Keeping it Real, Edmonton. Real People, Real Conversation, Real Estate. Episode 6 with Keaton Kirkwood

In today’s post, we’re having a conversation with Keaton Kirkwood, a mortgage broker based out of Edmonton, who's been an expert in his field for nearly a decade and has established himself as a trusted and respected advisor in his practice. We talk about the cash-flow properties and common misconceptions, market trends, common first-time investor mistakes, and how a multi-faceted approach is the best method for success.

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Q: So how long have you been working as a mortgage broker in the Edmonton market, and what’s your experience with real estate investing?

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[Keaton Kirkwood]: “I’ve been in the Edmonton market since May of 2022 – that’s when I came here as a broker. I’ve been a broker since 2015, and I’ve worked with real estate investors since 2015 in BC, and we’ve branched out to Alberta, and we’re actually getting our license in Manitoba as well. So I worked with a bunch of the big real estate investing groups, doing a lot of speaking.”

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Q: Right now, the Edmonton real estate market is booming and there’s a lot of experts on the ground speaking with potential clientele. What sets you apart from the other brokers?

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[Keaton Kirkwood]: “Probably the fact that we’re real estate investor and tax strategy focused. Instead of just [asking] what is it that someone’s trying to do in the sense of the transaction – buy a property, get a cash-flowing investment property, whatever it may be – we focus more on the outcome they’re trying to achieve. A lot of it is working with other professionals because it’s not the best mortgage, best real estate, best tax, best investment, but rather a combination of each of the silos and how they all work together. What compromise of all of these things is going to lead to the best outcome for the individual.”

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Q: Based on what you’ve seen in your two years in Edmonton real estate world, how would you describe the current state of the market, and what are some key factors driving the housing market right now?

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[Keaton Kirkwood]: “I think that you’ve got a bit of a valley effect going on in Canada. You’ve got BC on one side, you’ve got Ontario on the other. Due to rising inflation, it’s hit a point where the average Canadian just cannot afford to live there. So we’re seeing kind of, call it a mass migration in a sense, in Canada of people leaving those higher price point markets and going to lower cost areas. Edmonton is one of the most affordable cities in Canada. So I think it’s attracting, you know, a fair share of those people and that’s causing the market to boom. It’s pushed rents up a fair bit. It’s not as cheap as it used to be, but still, it’s a lot cheaper than those other markets. You can buy an average home for $400,000 in Edmonton.

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I feel bad for the frustration, but you know, it’s impossible for the youth. They’ll never own a home in Canada. You can buy a nice little townhouse as an example in Edmonton, you know, a year out of highschool if you get even a half decent job […] you could literally make $20 an hour and qualify.

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Q: In a post-COVID world, how did you as a broker stay up-to-date on market trends and changes in regulations as they continue to shift?

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[Keaton Kirkwood]: “...There are certain premium newsletters that we’re on, and I follow the CMHC {Canadian Mortgage and Housing Corporation] and OFSI, which is the Office of the Superintendent Financial Institutions. I do a lot of speaking and education on the topic, so I it’s a lot of looking at the data and then interpreting it in a way to make sense to the public. So kind of all of the above, I guess it’s not just any one piece, but rather it’s a matter of compiling it.”

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“It definitely catches off a lot of other province investors is that, let’s say you look at Greater Vancouver or you like at Greater Toronto, Ottawa – the difference in tenant profile you get in certain neighborhoods in Edmonton is there’s more of a range which means there’s some really good areas and there’s some really bad areas.?That’s one of the biggest pitfalls – we see [uneducated] investors… go to those really bad areas and it’s worse than they expect.

Q:?Are there any specific neighbourhoods in Edmonton that are experiencing significant growth or decline? Are there any areas that you predict will experience that change?

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[Keaton Kirkwood]: “I won’t speak to the specific neighborhoods level so much because I leave that to the realtors I work with. But yes, the whole city is experiencing a change because at the beginning of this year. They took all of the different RS1, RS2, and RS3 rezonings and they basically turned it into commercial or non-commercial. All of the residential zones are now allowed to have up to, I believe, ten meters of height and up to eight units on any lot.

