Recession Proof Real Estate Investing in 2023

It's one thing to talk about how an asset is when things are good, but it's where an asset performs when things are bad that really matters. Because rule number one, remember, is you don't want to lose your capital. And that, for me, sold it. And in real estate, past performance, even though it doesn't guarantee future performance, it's a pretty good indicator. So, you know, now we can look at the past three recessions and apartments have outperformed. So chances are for right now, apartments are going to outperform again.

Seth, welcome to The Bankers World YouTube channel. We met a few months ago and I'm privileged to have you as a guest on our Bankers Vault YouTube channel. Could you share a little bit more about yourself?

Yeah. Really excited to be here. Thanks for having me on today. I'm just a guy who's trying to do some really interesting and exciting things in the real estate space. So whether that's running something called the Multifamily Conference, which is the largest real estate investing conference in the country, investing in apartment buildings, you know, running really neat events with thought leaders in the real estate space, I've got my fingers in a couple different things, all centered around real estate investing and building wealth.

That's awesome. That's so welcome on Bankers Vault. What we coach Canadians on is the process of becoming a banker, the infinite banking concept. And as prospect clients connect with us, one of the questions that they ask all the time is, hey, cerebral, what are your thoughts on real estate investment and especially multifamily, the difference between multifamily and single family? So, Seth, by you being here, I have the privilege to ask you all those questions so that we can get the answers from the person itself. So, Seth, can you please talk a little bit about real estate and the security behind real estate investment and maybe expand a little bit about multifamily and single family, what the differences are if someone is looking at investing into these asset classes?

I think this is especially important right now. We're recording this in at the start of 2023, and we've got some bumpy roads ahead in terms of the economy, the global market, you know, micro markets. Rule number one of real estate investing we is you don't want to lose your capital. That's rule number one. Because as long as you can maintain and preserve your capital, you can live to fight another day. As an investor, you have to think about, okay, well, what types of assets, what kind of investment vehicles can I place my money in where I know that capital is going to be Safe, even if the roads get bumpy, even though we may get into some choppy waters, is my capital safe? One of the assets that I would say the asset that is foremost, you know, at the forefront of that capital preservation instability is apartment buildings. It's multifamily real estate. And that's something that I discovered many years ago when I was transitioning from doing, you know, single family home investing. And then for a number of different reasons that we can get into, I realized it wasn't the best investment vehicle for me and I had to look at some other options. And multifamily is incredibly stable in economic downturns.

If someone is just getting started in real estate investments, but they have a lot of capital, and it may be very overwhelming for them to hear multifamily, 100 units, eight units, 10 units. And they're like, well, that's going to cost me a lot of money to get into that investment scenario. I may not have enough money. I should just wait and hold and build enough money to get into investment in multifamily because those questions come up. So could you just expand on the mindset and thought process around so that you can help change people's thought on. It's easy when you know how. So. So again, we have set here. So Seth is just going to walk us through some of the processes, some of the steps that one has to take to get into multifamily investment.

