Canada is a wonderful place. Full of amazing people doing amazing things. Petr Kafka is one of those types of people. Not only does he have a PhD, but he also has intimate knowledge of the commercial retail space right across Canada. On this episode of The Your Life! Your Terms! Show, he breaks down how mismanaged malls present amazing opportunities for investors. He also shares his own personal journey of investing and just wait until you hear about his first investment! A pure home run.
Everyone is Tom Karadza. And one of the best things about doing this business working with different real estate investors all over Southern Ontario is you just stumble into the best people and this one stumbled into us Peter Kafka is the Vice President of leasing at strap Allen and I had never heard of Strathallan, but apparently, these guys know their shit. Am I allowed to say shit? I’m not sure if there’s no kids in the car. Anyway, um, yeah, what these guys do is they handle all the leasing for all the moles that you see as we drive along the highways and stuff. So I’m talking everything from like the big moles, like a York Dale mall, Sherwood gardens, Oakville place, maple view and Burlington, that kind of stuff to the smaller strip malls, and they do some stuff that is really interesting. They actually take mismanaged moles and basically flip them. So instead of flipping like a house, like you’d see on HGTV, they’re flipping malls, they will buy these mismanage malls, get them up to par, increase their value, and then sell them off to different pension companies. And this, to me is absolutely fascinating. We’ve never played in this part of real estate before.
So Peter was nice enough to come on the podcast and break out how this all works. So that’s what we did we talk about great guy, we get into his own real estate investing, and his own journey and how he got into Canada. It’s just another story of why Canada so great because some of the best people from all around the world end up in Toronto, and in Canada and in Toronto. So wait to hear his story. So Peter is a great guy, love chatting with them. I’m sure we’ll talk again soon. And listen, if you are listening to this, we do talk about a little bit about the destruction of the middle class and what our kids are going to do and how people are going to be able to afford properties because the population growth trends in this area are astonishing. And we actually put together a report that maps stats Canada data income data against Toronto real estate prices. And when you see these things mapped against each other, it is jaw dropping, like the chart doesn’t even make sense. And I call this the destruction of the middle class, how we’ve all been sold. The idea that you go to school, you get a good job and you get a good income and that’s how you get ahead. Well it’s kind of a load of crap.
If you don’t have some assets in your life, you are not getting ahead, you’re barely keeping up. And we extrapolated some of this data forward. So when you see it going forward from 2019 to 2055, your if your jaw dropped when you first saw the data, it definitely drops when you see this. So that’s just a projection what we did, but it’s To me, it’s fascinating information. You got to take a look at it. If you haven’t already, you can get that at no more middle calm, that’s www.no more middle.com so you can get a copy of that report right there. And with that, let’s get on with the show. Are you ready to live life on your terms? Is it time to take charge, real estate, business building, the economy, health and nutrition and more. It’s the your life your term show with Tom and Nick Karadza. Are you ready? Let’s go.
We are live with Peter Kafka. Peter How do you pronounce your last name? Kafka? Kafka?
Peter Kafka? And you told me it’s checked last name? Yes it is check from the Czech Republic bounce not a Slovakian last name. Now I checked last name. I want to be very clear. It’s not like when I was a kid when it was Czechoslovakia, Czech Republic and the Slovak Republic, Slovak Republic. So Slovak Republic Alright, so you got to tell me how does somebody like yourself? Get in? Because you have an interesting story. Somehow you have a p What is your PhD in?
pilot? Hi, indeed. That’s Yeah. No, that’s because every time I talk about this PhD, so technically you’re a doctor. Yes. Oh my gosh. My dad told me if somebody asks, Is there a doctor in the house, never raise your hand you’ll end up in jail.
Or if you’re on the airplane is there are in the house. We need some help. But you have a PhD in it. What was some Immigration Studies or what No. What is it? Exactly? Yes. It’s in political science in
policies, political science and immigration policies. Okay, that sounds It sounds very deep into this. You’re taking a sigh Don’t worry, we’re not gonna we’re not gonna beat you up on this podcast here. You’re good to go bring the mic nice and close. Yeah, there we go. So listen, Peter’s going to break down a for us because many investors who are listening to this have never heard of buying malls Plaza strip malls, putting pads on the strip malls to increase the value. And by the way, there’s a mall near where I live in Oakville kind of eight line and upper middle area in Oakville. That that strip mall must be the highest average rent of any strip mall. I don’t care because they just slip that there’s hardly any parking to begin with in there. And they just plop down a Shoppers Drug Mart, like right in the middle of the parking that’s left over there. And that Shoppers Drug Mart I know is going to do a ton of business. And I know how much rent those guys pay in there. They don’t tell me specifically dollar per square foot but they all complain and it’s packed. So whoever is owning that particular mall in Oakville, I know they are
Just raking it in. So, but we’re going to get to that in a second. What I wanted to talk to you about first is when did what age did you come to Canada walk us through the journey? How do you come into this country? How do you go to university and get this PhD?
That’s It’s a long story, but I’ll abbreviate it.