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We’re seeing a boom across Edmonton because they used to sprawl outwards, but the city was realizing that it was getting very expensive from an infrastructure perspective. So now they’re trying to grow up in density. So we’re seeing quite a little mini land rush right now because you could buy any $300,000 a lot on any, most $300,000 lots, and you could build up to eight units on it. Combine that with the MLS select program, where you could put a little as 5% down to build, say a $2 million building and a commercial space, and you can have 50 year amortization. There’s really a boom where people are finding opportunity […] [and] what I like about it is that it’s actually helping solve some of the challenges that Canada is facing, which is we don’t have housing.

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So, yes, it’s unfortunate that they’re taking an old house that’s maybe cheap to rent and they’re tearing it down, but then they’re building eight units. The nice thing about the CMHC program is that it, generally speaking, forces a percentage of the units to meet certain affordability metrics. So it’s nice to see that there’s actually a space in the real estate investing community that is, you know, basically unarguably helping solve the issue that a lot of renters are frustrated about.

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So Edmonton is seeing a lot of that because the municipality is quite forward thinking and they’ve changed the zoning they used to have. It was an almost 800 page document for mature neighbourhoods, special rules for these neighbourhoods. They just deleted it. They basically said, nope, not anymore – while this is a relic of the past, it’s a privilege that we can’t sustain anymore. The city needs to adapt and change, and they’ve just eliminated a lot of the red tape and barriers. There’s a lot of opportunity out of that.

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Q:?How have these recent changes in the market, especially with regards to interest rate changes, affected the Edmonton market and, likewise, new home buyers?

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[Keaton Kirkwood]: “Ironically, the driving factor was about rates rising – it’s put a lot of pressure that has completely dampened the BC and Ontario markets. While those markets have ground to a halt, the secondary consequence of those rising rates is a lot of people are being forced out, pushed out, or choosing to leave, they’ve been coming to the Alberta market. So, while rates stay rising, it actually stayed quite busy in the Edmonton market. Since rates started to drop in June, surprisingly, it’s actually slowed down a little bit. […] I think that this is, in part, is just that it’s the summer and that people want to enjoy it.

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There’s an interesting study that BMO did that [showed] that 72% of buyers were waiting. This was as of last summer, so it’s been a little while, but the rates have only started recently. […] It’s one of the things we actually have a tool on our website that we can do a comparison of. What about purchasing today at the interest rates we’re looking at, say, 5%, versus what if you wait [for] rates to go down to 4% and we can evaluate the cost or the savings of that interest rate going up or down versus the potential change in price.

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It’s quite surprising – prices need to go up a very small amount to outweigh potential interest rates savings with rates dropping. [This is] because, one, you have to remember that in Canada we’re only getting terms for two, three, four, maybe five years. So that period of you trying to get that lower rate is only a portion of the bigger picture of the property. If prices go up, you are carrying that extra. So, typically speaking, if prices go up you’re going to pay more. You’re going to have a larger mortgage because as many investors want to put down 20% as an example. The overall balance is that waiting and paying higher prices is far more expensive than purchasing today at a lower price, at a higher rate, in a lower competition market. You also have the bonus that, if there’s less buyers, you can get a better property.

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I think one of the things investors often miss is they target cash flow or other very simple metrics. [They] forget that real estate is ultimately an investment, and the quality of the asset is what’s ultimately going to drive your investment – not the fundamentals of the numbers in that asset, the date you buy, aka the cash flow. I think what you see with [investors], especially a lot of first time investors too, is that they’ll come at it from this angle of like ‘I want to make sure these properties cash flow right from the jump’. A lot of people are newer to the market, they’re new to the real estate space. It can be hard for families who are looking to invest to look at the long term because oftentimes there’s this question of ‘How long is this period of high interest rates going to last for? What is the overall trend like?’. If you’re going to sit with a property that may not cash flow as well, it could be a huge detriment. It could be a huge weight on people. So, ultimately, what it comes down to is consulting with a team of professionals like mortgage brokers, real estate agents, to try and figure out [these questions]: ‘What are the average trends looking like? Do we feel like it’s going to bounce back?’

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...If you’re going to buy a negative cash-flowing ?property, you need to make sure you have the funds and liquidity to manage that negative cash flow. People will readily go buy a $600 or $700 a month payment on a vehicle – so yeah, the idea of buying a really strong, good real estate asset that will maybe cash flow negative for five years at $200 or $300 a month, that is a tax write-off. It’s kind of interesting to see the mindset there.

[Note: Sprout Properties does not recommend buying negative cash flowing properties unless there is a solid plan to turn it around to a positive cash-flowing investment through increasing the numbr of units/property improvement/rent increases etc.]

