Zero to Kokomo: From $80,000 to $80,000,000 with Real Estate Investor Thomas Beyer

About Thomas

Thomas is President of Prestigious Properties and Oliver Land Development Group. He immigrated to Canada over 30 years ago. Thomas is a software engineer and started his career in software development and technical marketing. In the 1990s, after he left IBM, Thomas opened a software development and consulting company with a colleague who is now in California. They mainly sold to clients in the US. In the late 1990s, Thomas looked into real estate, but the trigger was pulled during his first job in Burnaby, a couple of years after the boom of Expo ‘86 and money coming in from Hong Kong—this is when he heard the word “bubble” in real estate for the first time. People thought a quarter-million-dollar bungalow was unaffordable then; today, it’s probably worth $1.5 million and will go up to $2 million soon. It was then that Thomas realized he should be doing something in real estate—his colleague bought ten bungalows in Burnaby and made $1 million over two years. Thomas then moved back to Germany and worked for IBM for a few years, then came back. He took a course in Toronto with Raymond Aaron and looked into real estate. He moved to Calgary and bought a condo in 1997 for $80,000. This represents the first $80,000 referenced in his book, 80 Lessons Learned: On the Road from $80,000 to $80,000,000. He had the condo for five or six years and sold it for upwards of $150,000, then bought another condo for $80,000 in Edmonton, which he still has. It’s now likely worth $120,000-130,000 and the mortgage is paid off. In 2000, he bought his first building for $570,000, which had 15 units. Thomas knew he would pay less per condo if buying the building than buying individual units. When he bought the unit in Edmonton for $80,000, units in entire buildings were going for $35,000-40,000 per unit. You need a large asset base to be in real estate full time, which means a lot of money. Usually, you start with one unit, but you can’t just live on that. To buy a large building today requires several million dollars. Thomas’ first condo didn’t provide much cash flow, but it sets you up for a second and third condo and a four or eight-plex (in his case, a 15-plex). Once you have a few of these you can quit or downsize your job. Thomas didn’t leave his job until 2004 and his asset base was about $20 million by then.

On the transition to and his relationship with real estate, today

After the “light bulb” went on, it took Thomas another five years to take a course. Raymond Aaron laid out how to make $1 million by buying townhomes. Thomas learned a lot from those in the industry, but he did not have a formal mentor. He started out with his own money. Thomas advises doing this to buy a few units and show a track record to people who have money and are interested in real estate but don’t have the time or capacity for it on their own. It takes a lot of time and effort to find assets, whether they’re condos, townhomes or warehouses, and to become good at it. It took Thomas about five years to know what he’s doing well in the multi-family space. Before long, he had 10 salespeople and three asset managers and, at the peak, over $100 million in assets, and it was suddenly more than a full-time job. Thomas wanted to work less, not more, and scaled back. He sold many assets but still owns $60 million worth today.

On where we’re at now, after having been through many market changes and bubbles

Real estate is always in demand. People move around and people have babies; people die and people grow up. Canada is an immigration country and we’ll always have demand for real estate. The issue is that prices have gone up so much, so fast, in the past ten years. It’s unaffordable, even for the average high-income earner. We’ve seen a retraction over the past two years and will continue to see this, modestly, over the next two years. Vancouver will always be an attractive city to live in, but you need money to buy. There is a deliberate attempt to suppress house prices right now and take from the above-average earners to redistribute wealth.

On what a deal looks like in a market like we’re currently in

It’s always a function of price. When you buy a used asset that’s been occupied, which most buildings are, you need to assess how big the problems are (e.g. wear and tear on plumbing, flooring, etc.). You need to look at the rentals and the potential for rentals. You need to consider BC’s rent control of 2.5%, which is mostly below cost increases. It’s tough to increase rent this way; you need to upgrade, which is also tough right now. There is opportunity on Vancouver Island and maybe in the Okanagan, as prices there haven’t risen by levels like in Vancouver, Burnaby, or New Westminster. However, even in Kamloops and Vernon, units are over $120,000 and rents might be up to $800—the ratio is tight. It’s hard to find good deals in BC and Alberta. Development in the right market with the right partner will always be profitable. Currently, Thomas is working on a development in Oliver and looking at small, affordable housing and multi-family projects. He is also looking at Texas right now, as it has no rent control laws, a pro-business attitude, and sizeable assets where you can add value.

