Downturn Investing with James Knull

Downturn Investing with James Knull
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Dave Debeau [00:00:09] Hey there, everyone, is Dave Debeau with another episode of the Property Profits Real Estate podcast coming to you live and quarantine for beautiful Kamloops, British Columbia. My special guest today is James Nowl. James is a very, very accomplished real estate entrepreneur. And I say entrepreneur in the true sense of the word, because he's not only a real estate investor who has built up a very significant portfolio of over two hundred and fifty doors. But he's also a realtor and he has his own brokerage. So he's a busy, busy guy. He knows real estate inside and out from all different angles. And today we're going have a great conversation. So welcome onto the call.

James Knull [00:00:51] Hey, thank you so much. I've been really looking forward to being able to be a part of the podcast. Really excited to chat with you.

Dave Debeau [00:00:58] So, James, as we're filming this right now, we're just, I guess, a month into the whole covid quarantine thing, I it's hard to tell. I can't keep track of time as well as I did before. How is this affecting things real estate wise in your neck of the woods in Edmonton?

James Knull [00:01:17] Well, Edmonton is pretty on par with what's happening across the country, across the country there. There's two main stats that are the easy ones to look out for right now, which are the overall market activity in terms of sales volume and the market activity in terms of new listings coming to market. So sales volume in Edmonton is down about six percent year over year, which means 60 percent fewer houses changed hands in the first 10 days of April. And there are about 50 percent fewer listings that have come online compared to last March. So, you know, I mean, I think the messaging is wait and see. That's what people want to do with this kind of thing. It's a completely unprecedented scenario that we're dealing with. And a lot of people want to watch how it plays out before they take action. So both sellers wanting to put their house on the market and buyers wanting to make purchases. Everybody's just taking a quick pause to see what exactly happens, what the impacts are on the economy and pricing before they're willing to jump back in.

Dave Debeau [00:02:16] Well, that makes sense, right? I mean, we've got so many people that aren't working or reduced working reduced hours, so much job insecurity. Alberta getting the crap kicked out of it left, right and center with with covered in the oil prices and the whole bear lining up. Yeah, it's definitely challenging times. However, I don't know. I think challenging times also bring massive opportunities. Typically, that's what I've seen over the years, that's for sure. So with your crystal ball, where do you see the opportunities coming after the smoke clears from going?

James Knull [00:02:53] Yeah, that's a great question for me. It's a scenario that in some ways we've really seen this before. Alberta is a cyclical economy. We have our ups, we have our downs, we have market growth, we have market recessions. And that that cycle happens on a fairly short timeline, really in the grand scheme of things like a seven to 10 year window. So even in my career, I've been through three pretty major market corrections now. And, well, the potential health concern and not being able to go outside is new. Everything else about a receding market is fairly, fairly commonplace for US investors in Alberta. So we know what to do. And we've seen this pattern before and so we know what opportunities are going to come. So I really feel like the Alberta real estate investor is well poised for this upcoming series of opportunities because we've seen them before. We know how to capitalize on them and the type of opportunities that typically come up first and foremost are going to be distressed sellers. So that's going to come in the form of pre foreclosure, foreclosure for people who just the weight of the world is being felt by them and they want to sell quickly. What that means is quick sales and short sales at below market price points. But it also really opens the door for creative style real estate, which is everything from agreement, the sale to vendor financing, stuff like that becomes more and more feasible as the market softens. So those are those are going to be opportunities that we're already preparing ourselves for, because during the last major correction, which was a twenty, fifteen, twenty sixteen, we saw the same pattern develop where oil dropped. People were worried. We want to see oil kind of established its its bottom point at the equilibrium. We got a new normal and then investors started taking action on opportunities that we're going to we're going to go through a period of change. We're going to hit an equilibrium point at the bottom. That's going to become the new normal and that it's time to start pursuing opportunities.

Dave Debeau [00:04:51] Yeah. So I think you're absolutely right, especially investors in Alberta. It's not your first rodeo. You've got the gist of this whole thing here. So let me ask you this, James, from from your perspective, with all of your properties, all your experience, all your doors, what do you recommend to those investors in Ontario and B.C. that has been go, go, go for quite a while? This is the first major hiccup they're seeing in a long time. What's your suggestions for how to hold the course, how to maintain things, how to not become one of those motivated sellers? Totally.

James Knull [00:05:34] That's a great question. And what I'll start by speaking to is what is Vancouverites and Ontarians have gotten accustomed to, which is rapid market growth. And when rapid market growth becomes the norm, strategies start to shift towards focusing solely on equities. So what that means is people buying without cash will be front row center. They'll even feed negative cash flow properties. Knowing that and hoping that will get equity growth, things like pre sale starts to make sense. Things like flipping without getting the property below market value makes sense because you can buy at market value, add a bit of renovation to it and sell it market value. These are the sorts of things that work in a market that's going up. They're not the sort of things that work in a market that's soft or static,

Dave Debeau [00:06:19] and everybody seems like they're a genius of those kind of markets.