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If anything, the investing pendulum has gone a little too far to being very cash-flow obsessed. I think part of that is that people get into real estate investing because they want financial freedom, […] they’re ultimately looking for passive income, financial freedom, which goes hand-in-hand with cash flow. The problem is, having done this for ten years, many investors are brought in with that messaging. Once they start to [get educated] by [experts], they often see it turn from ‘how to use real estate to create passive income’, to ‘retire using real estate to create active income’. They call it passive, but ultimately you’re managing your portfolio so you can quit your job and use real estate as your full-time job.

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I think we’ll see that pendulum swing back again as many young professionals will realize that there’s strong benefits to getting good real estate over cashflow positive real estate. If you have the timelines, you can use it as a very powerful [resource]. […] That’s what I believe in – a better future for families. It just doesn’t happen overnight.”

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Q:?Given the amount of elements you need to analyze to make a good investment in this market, is there any single piece of advice you’d give to families or investors to make the best decision they can?

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[Keaton Kirkwood]: “I?think that real estate isn’t a silver bullet. Many people will use it as this leverage [point] and [say] it has all these benefits, and therefore it is the best thing and you should put all of your money in it. Whereas I believe that real estate should be used as one of the components and a bigger strategy for your future.?[…] Real estate is not going to magically transform your life, but rather it can be a very useful tool that, with the right timeline and strategy and process, can create a far better future for not only yourself, but your kids and hopefully your grandkids one day. Or maybe take the burden of supporting your parents off of your shoulders. Real estate’s very powerful for that, but odds are it’s not going to happen in a couple of years – it’ll take 10, 20, 30 years. I think that’s the biggest thing: to have a realistic timeline and to not buy real estate for the sake of buying real estate, but rather buy it as a means to an end. Something to compliment the goals you have.”

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Q:?In the real estate market, there are areas in which the infrastructure can drastically change from zone to zone, street to street. How could an investor analyze a new property to ensure that they’re investing into a quality unit?

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[Keaton Kirkwood]: “...You have to weigh everything – it’s not just prices. It’s not just cash flow, It’s not even just the tenancy rules – what’s the tenant profile? […] What are the economic trends? What’s driving people to go there? What’s causing people to leave? Where is the population pooling? I recently had some investors ask me my thoughts on a one bedroom vs two bedroom condos in the Alberta market. […] One of things I said was ‘what do you think the differences in your tenant profile will be? What do you think?’ and they kinda of a surface answer there. I hit them with the second question, they had nothing, which is ‘what do you think will be the [case] if you think long-term, where the property goes, the city goes – what do you think will be the potential scenarios where that tenant profile will leave your units? As we went through and explored [the possibilities], I think they realized that two bedroom would be superior for their needs [compared to] a one bedroom. Who lives in a one bedroom? Single folks, old people, young people, occasionally a couple. But what happens when single folks get into a serious relationship? You’ve got a 50/50 shot that your unit becomes vacant. They leave to go live with the other person somewhere else. […] It goes on and on. Whereas if you look at a two bedroom, if they’ve got a couple living there and they break up, well, there’s a chance that the one person stays and gets a roommate. If they have a baby, they have enough space to stay. If they start a business, they have enough space.

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...I think that there should be a level of analysis when you decide on a property. Why are you choosing that specific type of asset? It should be more than ‘the realtor said it was a good deal’ or ‘it cash flows’”.

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Q:?What are some things that successful real estate investors are doing in Edmonton to make those ‘good deals’ happen?

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[Keaton Kirkwood]:?“It depends on what the goal of what someone’s looking for. Is it extremely high leverage, and building high net worth? For cash flow, we're seeing a lot of rent owns because rent to own is one of the few strategies that not only [creates] cash flow but you also have the option credit [where] the tenants – who you’re buying the property for long term – is actually advancing you money towards the purchase of the property, towards the option to purchase that property. As the owner, you get to take and spend that money. So there’s ways that you can use creative structuring of a deal to create cash flow in an environment where you otherwise wouldn’t find it. We’re seeing investors find success with just traditional bread and butter strategies – buying properties and holding them long term.?These [strategies] perform differently at different climates or different markets […] that’s fundamentally how it breaks down.”

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Q:?Between fixed-rate and variable-rate mortgages, what are investors choosing?