I think the best example would be my own example. So I'll take it back in time. And because I made a whole lot of mistakes and I think I had a very similar mindset to what a lot of people have right now. So when I first started acquiring real estate properties, I was of the mindset that we had to own everything. I wanted to manage everything myself. I needed to start small and work my way up. It was like a duplex conversion, then it was like a condo, then it was like a detached house, it was that typical mindset that I think a lot of people have. And I had the dream of, okay, well, you know, eventually I'll own like 10 homes and then I'll be able to sell a couple, pay off the rest, and then that will be my retirement. I'll be able to live off of that. That was my real estate investing roadmap. That is what I was working towards at the time. But what I realized and what I discovered was that the types of houses I was investing in weren't necessarily the best ones that would get me to my investing goal. For instance, I live in the gta, the greater Toronto area, anywhere you look. Even with the correction that we've had in residential real estate prices, if you buy a detached house or if you buy a duplex or a triplex in a, in a, in a popular area, you're not going to cash flow. Businesses need cash flow. And why would you get into a business and start building business where the cash flow isn't there? That's the lifeblood of investment. I remember an example with a bungalow like a duplex. The drain out to the sewer had been broken through with the tree, so a tree root had gone right through it and it needed to be repaired. And that repair was like $8,000 because the properties were equity wet, but cash flow poor. That ate up like three years worth of positive cash flow just for that one repair. My son was born, you have a daughter. And so I don't know if you had this same reaction, but I remember looking down at my son, holding him for the first time and then like it was like this big feeling of having to be better and do better for him now, like it wasn't for me. And I realized like in that split second like that I'm like, you know what? Like I need to do a whole lot more because I have somebody who's going to be looking up for me. I want to do the best for them. I realized a couple things in that moment. Number one, I had made more money than I ever had with my earned income owning the real estate. So I knew owning the real estate was the right way to go. But I also knew that because of the constrictions with financing, the poor cash flow, how I could access that equity if I needed it, and just the ease of management, I realized that the single family homes, the small stuff I was buying and investing in, it wasn't the right fit. So real estate was the best thing to do for me. But, but the vehicle I was using, the real estate asset, wasn't the right fit. So I started looking at mobile home parks, self storage, commercial office space, retail and apartment buildings. And apartment buildings made a whole lot of sense to me, especially now for this topic. This is very pertinent. I looked at how apartment buildings had performed as an asset class over the past two recessions. And one thing was very clear. In commercial real estate, apartment buildings outperformed every other asset class out there. Apartment buildings were the most stable, they had the shortest downtrend, they exceeded the previous peak faster than any other real estate asset class. I was thinking, okay, well it's one thing to talk about how an asset is when things are good, but it's where, where an asset performs when things are bad that really matters. Because rule number one, remember, is you don't want to lose your capital. And that for me, sold it. And in real estate, past performance, even though it doesn't guarantee future performance, it's a pretty good indicator. So, you know, now we can look at the past three recess and apartments have outperformed. So chances are for right now, apartments are going to outperform again.

Real estate, no different than anything else out there, is a volume game, right? It's not a single transactional. And that's where apartment building, because of the volume that's going to be there, it creates that cash confidence. As an investor, would you agree with.

That is yeah, nobody's going to get rich off of one real estate transaction. Yes, you buy one house, you're not going to get rich. You buy one apartment building, you're not going to get rich. It's that compounding effect. But when we talk about apartment buildings, multifamily real estate specifically, there are a number of advantages that help us build that portfolio that we don't necessarily get with residential real estate. So I'll give you an example. If I was to buy a house right now and I wanted to rent it out, the bank would look at my income because I have to qualify, I have to service that debt. The bank doesn't care about how much rent the property produces. They care about how much I produce for my personal income. So I have to qualify for that debt. And then the bank wants to be able to come after all my assets in case I stop paying them. So they'll take the house and they'll come off after my other assets to make themselves whole. That has a number of disadvantages for real estate investors. And I went through it like you need to give your arm, your leg, your kidneys, your firstborn child, maybe your second born child, just to get a mortgage once you start acquiring some properties. If I look at financing apartment buildings and we can talk about different ways you can participate, but just financing the building, lenders are looking at the building first, not you. They want to make sure it's well managed, but they look at the apartment building as a business because when we get into multifamily real estate investing, we're really buying a business that just happens to be tied to the real estate. So the property has to support the debt. You don't have to support the debt. And in terms of financing you know, there's recourse versus non recourse loans. So recourse means the bank's ability or the lender's ability to make themselves whole in the event of a default, in the event that they lose. Non recourse debt is actually very common in the commercial space. So you don't actually have to put all your personal assets on the line because the bank will just take the building, which is what they want anyway. They don't care about your car. So there's a number of different advantages of, of getting into the apartment space and then the cash flow like, like you mentioned, I'll use this example. A duplex. One tenant moves out. 50% of your revenue disappears overnight. No business out there can survive a 50% drop. We saw this during COVID But with an apartment building, let's say you have 100 units, five tenants move out. That's not going to be a big hit. That's a 5% loss of revenue. And that, that's actually worked into the underwriting. So the scale works in your favor. Your cost per unit is down, your expense ratio per unit goes down, your ease of management goes up. There's so many different benefits with apartment buildings that I had no idea about when I first got started in real estate.

