How anyone can be a real estate investor

And what makes it so exclusive in the first place

Jun 16, 2021

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This week's Rule Breaker unpacks real estate investing and how addy enables anyone to have access.

addy makes getting into real estate possible without turning your life upside down. Without changing. Without compromising. Because when you can own real estate for as little as $1...Everyone’s a homeowner.

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Opening Spiel

I know a social issue is wide-spread if it hits my 80-year old, Hungarian dad’s radar and he talks about it a lot (or he’s fallen down a YouTube rabbit hole like when he introduced me to Dimash Qudaibergen, Kazakhstan's #1 pop star. Holy Land is my reco.)

Anywho… he’s been talking about rising home prices for years. He keeps saying how young people today can’t afford to buy a house. He then reminds me of the house I was born into that he bought for $69,000 with a $5,000 down payment.

He’s right. Home buying is increasingly out of reach for Canadians and the game of making money off real estate that isn’t your primary home is an even more exclusive club.

This is why Michael Stephenson and Stephen Jagger started addy. The company provides a unique opportunity for Canadians to be able to invest in real estate THEY PICK for an amount that fits their budget. addy sources investment opportunities typically reserved for the wealthy (apartments building, commercial property, developments etc.), divides that investment into equal parts (for example a $500,000 investment would be divided up into 500,000 units) and then sells those units for $1 a piece.

For me - this is more than just a new way to grow wealth. addy is changing the way we think about who should own the things we value. That’s pretty Rule Breaker of them.

To fully understand why this is so rule breaking, I’m gonna cover:

The rules of the game: How real estate investing works
The attraction to the game: Why real estate is so lucrative
Winners and losers in this game
The rules addy breaks to make real estate investing accessible

As a heads up, this post is a Rule Breaker referral. If you sign up with addy, you're helping support this newsletter and addy, a company doing important work to build a more equitable and inclusive system for all (IMO). Let them know I sent you and you’ll get a Charter membership for only twenty bucks.

Let’s see what all the fuss is about.

Part 1. Rules of the Game

How Real Estate Investing Works

Whether a first home or the 40th a high roller will invest in, the mechanism for investing is basically the same.

Here’s the recipe for how to own a $30 million commercial building.

Recipe for Commercial Real Estate Investing

Get a $20 million mortgage from a bank. This may seem like a lot but real estate is relatively easy to get a loan for because there is a more secure source of future funds from resale or rent and if all else fails, the bank just takes the property.
Add in $6 million of your own funds as the property owner.
Break the remaining $4 million into smaller pieces and get investment from Limited Partners (LPs). (I’ve covered LPs in a Rule Breaker post on VCs - they are wealthy folks who want to diversify their investment portfolio outside of stocks and bonds). Note: Require a minimum of $500K investment because you don’t want to deal with all the administrative hassle for too many people.
Either rent the property and collect the monthly rent cheques or rebuild on that site and sell it for a higher sum
Redistribute the profits back to LPs and payback your mortgage.

The system to buy your own home to live in isn’t too different:

You’ll likely still get a mortgage
The bank of mom and dad (which an HSBC report says 37% of use) will essentially act like your LPs
You’ll take care of the property and in the future when it’s time for a new home, you’ll likely make a profit on the sale
You could also rent out the basement or a room for some recurring cash flow

Part 2. Why people play the game

Real Estate has been super lucrative

Dollar for dollar, a house will not appreciate in value as fast as a stock on the TSX.

But this doesn’t give an accurate picture of real estate investing.

When you buy a property, you’re using the bank’s dollars (i.e., debt). As a result, you get outsized returns on your dollars invested.

This is what they call in the investment world: leverage.

Let’s see how leverage changes the game.

If you invested $300,000 in 1996 in a S&P/TSX index fund, you would have made 8% average annual return and 25 years later have $2,037,753. Not too shabby.

If you put the same amount of money into the average Canadian house, you’d only have $1.2 million. Good, but not as good as stocks.

But - you likely wouldn’t have bought the whole house in cash. Let’s say you put down 20% ($60,000) and the rest is covered by a mortgage. After paying about $200K interest on your loan over 25 years, you’ll still make $1,000,000 when you sell. That gives you an annual rate of return to 12% for your $60K. That’s more than 50% more than you’d earn on the stock market!

So yeah, this is a lucrative game to play.

If you want to get into the real estate game - addy makes it possible with just $1. And they cap investment at $1,500 so a few people can’t just gobble up all the profits. Check them out and Rule Breaker subscribers get 20% off a Charter membership (that’s $5 off a $25 membership).

Part 3. Winners and losers

Fewer have access to more returns

A fundamental element of our economy is that money makes you more money. We use our money to buy things we think will be worth more in the future. Then in the future we ideally sell it for a profit. We do this with stocks, art, houses, gold and more.

But what happens when you don’t have enough to buy the valuable thing today to sell in the future for profit?

That’s what is happening with real estate. Real estate gives Canadians the best return for their money according to BNN Bloomberg investing columnist Dale Jackson. But, it is increasingly unaccessible for Canadians.

As a result, here’s how the scoreboard shakes out:

The winners in real estate are the very wealthy because they can afford to invest.

The losers in real estate are the rest of Canadians who can’t enter the market or if they do, own less of the asset and have less money for other things in life.