On how Thomas starts to learn a market and the metrics he considers when investing

Markets can be sizeable. It depends on your budget. The US is so large; Texas alone is as big as Canada. The Dallas/Fort Worth area has over 10 million people. Pick a town, city, or metroplex where you think there’s upside and ample statistics and secondary research on growth rates, GDP, and immigration. Of the top-10 growth areas in the US, four are in Texas. Pick one, do some research, and look at sales listings. Go down there and spend several weeks, likely over the course of a few trips, to research the specific submarkets and buildings. This process applies to any city in the world. The numbers will tell the story that exists. Sometimes, the market will be so small that there will be very little inventory and what’s there will be overpriced. This is the case for much of BC right now. You need to look at income potential and as-is numbers and expenses (what they were historically and what they ought to be—sometimes realtors deflate numbers to sell a building). Based on the numbers, you know the maximum amount you would pay. The other side is the mortgage—the bank may only cover 60% and you may end up needing several hundred thousand dollars to close a deal. The issue is the building is often not for sale at the price you need, so often there is no deal. Thomas has seen this many times over his career, especially throughout BC. There is a disconnect between reality and what the seller wants.

On who Thomas includes on his team and how he builds a team when looking at different markets

When they were raising $5-10 million a year, Thomas had a partner whose main job was acquisitions. They would pick certain markets together and look at every building for sale in those markets. Realtors know the buyers and what they’re looking for; you want to be on the lists of multiple realtors. You need to know the key realtors and companies in local markets. Go to conferences to meet them and look at buildings with them. After a while, you get to know who’s selling you what and if it’s usually priced right. You build a team of trustworthy, local realtors and property managers. Property managers are important too, as there are usually 2-3 months before closing and someone needs to manage the building. Many metrics are transferable. Within a few weeks in a new market, such as Atlanta, Thomas could have a team of people helping him as he would in markets he already knows. Buying a hotel in France, on the other hand, would be difficult. He doesn’t know the language or anything about the hotel business in France. You take your knowledge base, in Thomas’ case multi-family homes, and bring it to other markets. It’s more difficult to transfer it to another asset class, though things can be similar, such as mobile home parks to multi-family. Mobile homes are less common but can be good opportunities. Likewise, office, retail, and industrial can be similar to one another.

On Thomas’ biggest mistake in real estate

As you go through life and grow, you look at opportunities and only see the mistakes in hindsight. Thomas bought too much in Alberta, especially after 2010. The market went down significantly from 2014 to now. They were overexposed to Alberta and underexposed to US markets, as we were at par. At the time, oil was booming, the NDP got elected, and oil crashed. Socialist governments are never good for business. This was maybe not visible at the time. Texas was the opposite, with Trump being elected.

On other lessons from his book

There are many. One is to pick the right partner. Right now, Thomas is dealing with a mess from a previous partner who didn’t deliver as envisioned. He asks himself three things of a potential partner: does he trust them (others can help verify their honesty), does he respect them (do they have the required domain knowledge), and does he like them (can he travel and have meals with them)? Another lesson is that the mortgage always gets paid down. Life is unpredictable. What Thomas knows is people must live somewhere and pay a certain amount for a rental unit. The numbers don’t fluctuate that much, maybe 2-4%, on average. You can still make money in flat markets if you’re at least cash-flow neutral. It’s the “affordable” or average rental property that does this, not luxury condos. Paying down the mortgage is the “main course”, and capital appreciation is the “dessert”.

