you think you trust, right is saying, this is a safe investment, right, and you just blindly give your money because you trust that broker, but it turns out, it’s not, not, in fact, a safe investment, the accountability has to come back to the lender, in that case, you need to take account of exactly, you know, if maybe the broker told you that it’s all good, and maybe they’re right. And you know, and a lot of brokers are really very good people. But it could very well be a situation where you need to do your own diligence, because at the end of the day, the lender is the one holding the bag. So you have to do your due diligence and make sure all the things that we talked about

Erwin 56:02
before, you should be able to justify to your spouse how you made this decision. I like that bag I’m holding, and if it’s a great bag, because again, like private lending can be done properly. If the if the principle of the borrower defaults, and you get a great property, and a great discount that you would want to own any day of the week. That’s probably good. Yeah, right. And also, we talked about, like the brokerage responsibility, you and I were discussing how we have some we have one of their, their documents where they’re promoting one of these mortgages. And they the verbiage, the the copy of the language is, quote, be thoroughly endorsed and approved these borrowers. Yeah. This is this is this is on the one of the mortgages properties that

Christian 56:47
lends a lot of weight to relatively naive lenders. Yes, yes. Right. It’s not good, right. And I want to emphasize, again, for people that thinking to lend their money, don’t rely on that, do your own due diligence.

Erwin 57:05
You know, like I when I, when I was working with clients directly, you know, their real property manager, you know, he’ll tell you what this can run for, right? So here’s the home inspector, that’s how you would thinks about the property, they’re all third party, they’re your you are their client, they’re here to protect your to protect your butt. Right? Do you don’t do diligence, see the property yourself. Such a foreign concept.

Christian 57:28
And I think we also need to make sure people understand too, that, like, good quality borrowers, right are not much of a headache, you just kind of deal with them, you know, at the beginning you to deal with them towards the end, maybe a couple of times in the middle there not a lot of book or a bad quality borrower, even if you don’t go into a power sale or foreclosure, or a lot of work. Right. And I’ve had bad quality borrowers, I did it on purpose, you know, so my eyes were wide open. And trust me, they’re they’re making, you know, I’m making money on it. But it sometimes can be a distraction, it can be a lot of work, where you’re trying to manage manage the situation with the borrower so that they don’t become insolvent, for example, or if you’re dealing with, you know, one of the, you know, RSP trust companies, for example, like, like Olympia, for example,

Erwin 58:27
actually gonna be pissed about all this to make enough money for all this trouble.

Christian 58:32
Well, limpia has a lot of overheads and so on, right. And we also have to recognize that they are acting as a trustee, and they have an accountability not just to you, but also the federal government as managing things as a trustee. And they’re going to put you in situations where you’re forced to do something that you might not think is necessarily in your own best interest. But them’s the rules. So you have to take that into account in what you’re doing.

Erwin 59:03
Yes, let’s think we’ll leave it there. Christian, thanks so much for your time. I know you gotta run. Any final thoughts?

Christian 59:11
Well, I think we really categorial Well, sure. That

Erwin 59:15
you screen for screen for quality of people come on stage and stuff like that. We

Christian 59:20
absolutely do. Right, you’re never going to be sold that right. If you’ve come to an Oreo events, right? We we curate those events very carefully to make sure that it’s information for people. And you don’t have to worry that someone is going to try and sell you from the stage. There’s no nobody telling me to run to the back of the room, nothing like that. So And as you’ve been a presenter a number of times

Erwin 59:42
you’ve been sharing a screen. I know. You’ve

Christian 59:45
been screened exactly right. And I’ve always said don’t sell from the stage. Right. So we want to make sure it’s a safe environment for club members and, and I’ll shamelessly promote the club right are proud member. Yeah, that’s the Ottawa real estate investors organization, o r e i o.org. The membership is only $127 a year, it’s been suggested

Erwin 1:00:11
you increase, at least the Ontario rental rental increase

Christian 1:00:19
would be very, I think that’s a clever idea, we might try to do that, and two and a half percent this year, just for just a bit of tongue in cheek. But it’s, we’re a not for profit club, right, one of the very few that you’ll ever find around and we’re very large, we’ve owned nearly 400 members. So very, very good company and in a safe space to, you know, to network with people in real estate. And

Erwin 1:00:47
I’ll just add that, you know, thankfully, that the principles such as Robbie Clark, who I don’t have never heard of before, and Dylan, who I’ve never met personally, have obviously never been on my show as well. And sadly, many other shows cancer the same. Alright, so we’ll leave it there. Christian, thanks so much for doing this. And we’ll talk about Oreo another time.

Christian 1:01:12
It’s always fun Irwin. And, you know, I think people should really take a lot of stock in what’s been discussed today, because that’s why we wanted to have this discussion was to make sure that, you know, we helped keep people safe in these environments.

Erwin 1:01:31
Stay safe out there go slow, go. No, don’t rush into it. And oh, Christian, can we can? Are you still offering coaching? Because Because one thing I want to say is like, for example, I mentioned about, like, if a course is saying like, Go highly leveraged. Like, these courses are a lot of money. Like what at least by an hour of consultation with like, there’s someone like yourself, or like Elizabeth Kelly, or like a Ryan Carr, all these people who have encore unbiased, been there done that, like, continue to get a second set of eyes on this?

Christian 1:02:00
Well, I think that’s really important. And, as you know, I take on a very limited number of clients, my principal business is my investment business. And so I tend to only take on people that are, you know, already well along in their investing career. And it’s very much like what you said, it’s a second set of eyes, or it’s refining their processes in order to create scale, or operational efficiency, etc. And I often getting second, you know, people asking for a second opinion on their deals. You know, I, in the coaching side of things, I would publicly endorse Elizabeth Kelly, right, especially with beginners, or people that are very early in their investment career. You know, to your point, having someone like Elizabeth, on board is is someone who ultimately, like, people look at as Oh, you know, look at the ticket price or doing that. But if you have a real true quality coach, right, and a good quality person, that investment is going to come back very quickly, just in terms of protecting you from the downsides, looking for opportunities, and accelerating, you know, your your success, so, so coaches and education programs that are out there, there are lots of good ones, right? Unfortunately, there’s a lot of bad ones. Yeah, but that’s why like, Elizabeth, I know extremely well, and I have no problem publicly endorsing her.

Erwin 1:03:27
Alright, we’ll leave it there. Are you gonna run I gotta run to. Thanks so much for doing this Christian.

Christian 1:03:31
My pleasure. Take care. Thank you for watching.

Erwin 1:03:35
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