Allow me to explain…

Winners: The very wealthy who can be real estate investors

You need a lot of bling to be an owner in anything outside of a modest home.

Let’s say you want to put in money for that $30 million commercial property I wrote about above. You’ll either need $6 million laying around or you can come in as an LP.

To be an LP, regulation stipulates that you need to be an accredited investor. That means you need net assets of over $5 million or make over $200K a year (there are other criteria, but these are the most relevant for this situation).

Who has the kind of money to be a mega property investor or an LP?

Only 1% of Canadian families have over $5 million of net assets.

Source: Office of the Parliamentary Budget Officer

Only 1.6% of Canadians make over $200K a year.

Losers: The rest of Canadians who find it harder to be small-time investors as homeowners

It isn’t as easy as it was in my dad’s day to buy a house, raise a family and then make a nice return in 25 years for retirement.

Housing costs eat up more monthly income than it has in 30 years.

And if you live in Toronto or Vancouver, which some 25% of us do, you’re not bonkers - prices have gone waaaaaaay up. It will now take up to two decades to save up for a house.

These figures for the average Canadian only relate to home ownership. If you want to get into the investing that addy specializes in - like 500 unit apartment complexes, 20 acre industrial campuses or prime retail on Main St. - the average Canadian is fully shut out.

Part 4. Changing the rules so more can win

How fractionalization enables us all to be real estate investors

The issue with real estate - and other very expensive assets - is that you can’t easily break them into tiny pieces to make them more affordable. It’d be weird if you owned the bathroom and your buddy owned the kitchen.

So what’s happened is that unless you have enough to buy it all then you’re stuck owning nothing.

This is where fractionalization comes in.

Fractionalization isn’t new. You likely know about timeshares, in which you can “own” a vacation home for a few weeks a year. This started back in 1974 and people have been continuing to buy them because it’s way cheaper than buying that Florida condo outright.

So how does this work with addy and real estate investment?

Remember that $500K minimum investment the LP has to make to buy into that $30 million commercial property? They break that $500K investment into 500,000 individual shares.

That means you can buy $1 or $678 worth of that commercial building - you don’t need the full $500K. And you still benefit from the leveraged gains.

This is how 800+ people own a piece of a prime property that houses Starbucks as a tenant in Chilliwack, BC. This is also how over 1,100 people are investors in a 280,000 square foot suburban office park in Calgary.

So what are the new rules of addy’s real estate investing game?

First, addy uses tech to eliminate the administrative burden of having a ton of investors.

There is a lot to manage with each real estate transaction. You gotta:

Keep track of who invested what
Collect all their information
Have them sign documents
Track what profits come from the property
Distribute the profits according to the level of investment

That’s a lot of paperwork for $1 or even a $100K investment and so most GPs only take big cheques. But with a few lines of code, you can do all of this automatically for as many people as you like.

Second, they take advantage of regulation that makes it easier for non-accredited investors to get into the game.

In 2016 the Canadian regulators allowed companies offering an investment for anyone (i.e., you don’t have to be accredited) to be exempt from filling out a prospectus, which describes what you’d be getting into if you invest and all the associated risks. It is suuuuuuper long and complex (the document just spelling out the requirements is 101 pages and full of text I can’t comprehend - insomniac reading here) so the prospectus forms a major barrier non-accredited investors accessing really hot investments.

Instead, addy fills in a three and a half page exemption form that’s got lots of those easy-to-complete check boxes (have a look here if you’re nerdy and curious like me).

Now, they still let investors know what’s cooking. They do this in what is called an Offering Memorandum. The benefit of an OM is that it’s much more human friendly while still giving you the information to make a solid decision (and of course - they’ve used tech and worked with lawyers to streamline the process of making an OM).

Third, in my view, they cared enough to bend the system for the better.

Fractional ownership is all about improving equality. It makes things we value in our economy (i.e., assets) available for anyone to buy and make money from (i.e., accessible).

This isn’t just happening in real estate. Masterworks enables you to own a piece of art made by Andy Warhol or Banksy. Interactive Brokers will let you buy fractional shares of stocks (cause not everyone has the $3K for one share of Amazon).

The addy team had to care enough about making this inaccessible system accessible to all. They had to put in the work to develop new processes and new tech so that you or I can own a piece of an office park or condo complex just like the wealthiest 1% of Canadians can.

Parting Words

We need real estate investment. It’s what gives us the beautiful and functional spaces we all enjoy.

The real estate developers I’ve gotten to know over the years recognize they place their fingerprint on society and are thoughtful about what they build for the broader community.

But - without increasing access to investment, we maintain the status quo of only a few benefitting from the wealth creation that comes from real estate development.

So, what if more real estate investing was open to anyone with $1?

Would more money stay in the community when it’s developed because locals were also investors?
Would we build different structures (like condos with three or four bedrooms for families) because the people that lived in the area thought that was a better use of funds?
Would local businesses get more support because locals were also owners of the building?

I think so. That’s why I’m betting on addy’s evolution of real estate ownership - and allocation of assets more broadly.

Go check addy out

My thanks to Stephen and Katie for helping me learn all about addy and to Kapil, Susan, and Dan for input on the latest edition of Rule Breaker!

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