You've been doing this for several years and you've coached and mentor a lot of folks into multifamily investment. So when people approach you in terms of, hey Seth, you know, I want to get into it and let's use an, a family like, you know, average income in Canada within, you know, family is maybe 150 to $170,000 between the two spouses and, and they have bills to pay, they have mortgages, they got cars, they got kids and, and they're setting aside some money for the purpose of investment, but it's not a lot of money. Let's just say they're setting aside 10% of that money, how do they get into something that's going to be like a million, two million dollar transaction. When it comes to multifamily, what defines a multifamily? How many units define a multifamily? And if someone has money but not enough money, like how do people join venture or what options they have to get into something like that. And maybe also speak about the importance of coaching in this whole process.

Real estate's pretty simple. And there's four ways you can really acquire apartment buildings. Number one, you buy it yourself. Number two, you joint venture or you partner with somebody. Number Three called syndication. I'll go into that a little bit more. And then number four, you invest in a fund. So the first two that I mentioned, you buy it yourself or you can partner with somebody. Those would be considered active roles, right? You're getting the financing, you're finding the deal, you're managing the deal, you're making all the decisions. Because what happens is in every single real estate investment in the history of mankind has had four key, key components. And I call this the real estate matrix. Number one, you need the deal itself. Number two, you need the financing. Number three, you need the equity, the capital. And number four, you need the management component. So if you want to buy a building all by yourself, people do that. You know, there's lots of doctors who do that. They'll buy a building, they'll buy a 57,500 unit building on their own. They have to bring all four components of the real estate matrix to that transaction. But what if you don't have, maybe you have the deal and you have the experience to actually run the deal, but you don't have the capital or the financing. And this kind of answers your question. Well, then you can actually seek out somebody else or a couple other people who can bring your missing components to the mix. So then you end up with everybody working together. Those are all active. And we talk about risk versus reward. And when you're an active real estate investor, you are shouldering a lot of risk, right? If things go wrong, if there's a lawsuit, if the deal goes belly up, you're shouldering that risk, right? There's return that you're getting, but there's also the risk factor. Then we get into the two other ways that you can invest in apartment buildings that I mentioned. There's syndication and there's a fund. And these are really designed for passive real estate investing. Because let's face it, if you're a high income earner who's interested in investing in real estate, with all the cash flow, the appreciation, the tax benefits, the stability, it doesn't make sense to start, because I discovered this myself. When you're starting an investment business, it is a full time business. So let's say you're a surgeon, let's say you're a lawyer, an accountant, you know, whatever, a programmer, you're working full time in your job, you don't have time to start another business from scratch. It doesn't make sense, right? It's not the most efficient use of your time. That's where syndication and real estate funds come in because they give you a vehicle where you can invest passively. You're earning the cash flow, you're earning the appreciation, you're getting all the benefits of ownership. And, but you don't have to devote that full time attention to your investments. And the investments are actually run by real estate experts who know exactly what they're doing. They have the track record, they have the team, they have the experience, they have the market knowledge, they're. They're dealing with all that stuff on a daily basis. And I think the main benefit too is when you invest in these structures, you're actually afforded a number of protections under the law and you're really limiting your risk exposure. Exposure. So you're getting all the benefits. Also, you have the benefit of not exposing yourself to excessive or undue risk. If somebody's looking at investing in real estate, you look at those four options. You buy it yourself, you partner with somebody, you. Or you can invest passively through a syndication or a real estate fund.