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[Keaton Kirkwood]: “It’s actually shifting right now. So three years was the most popular for [fixed rate mortgages] the last year, roughly. It was the shortest term you could go with [and it was] relatively cheap. We’re seeing that diminish a little bit as we’re seeing people return to adjustable or variable rate mortgages again. You have to consider your cost from the short term perspective, – so the term one year, two year, three year or whatever it may be – your penalty risk which is a big one to fixed rates, and also just the overall flexibility of the product. […] We’re seeing the variable side of things return for investment at least.”

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Q: Taking into account what you’ve said about cash flow, how do you assess the potential ROI – or return on investment, for our readers – in Edmonton for different properties?

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[Keaton Kirkwood]: “Well, I think it ultimately loops back to that Acre Systems book. Short term properties are going to rise or fall as the real estate market does. Long term, it’s going to be based on how that property itself – and those around it – compare to the greater picture.

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Imagine if you go back in time in 1995, and you get the choice of a house autographed, perfect condition, Wayne Gretzky rookie card. You’ve also got some random NHL player, also autographed, but [they’re] just kind of a nobody. Also, the Wayne Gretzky card is worth 50% more than fair market share at the time – let’s just say it’s worth $1000, but they want $1500. The ‘nobody’ card is worth $100, but they want $50 for it.

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You have to ask yourself as an investor: which would you buy? Arguably, in hindsight, the answer would be the Wayne Gretzky card. It has fundamental characteristics that define it – record setting goals, winning the Stanley Cup multiple times. There’s certain details that will drive the value and the desirability of it long term. Whereas the ‘nobody’ card may be cheap, but it does not drive value. […] I would say that, with real estate, it’s the same thing. You need to look at those characteristics – what is the proximity of transit, employment, schools. What is the growth of the population in the area? What is the OCP or plan for the community of how that neighbourhood will change as the population grows? Will that area be more susceptible to vagrancy? Homelessness? Crime? Or is it going to be an area that will do better? Is it larger lots, smaller lots? There’s all these little things that factor in. I think you have to care about the actual tangible characteristics of a property, rather than [looking at] is it cheap? Is it expensive? What is the rent it generates?

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At the end of the day, the land is like owning a farm, and the house is like owning a cow. The cow will die at the end of the day, a cow does not live forever. Yes, it generates revenue, but eventually it gets sick and old and [becomes] very expensive to keep, and then it will pass on. The house is the same thing. The land is ultimately going to last forever, and structures on it will come and go.”

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Q: Where can our readers find you?

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[Keaton Kirkwood]:?You can find me at?kbmortgages.ca, or you can find me on Facebook as Keaton Kirkwood.

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Keaton grew up in the Okanagan where he attended Okanagan College. In 2011 he racked up a $700 phone bill calling every drilling company in Alberta. After securing a job over the phone he threw everything he owned into his car and drove to Edmonton.

He started out roughnecking on a drilling rig, quite quickly he worked his way up operating power tongs and running casing from rig to rig. After spending 3 years working on call and in camp, with the longest hitch being over 100 days straight, enough was enough, it was time for a change.

This time setting out for Vancouver where he ended up working under one of Canada’s brightest Mortgage Brokers. It was here that Keaton met Scott Brennan, his now business partner. Initially they spent countless weekends taming unruly client files, each climbing a separate path inside of the company and honing their skills.

Eventually they decided to part ways with the company and founded Kirkwood & Brennan Mortgage Group.

Outside of work Keaton spends most of his time hiking and camping with his family – fiancée Karoliina, daughter Freya, dogs Zane and Malee, and his two cats, Shiva and Napoleon.

With the goal of creating a charity that helps addicts gradually transition from rehabilitation programs back into society, Keaton is very passionate about helping others.

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- [KB Mortgages,?https://www.kbmortgages.ca/]

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Further reading/information:

We have added some additional information for your reading pleasure!

Fixed and Variable rate mortgages: Here is a link describing the differences. https://www.ratehub.ca/variable-or-fixed-mortgage

CMHC MLI Select: This is the type of mortgage we (Tom and Brandy Mullen) are currently getting on our new builds in Edmonton, Alberta. https://www.cmhc-schl.gc.ca/professionals/project-funding-and-mortgage-financing/mortgage-loan-insurance/multi-unit-insurance/mliselect

Here is our Sprout Properties website for those interested in Rent to Own www.sproutproperties.ca

And lastly the Acre Systems Book by Don Campbell

https://www.amazon.ca/Real-Estate-Investing-Canada-Creating/dp/0470158891

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