On rules for buying cash-flow neutral or subsidizing investments, if it makes sense

You need to take a five or ten-year view. In BC, for instance, you pay a very high land transfer tax, so transaction costs are high; whereas in Alberta, this doesn’t apply. With all the other fees, like legal, realtor, inspection, and appraisal costs, it sometimes doesn’t pay to only hold real estate for five years. You need to make assumptions about the property’s worth in certain amounts of time and run scenarios on spreadsheets. Barring a natural disaster, you will likely come out okay here, especially given our immigration. The downturn in Vancouver right now will be short-lived; it’s government and tax induced but there is strong demand and people want to live here. 70% of Canadians will retire in BC because it’s the only fair-weather province. Specifically, Vancouver Island and the Okanagan will see demand for the next several decades because the prices aren’t as high as the Lower Mainland. You’ll do okay as long as you can hold, so it’s fine to subsidize for a year or two maybe, but you need the cash from somewhere. You can’t pay for 10 properties at once.

On Thomas’ story of buying his condo after the financial crisis in 2008, when things were tricky with completions:

The condo Thomas lives in is at UBC on the endowment lands. He looked at it when he still lived in Canmore in 2007. His kids were about to leave home and he was downsizing. The market was really moving fast. Two years later was the financial crisis and many buyers of the complex could not close because they lost too much on the stock market. The development itself was squeezed by the banks because they were behind schedule and couldn’t get the mortgage extended. Thomas was able to negotiate an upgrade at a modest price, and today the value has probably increased by 50%. Condos haven’t gone up quite as much as houses though. Sometimes timing is in your favour, but you often don’t know that. You have to be playing the ballgame and batting in order to get a home run, and this means you will miss sometimes. You have to try. If you’re sitting on the fence, at least write the offer. Buyers have a slight advantage because offers usually have conditions and are an option to purchase but an obligation to sell. Buyers have the option to walk away. Thomas has had several deals where the seller turned down an original offer and came back later to ask for it again. Sometimes prices come down not because of the market but because the seller’s life circumstances have changed, and they are more motivated to sell. Ideally, you need the right market, the right deal, and a motivated seller (which you don’t often know).

On the long-term outlook for the city of Vancouver

Thomas is bullish on the market. Many people want to live here. There aren’t many cities where you can go sailing in the morning, skiing in the afternoon, to the opera in the evening, and all on public transit. It’s safe and stable. People from all over the world want to be here. The prices, while high, aren’t all that different from other cities in the world. Condo prices in Munich are similar at $1,000-1,500 per square foot. Development in Vancouver is essentially brownfield (you need to take something down to build something new), so we will have fewer and fewer single-family homes. Vancouver proper is less than 1 million people currently, but the region will grow to 4-5 million over the next 30-40 years. Many of these people will want to be in the city, so prices will go up. In the short-term we have a mild correction, mainly government induced with taxes and we may see higher taxes going forward. Construction costs are very high in Vancouver, which is why we don’t see anything for under $1,000 per square foot. This won’t change much. We’ll see less construction, as developers want to see their presales go through. Prices will rise more naturally at 2-4% a year. Immigration of 1% each year won’t change; BC is just a more attractive place to live than other parts of Canada.

Five-wire:

Favourite neighbourhood in Vancouver:

UBC, where Thomas lives. It’s very walkable and quiet, close to parks and beaches.

Favourite bar or restaurant:

La Brass on 10th in West Point Grey.

First place he brings someone from out of town:

The pier at Jericho’s sailing club; you get a great view of the city.

Advice to his 18-year-old self:

Buy the biggest house you can afford. It makes sense to live in your own investment rather than buying stocks or paying a landlord, especially if you know you’ll be in the same place for four or five years.

Something he’s bought for under $500 that’s had a positive impact on his life:

Thomas likes experiences. He did the Grouse Grind and paid $20 for the gondola ticket. To find out more about Thomas visit Prestigious Properties.