So this active way to do it and this passive way to do it, it's. It's based on what someone want to get accomplished and they can choose the direction. Now, Seth, you mentioned something regarding the Multifamily conference, which you host one time per year on multifamily real estate investment. Can you tell a little bit, share a bit about the conference, like how long you've been doing this and where do you do this normally and where it's happening for 2023, what people get in terms of value from this conference? And obviously if someone wants to enroll into attending the conference, how can they do that? Could you share a little bit more about that?

The Multifamily conference is very special to me because what happened was when I first started getting involved in learning about really investing in apartment buildings, I found that there weren't a lot of resources out there and I found that very frustrating. I decided that, hey, you know what, now I'm in this position in the space, it's time to actually build something that can help people. Where I was right. And it's a resource whether you're looking at getting into apartment building investing and it's your first deal, or maybe you're starting your own investment company, maybe you want to launch your first real estate investment fund, maybe you're on your 10th fund and you're looking really to scale. Basically the Multifamily conference is everything to do with investing in apartment building. So last year in 2022, it was our first time running it. We had over 1,000 investors come to Toronto. Kevin O' Leary was the keynote speaker and we had top investors from all over the place. This year for 2023 we're taking things to a totally different level. I rented out the CN Tower in Toronto, so we're doing a special party there. I rented out the best nightclub in the hour after party we've got Grant Cardone, mammoth beast in the space. He owns over almost $5 billion. He controls of multifamily real estate. We've got Alex Rodriguez coming. He owns over $1 billion of real estate. He has over 15,000 apartment units. We've got Janet LePage coming, she's at like $3 billion now I think for apartments under control. So basically if you are working in or if you're looking to get into the multi family, the apartment building space, this is the conference to go to. This is where the multifamily world connects and it's going to be so much fun. I have to say, like I still get text messages and messages from people now and we're almost a year after the last year's conference of people like sending me messages about how much of an impact that conference had on what they're doing. Like I had this one guy, he sent me a message, he thought he was done investing because he had achieved a lot of success and he was comfortable. He came to the conference, basically he's leveled up what he's doing, he's back into it, he's energized and he's banged out some great deals already just with what he learned from the conference. Like we had Joe Fairless last year talk about partnerships and how to structure things and Joe's over $2 billion now. So it's really inspiring to see the messages and the feedback I'm getting. We had a 17 year old kid start investing and he's going to get his first deal very, very soon and his mom brought him to the conference so he could learn. So like all these cool stories just from coming to the conference. Like I had no idea it would be like this when I launched the conference. Like it has blown my mind.

So if you are thinking about getting into multifamily investment, think about why you should not be at the investment or at the conference itself. Like it sounds like an amazing way to network to get connected with other like minded people. If, if you want to get into multifamily real estate investment and also connected with people who already have success, successful track record and hear their journey regarding what it took for them to be successful Success leaves clothes and if you just do what they did, you'll be successful. Also, when it comes to multifamily and said we, we have clients, as you're familiar with, we, we practice the process of becoming a banker and our clients ask us this question all the time. Hey, so can you make a connection? Can you teach more about passive income investment? Can you show us where you put money so that we can learn from you to grow more passive income? So multifamily conference, I think it'd be a great way for someone to get into learning about multifamily investment networking connections. I'm personally looking forward to being there.

Seth, going back to kind of when I first made the switch from single family to apartments, like you have a whole lot of questions and you're looking for those like that basic foundation. And one of the things we're doing this year at the conference is we're actually hosting a Friday workshop that's designed and geared towards beginners. So it's myself and some of my very successful apartment investing friends and we're actually walking through a full day workshop if you're a beginner. So you can be ready to actually take as much as you can out of the two main days of the conference. So you know when Grant Cardone's talking about what he's doing, it will make a whole lot of sense because you've gone through that Friday workshop and you've built a solid foundation of understanding. I'm really excited about that because that's going to open up and allow beginners to actually come in and really ramp up really fast with what they're doing. Their knowledge is going to go from here to here in a day. And then when Grant, Alex, Janet, all the other speakers when they're on stage, you're going to get so much more out of the conference just because you've done that workshop.