James Knull [00:06:22] Right, exactly. Exactly. So what what what you have to do in a market that's more more either receding or stable is go back to some of the more classic fundamentals of real estate investment, the first one being positive cash flow, because we don't know how long things are going to stay flat or when they're going to start growing again. In the meantime, cash will becomes so much more important because that holding power and that staying power is what's going to allow you to hold on to your real estate without becoming, like you said, one of those motivated sellers. The second thing that we've gotten really, really good at in Alberta, knowing that the market hasn't been growing, is saying what we've said. We put on our Alberta ingenuity and said, to heck with it, we're not going to wait for the market. We're going to add our own value to the properties. So a strategy that's very popular is the first strategy or as they call it, other circles. The flip to yourself strategy, where you buy a property, you renovate it to add the value, and then you take that equity back out on a refinance. That strategy becomes so much more popular in a flat market because you can still add equity value to a property without sitting on your hands waiting for market appreciation. So that's another thing that you can do in a marketplace. And that's a lesson to learned from Alberta and other markets in the country. The last thing I would say is you have the luxury of being patient in a hot market. I mean, Vancouverites multiple offers situations in the 20 to 30 is the 40 bits that's kind of become par for the course. Whereas in a market like ours in Alberta, you can actually look at multiple options, take a day to think about it, and then submit offers that are below list price and negotiate for better terms and aggressive price points. So being patient and being choosy is something you can do in a market like the one we're about to enter. And that's where you get really, really great deals because you can actually be selective and negotiate aggressively. A final strategy that I would recommend is because we are investors, we're not emotionally invested in any one property or another. That means that if you have a property type that you want to pursue, pick five that match your type. Right. An aggressive offer of all five and see what sellers willing to play ball in that marketplace. Because if you're not so dead set on any one property by the one, that's the best deal. And that's something we do with our clients all the time.

Dave Debeau [00:08:42] Yeah, that makes sense. Another another thing that that I've done in flat markets, as well as making multiple offers on the same property. So going in with a variety of different offers, using different strategies and and for the seller especially, it's kind of a flat market and they aren't getting very many offers in the first place. If you bring in three or four different possibilities for them, one of them perhaps being a complete lowball, but a couple of others being some creative financing, owner financing, what have you, then it becomes a matter of which one do I choose versus yes or no?

James Knull [00:09:22] Yeah, I would echo that sentiment when it is a buyer's market. As a buyer, you can start bringing more creative negotiating strategies to the table at the either or negotiating strategy is a longtime favorite of mine. It's awesome that you can use it in this type of marketplace because it's a really low unsavory offer. Might actually make the other one look more acceptable by comparison. And you're subtly steering the seller towards selecting the option that you wanted on the floor, which might include creative terms, which is what you want to see, right?

Dave Debeau [00:09:51] Exactly. Either way, you're getting a good deal instead. Just good price or good terms. Awesome stuff. Awesome stuff there, James. So I love this because, again, these folks in these hot markets are. Very, very nervous and justifiably so, because we don't know exactly how things are going to land, but by sharing this, you're showing that there is hope and there is opportunity on the other side of this, no matter what happens, that's a beautiful thing that you can shift. You can you can you can change your investing style on a dime to meet the current circumstances. So speaking of investing styles, you've been how long have you been investing in real estate for James?

James Knull [00:10:38] I've been investing for about 15 years in real estate.

Dave Debeau [00:10:40] Wow, that's great. Now, you've built up a significant portfolio over two hundred and fifty doors. What does your portfolio look like these days?

James Knull [00:10:48] I would say the majority of those doors are multifamily buildings, very, very classic walkup style. Apartment buildings are symbolist being 12 units, our largest being 40. I still do have a lot of houses with basement suites. That was kind of the first step. I had a real estate with houses, with basement suites. I've got a couple of duplexes with suites and then every primary residence I've ever owned. After I was done with it, I kept it fully furnished so that I could decorate my new place. So I've got a collection of furnished rentals as I move from primary residence to primary residence. Some of them are Airbnb, some of them are long term furnished. But it's fine because I get to get creative every time I move and decorated the place.

Dave Debeau [00:11:27] That sounds like that's a fun idea. That sounds like a heck of a lot of fun. So you're done with you get bored with one house. You don't just move into a new house. You leave all your stuff in the old one. Saves a lot of moving expenses. Yeah. You get to completely refurnish and redecorate the new one with all the all the cool stuff you've seen in the meantime. And chances are, I mean, if you're getting the kind of cash flow that I know of from some of my clients coming furnished rentals, you're probably getting at least three times the cash flow, if not far more from that furnished property than you would renting it out as a regular unfurnished.

James Knull [00:12:07] That's exactly you hit the nail on the head, you know, it's it's a system that works on a lot of levels. And, you know, I really enjoy being able to get creative every so often with the new place.

