Real Numbers - Our 2022 Highlights!

Hi Everyone,

It is the time of the year! Every year-end we share our thoughts about the changes in the market, how we dealt with them and what we think is coming up. We also publish real statistics of our assets and lending at the end of this yearly letter, for those of you who are curious to know.?

The theme of 2022 was?"cashflow"?which I don't think anyone would dispute much. We felt it in two very direct ways. First way was through all the letters we have received from the banks regarding all of our assets in our fund portfolio which did not refi at CMHC yet. I'm sure many of you have received the same, which indicated that the mortgage payment needed to go up again. Imagine having a flood of those come to your way every once a while! The second way that we felt the market squeeze, was rather surprising. Some of you called us and asked 3 questions:?

1. are you guys still in business??

2. in this market, wherever I turn I'm losing money.?What should I do??

3. what's your outlook for 2023?

So, we thought, let's try share our answers to the above 3 questions in this letter with all of you, so you may draw a lesson or two from what we have to say to correct your own path if needed.?

1. Are we still in business? We were so surprised by this question, so after answering "...yes" we had to ask "why ask?"

It turned out that some of you couldn't reach some people who were in this industry, therefore were in a panic mode and started calling everyone to see who's still in business.?

2. Losing money everywhere, what to do??

So our answer actually ties nicely to point #1 above. Most service provides turn out to be commission based and earn their living through transactional revenue. We run a completely different model. We tie our profits with how assets perform, and do not depend on transactional revenue. So, it's in our and the assets' best interest to reduce risk while delivering above market returns for the long run.

Thus, from the beginning, we have decided to not seek ultrahigh returns, and simply focus on getting above average returns on solid assets while minimizing risks.?So our returns have been averaging about 10.33% annually, while we can sleep soundly even in times like this.

So if this approach sounds too boring to you, and you want a much higher return, you don't need to waste your time to continue reading. If, however, this is aligned with your philosophy, and you are happy with 10%ish return, then below are some recommendations we shared with many friends in 2022 which we also followed as well - we put money where our mouth is.?

Everything can be summed up in these two words:?asset swap.?

Step 1.

If you have assets which are giving you too much of a negative cashflow (especially condos), while not appreciating in value when the market is tanking AND eating away a big chunk of your mortgage qualification room for your next purchase (due to things such as condo fees),?cut your loss, SELL it in 2023 and MOVE your money into something that gives you cashflow immediately (such as lending with us which is about 10% return annually, or anything else out there which gives you a return, GIC, whatever, I don't care)!?This way, instead of losing say (-)5% annually, you are earning 10% on your capital, which puts you +15% annually ahead of your current financial status! The point is, swap your losing assets into winning assets that will give you 10%+ return immediately!

Step 2.

If you have spare money of 200k and below, please put it in lending or whatever you believe in (GIC, bonds etc)?so you get extra return on your money right way instead of letting it rot away by inflation! Extra income of 10-20k per year doing nothing in this market is great!

Step 3.

If you have 200-500k spare money AND you can still qualify for an A Lender (big 5 banks) mortgage,?BUY CASH FLOW POSITIVE DUPLEX and TRIPLEX! You can buy 5-10 of these!?Yes even in today's market you can still get cash flow positive real estate assets, just ask us where, what to buy, how much, and how! You can?increase your yearly rental income by 40-70k per asset per year!

Step 4.

If you have over 500k cash and you can still get residential mortgage,?buy cash flow positive 4 Plex. Just ask us where, what to buy, how much and how! This should?increase your yearly rental income by 70-90k.

Step 5.

If you have over 1M in cash, and you can still qualify for A lender mortgages,?use up ALL of your mortgage room until the bank won't lend you any money!?Once you hit that 5-10 houses threshold, then...

Step 6.

You can buy unlimited number of multifamily and don't have to worry about mortgage qualification!?You can either do it with us, so you don't have to lift a finger, or ask us how to do it yourself such as what to buy, where to buy, how to operate etc. if you want to do the work yourself.?

What's our reading on 2023?

To be honest, we are not as optimistic as the capital market. We always run our models on a range of scenarios, starting from the most miserable to the most optimistic and tend to prepare ourselves from more of the former point of view - simply put, we believe how we prepare for the worst is far more important than what we think the future will hold. I won't bore you with our modeling assumptions and our thinking processes - I will just highlight a few conclusions that we think will have the higher probability of happening which is also what we have prepared ourselves for:

a. we don't think rate drop will happen in 2023.?

b. we don't think inflation will ease back to a minimal level.?

c. instead of cheaper rate and hot economy, we think it might be stagflation and recession.?

d. btw, we don't believe the unemployment rate is as good as what the number shows.?Our assessment based on the data we have is that there has been a significant number of people dropping out of the labor force due to the pandemic, therefore the unemployment rate looks rosy, and the central banks are basing (betting) their policy on this skewed number, therefore the economy will inevitably break (if not already broken).?

So, if we are right, everyone will be miserable. If we are wrong, that's great news and everyone will be happy. So, we usually hope we are wrong.?

Also, based on our conclusions above, we have?put much more emphasis on cashflow rather than ROI and revamped our KPI based on this approach. We have cut our losses in losing assets, got capital back and put them into?winning and cashflow positive vehicles such as lending to increase our reserve, and have minimized any significant capital expenditures and budgets.?We also did not initiate any construction related projects in the foreseeable future.?

This is how we are preparing for the lengthy winter ahead that we see. You may be able to draw some parallels to what you may want to do in your life as well.

Lastly, we want to mention the discussion around "buying opportunities" that so many of you have asked. We monitor the market of our asset class everyday, so we have our own conclusion based on our own observations of the market. First of all,?we still have not seen any such opportunities in the multifamily space?that we monitor which is between 6-20 units. This is surprising to us.?We have indeed seen buildings selling for cheap, but those were the buildings that we wouldn't touch anyways for a variety of reasons.?Simply put, you can buy buildings cheaper nowadays, but not the triple A buildings.?The good quality buildings are still either not for sale, or are still selling at almost no discount. The ones selling at deep discount right now are the ones that are of lower class and we wouldn't want to touch it anyways even in normal markets.

However, we see a different picture of single detached segment where homeowners are more venerable than multifamily buildings owners who probably have deeper pockets, therefore?we do see some good buying opportunities for single detached right now which are triple A quality. For e.g., duplexes in Toronto have always been over the 1.2M mark post reno and don't?yield positive cashflow. However, all of a sudden we see that similar duplexes are selling under 900k, which will make positive cashflow and all of a sudden, our model starts to work in Toronto in addition to where we usually do this (Durham and Barrie).?

So, this means, if you have enough cash on hand (somewhere between 250k-350k), and you want to own real estate assets, you?only have to make a decision between the 2 options below in order to figure out the timing to your liking:

Option 1:??buy it now and get into single detached (duplex); price will be discounted by 100-200k but rates are higher and cashflow is neutral?

Option 2:??wait to buy it later when rates drop; get into single detached (duplex); price discount may be much less or none; however rates are lower and you have positive cashflow?

Just pick whichever one makes you more comfortable!

Lastly, here's our real stats of 2022. If you want us to have a strategy session with you regarding your specific situation, feel free to book it here. Happy Holidays and May 2023 bring opportunities to everyone!