Going back to what's happening in the economy with the interest rates going up and one of the concerns that some investors who already have real estate investment is how the cash flow has suffered because now the cost of holding the property has. Has gone up. Can you speak to a little bit about that and multifamily, like connecting the dots for as. As a question that may have. May come up for someone.

Yeah, for sure. And this kind of goes back to our underwriting, how we model our investments. So a good rule of thumb to do to avoid this type of situation is let's say your business plan is to hold the property for five years as you improve it right. You'll always want to at least double the term of your debt on the property. So for instance, let's say I've acquired an apartment building. I'm going to turn it around, I'm going to implement my value add process and I'm planning on selling it in year five. I'm going to want a mortgage debt on there for at least 10 years in case we hit choppy waters so I can actually live through it and then, you know, sell when it's more advantageous. So maybe I have to sell in year seven. The mistake or the situation a lot of people are in right now is bridge financing, which is short term, more expensive debt, became very popular over the past couple years. Somebody acquired a building on bridge debt without accounting for increases. Now values have kind of stalled and now the conventional debt, regular financing, they can't roll into that at the cheap rates that we saw before. The debt cost has increased. So now their underwriting model suffers and they're not able to hit the targets they wanted to. So I think this always comes back to how we look at potential deals, how we look at potential scenarios. And you know, I use an underwriting tool where basically when I'm looking at a potential deal, you know, the deal works, but now I try and break it. So at what point does it break? How much increase in interest rates has to happen before the deal falls apart? Where does occupancy have to drop to before the deal falls apart? Where do expenses have to go before the deal falls apart? When you start trying to break the deal that you're looking at, you learn a lot more and then you can actually take steps to, to shore up any weaknesses you have. Because especially if you're raising money from investors like rule number one, you can't lose your capital. So you have to make sure that you're, you're entering a deal where you have a lot of control. I know you talk about control a lot of. But you have to control the deal as much as you can. So right now with interest rates, it's going to create a lot of opportunity for purchasers because some sellers didn't take that conservative approach when they were analyzing their deal. So that's going to be good for people looking to wrap up properties. I'm certainly in that boat. It just speaks to the importance of underwriting and modeling your deal and understanding all the different levers at work in a deal and how they can impact your end result.

Someone who is just brand new and they're going to need coaching and mentorship and all that. Is there, like, a coaching program that you and your team provides when someone connects with you? Like, what's the process like?

I'm never one to, like, hard sell anything that I do because there's so many different ways to slice a cake in the real estate space. I do have a program where it's designed to take somebody from being brand new, not, you know, square one. And it brings you all the way through to your very first apartment deal, because the first one's going to be the hardest, right? So it's all about, like, building the systems, getting the frameworks, teaching you all the different components that have to happen all the way through. And that's done through eight distinct modules. And it's designed to take you from square one to your first apartment deal. So if somebody's in that learning phase, because I wish I had that. And one of the things I did when I really wanted to learn about multifamily is I sought out one of the very best people in the space. Like, right now, the guy's doing deals with, like, Blackstone. Like, it's ridiculous. So I wanted to learn from the best, so that's who I approached. I learned a lot. I avoided a lot of mistakes. I just wish I got coaching sooner, and I wish I got coaching when I first started investing in real estate, because I would have avoided, like, 10 years of doing it the wrong way. So, yeah, my program is called Discover Multifamily. But there's, like, when you come to the conference, like, there are so many, like, it's all about finding the best fit for you, right? Because, you know, there's different personalities, there's. There's different strategies, and the way I do things may not be the best for you, or it may be the best fit for you. So when you come to the conference, like, you're going to see how everybody else does things, you're going to be exposed to so many different ways of investing. Different strategies, different markets, different. Different systems. I think that's the best place to start for a beginner is come to the conference. You're going to get exposed to basically everything out there. Then you can make the most educated decision for you. I would be remiss if I didn't put out the conference website. It's multifamilyconference ca. If you. If you want to find more, find out more about what we're doing at the conference and all the different things we've got for you.