Dave Debeau [00:12:17] That's that's brilliant. So, you know, for those folks that are kind of new to real estate investing or they've been focusing on single family homes or, you know, pre sale condos or whatever the heck they're doing, what would be your little one minute take on why you prefer multifamily?

James Knull [00:12:38] Well, I like multifamily because of efficiency, so a really quick way to illustrate that is, you know, if you have a million bucks, a million bucks can divide into ten, one hundred thousand dollars down payments on ten five hundred thousand dollar houses at 20 percent down. Well, I can tell you right now, one five million dollar apartment building with a million dollars. Now, that 20 percent is not ten times more work than 10 houses. It's quite the opposite. Each one of those houses is quite a bit of work, almost as much so as one multifamily building. So when you start scaling up, attracting more capital through your joint venture efforts and you kind of have the confidence and the ability to go larger, even pound for pound, if the return on investment is a little bit smaller and multifamily, you're getting one percent less ahli and a five million dollar building compared to a five hundred thousand dollar building is way more equity creation. So it's a much more efficient way to deploy capital in terms of managing your time. And because you're going for a larger project, it's OK to have a slightly smaller R y because you're generating so much more equity with a bigger building.

Dave Debeau [00:13:47] So when you say you're trying to cash on cash, is that correct?

James Knull [00:13:50] Yeah. Cash on cash or equity growth either or. Yeah.

Dave Debeau [00:13:56] And the other thing especially taking into account today's current situation is your risk is so much lower with the multifamily. Right. Because if you're buying a five million dollar property, depending on where you buy it, it could be anywhere between 20 and one hundred. But compared to a single family home, we got a vacancy. One hundred percent vacant with your single family only got a vacancy in a 20 year building. You've still got 19 that are carrying you. So it lowers your risk a lot. The other thing I've loved about multifamily is the valuation of the property. So a single family homes, the values are tend to fluctuate a lot based on emotion, based on based on what people are willing to pay for a property versus a multifamily. Typically the valuation is based on how profitable is that property. So if you're able to get in there and make improvements on their lower expenses, increased revenues, you can exponentially increase the value of that property compared to what you had to put into it to increase the value.

James Knull [00:15:04] That's absolutely. Yeah. And if I can build on that just from my own experience here in Alberta. The way that Alberta is set up from the landlord tenant law perspective, first, we don't have rental increase restrictions. So that being in place, it allows you to if you improve the building, increase the rents accordingly to the building improvements without having to fight up against a rental restriction of a couple of percentages like you deal with in most other provinces of Canada. Now, the second thing is, if you want to do a full scale overhaul of the building, if you have an older building that is at the end of its economic life or that's been poorly managed or has a tenant profile, that it doesn't fit the building in the neighborhood, it's much easier to get vacant occupancy of a building or to vacate a building once you've taken possession compared to most other markets. It's very, very difficult. I know in British Columbia to, for example, take a 20 unit building and end up with 20 vacant units to do a large scale renovation, whereas in Alberta, every lease is on a timeline. So as long as you give the tenants proper notice, we're not throwing them out on the street. But as long as you get the tenants proper notice in reasonable time to find a new home, then you can actually vacate that building to undertake a large project which leads into the ultimate goal, like you were touching on of raising the rent, which raises the net operating income, which can create a ton of equity very quickly in the building because that value of the building is tied to the net operating income.

Dave Debeau [00:16:26] Yeah, most definitely. James, I can tell you that we could go on for a long time here, my friend. We're four of the same mindset, that's for sure. So it's obvious you're a smart guy. You're a successful guy. If people want to find out more about James Nolan and what you're up to, what should they do?

James Knull [00:16:43] I would say the first and easiest place would be our website www.youtube.com OGU. And we are incredibly active on social media, love social media. So look me up on Facebook and meet with a friend request. I'd love to connect with you and keep in touch.

Dave Debeau [00:17:01] That's right. And if you happen to be in the Edmonton area, I think you've got a very, very popular real estate club in the area. Is that correct?

James Knull [00:17:10] Yeah, we do. We really love fostering the real estate investor community here in the city. So we do have a meetup on the last Wednesday of the month called Vogel Mastermind. And we have fabulous speakers come out and we really focus on facilitating networking so that investors can connect, share ideas and inspire each other.

Dave Debeau [00:17:28] Brigid, James, thank you so much for being on the show. I really appreciate it has been a lot of fun.

James Knull [00:17:32] Yeah, it's been my pleasure. Thanks for having me.

Dave Debeau [00:17:34] All right, everybody, take care and we will see you on the next episode. Stay safe. Well, thanks very much for checking out the property profits podcast and you like what we're doing here. Please head on over to iTunes, subscribe read us and leave us to review it. Very, very much appreciated. And if you're looking to create a regular flow of inbound investor inquiries about your real estate deals, then I invite you to attend one of my upcoming live online demonstrations. And you can check that out at Investor Attraction Demo Dotcom Ticker.

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