Is there anybody that you think should not consider Multifamily, as a asset class. Not just create wealth today, but to have that generational wealth. And if you can speak about generational wealth, because that's really near and dear to our audience. So how does one go about doing that in terms of transferring it from generations to generations to come?

Well, you look at some of the wealthiest families in the world, the bulk of their wealth lies in real estate, right? And apartment buildings make it a large component of that because you've got the consistent cash flow, you've got the appreciation, the ownership, structuring, the tax, the tax benefits that come along with it. There's really no better investment vehicle out there. Like apartment buildings are the ideal investment vehicle for building that generational wealth because over the long term, real estate assets go up. We are becoming a renter nation. So rents keep going up. The stability aspect is there. I think once you build the wealth, you have to preserve it. And apartment buildings, that's why a lot of people keep pumping so much of their money into apartments, because it's not going away. When we look at family offices and families that have set up their, their own offices by the third generation, lots of times the money gets squandered because it's so far removed from, from the strategies that actually built the wealth. Apartment buildings are illiquid. So it's not like the money sitting there and can get squandered by the third generation. Like if you build your portfolio like it's there, like, like you can't tap into that money and just blow it. It's in that cash flow producing asset. And then we can talk about like insurance policies in terms of like passing buildings on it and covering tax liability and all that exciting stuff. But I just look at what the top performers are doing in the space, what the top investors are doing in the space, the wealthiest families. And apartment buildings are a huge part in how they built that and how they're preserving their wealth.

We have a lot of Canadians that watch our content, but we have, you know, a lot of Americans also watching our content. Could you speak about Canada versus the U.S. and you know, if you're, if you're a Canadian looking to invest in US or if you American looking to invest in Canada, like, how do you integrate those questions that come up for you?

Structuring is really, really important. And as a Canadian who focuses on U.S. apartment buildings, what I found, especially when I first started learning about apartment buildings, if you're interested in US real estate, as a Canadian, 99.9% of the content out There is written for Americans, which is great, but it doesn't take into account how the Canadian tax system works and how the tax treaty works and what CRA will give you versus the irs. So it's really important if you're looking to invest as a Canadian in the United States, huge opportunity, like the US market dwarfs us by a factor of 10. Huge opportunity. But literally every week somebody contacts me and says, hey, listen, I just set up my LLC, I'm a Canadian. And like that's, that's mistake number one. If you're a Canadian looking to get into the U.S. make sure you're investing with somebody who knows what they're doing. A lot of US operators, they don't understand the tax implications for Canadians. And by the time you're invested, it's too late. Like you're going to get, you're going to pay double tax. So make sure, whether it's myself or another person who specializes in cross border investing, make sure you're having those conversations and you're working with somebody, you're investing with somebody who truly understands the implications. So that way you're not paying double tax, you're not paying more tax than you have to and your money's in a very secure investment that's going to provide for you. Not this year, but like we're looking five years, 10 years into the future for you and your family.

Is there sometimes something you want to share in case, you know, people watch this and they say, hey, this is good, we're going to be at the conference or they want to get in touch with you on a one on one. Is that something that you facilitate as a one on one or maybe you have team that facilitates this for them.

All you have to do is go to www.callseth.com. we have a couple questions so we can direct you to the right people who can actually have the best conversation, help you the most. So go to callseth.com and we'll set up a strategy call with you and just really learn more about where you're looking to go, what your goals are and we can suggest the best way to do that. There's so many different ways it can go. So the best thing is get on the call, we'll have that conversation and we'll go from there. So if you are interested in any way in apartment buildings, the multifamily conference is the event you have to come to in 2023, guaranteed.