The first. My first exposure to Canada was actually through my great uncle who came to Canada as a as an immigrant in 1948. escaping the communists, he was a Royal Air Force pilot and we all know what happened to those fighting for the lie so he left for Canada and we haven’t really had any contact or much contact with him for 50 years. And then when, when the Cold War was starting to cool off, we started connecting with him and eventually he visited in the Czech Republic or Czechoslovakia back then. And then in 1993, we visited him for for the summer here, but
A real firsthand involvement with Canada was when I was writing my dissertation on Canadian federalism. And you lie countries like Czechoslovakia, Yugoslavia and Russia, the Russian Federation of Soviet Union back then, why they split? And while Canada is still together, so that was that was saying kind of what motivated me to come to Canada because my supervisor was a Canadian hippie who came to Czechoslovakia in 1968. And he became so you were writing this over there over there under a Canadian like a Canadian professor of science, right, fantastic guy and he, he was very into first hand experience and he said, Peter, if you want to write about Canada, you have to go there. And of course, I didn’t have the funds to to go so I wrote to Canadian embassy and the Ministry of Foreign Affairs and and eventually they get back to me and they said, Sorry, we don’t have any scholarships, but we can give you a temporary work visa. So I borrowed money from Royal Bank.
Mum and Dad for the airfare and then they got 700 Deutsche Marks and in 1999 I landed at the Pearson airport and it has a return ticket and six months later and I had two email addresses one was for professor at the U of T and the other one was at Queen’s University and and I very quickly realized that I don’t have first and last month’s rent you know my 700 bucks will not get me to stay and I had three days prepaid at the global village backpackers so I had to make a move to Kingston Global Village backpackers Yeah, it was I think you told me is that the one on young street I think it’s gone now but it was at Medina and Queen I believe. Okay, God is really okay. So you lick land at Toronto Pearson right. And you make yourself you make your way down to downtown Toronto, Medina and country and then from there, you’re emailing these professors? Yeah, to two guys. I met with the UFC.
And it was just you know, it was just too overwhelming I think both for him and for me to get him negotiate the the landscape of city of Toronto and I kind of realized I can get first and last month’s rent I cannot live literally and I have to stay here for six months so so I went down to Queens and the professor I work with over there welcome Nick was
fantastic human being and leading scholar in the field of integration citizenship and, and he hooked me up with the library card and let me work in his in his office actually and I got a restaurant job and and I was you know, I survived the five, five months did research during the during the night and work during the day. And then we went back did another Master’s in Central European University in Hungary and we kind of like the student lifestyle. My girlfriend back then.
wife and I and we said well let’s let’s extend our youth by another five years and so that yeah, that’s how you got the PhD. That’s right and then and so we apply to USD and we were very fortunate to get
fully full five years worth of funding and work this teaching assistance and but then halfway through the program, I kind of realized that you know, I’m burning out and I don’t want to be an academic So again, we didn’t have the money to for me to go through the MBA program. But I kind of felt I need to gain financial literacy because my parents were experiencing financial difficulties back home and and you know, I needed to grow up so so I started taking courses and I was auditing the courses not taking them I was knew how to study and be cheeky so I went to talk to the individual professors and the let me sit in the fly on the wall and and do the homework.
And listen what they had to say. And so I to corporate finance, accounting marketing and one of the courses I took was in real estate development and it was taught by this billionaire owner of smart centers developer that brought Walmart to Canada and
you know, he must have light the fire in the dark he was teaching that course he was teaching that Okay, so that then you approached him or whatever. Well, I approached him before I started taking the course and and and after the course I said, Look, I really I enjoyed what what you just what you were presenting here, but I would like to learn more. And I took the course actually, again, I think the fact that that I took it again and he saw me again and and probably could relate to the end. Who was he? He’s the owner, Metro gold heart. He’s the owner of smart centers, like the guy who’s putting all the big big box smart centers all across the GTA correct. Well, he sold
The company now or the it’s owned by a retail store. Yeah. Okay, great. But yeah, only great things to say about him, he gave me a chance to join the company, I took part of their executive rotation program. So it was for all the graduate MBAs that qualified. They go through a two year program where they get really condensed, I thought you didn’t have an MBA. I didn’t but as I said, I went through the, I guess,
PhD was considered as an equivalent. So you had this PhD so I thought, Okay, fine.
I’ve suffered enough, whatever that PhD. Get to go Okay, got it. But anyway, great, great experience, great people there and and, and then you know, 2008 rolled over the the crisis came in and so I decided to stay on the leasing side because I figured that will always be vacancies and you can you
You’ll have a you’ll have a job and, and so I worked on the Walmart anchored power centers and the development of these types of assets. Then when Zellers went bankrupt, I switched over to the enclosed model portfolio because I wanted to learn that side of the business and, and I also felt that there will be a lot of inventory, a lot of shopping centers that were built in the 60s and 70s that will need kind of refurbishing and whoever knows how how to do that will be a very marketable person. So I did that for 34 years and then stress Allen, my current employer came knocking and they it’s a boutique company that works for deploys money of pension funds, and they buy, you know, mismanaged shopping centers and they buy them, fix them and sell them for profit. So they basically the way most real estate investors think about flipping houses, they they basically flip mismanaged shopping center.
added that is correct for good returns correct so so the it’s a vertically integrated company so they have what does that mean vertically integrated you’re well you’re welcome to the corporate speak now for well, flashbacks I’m having flashbacks vertically integrated so they handle everything three they do the random they fill it with a new tenants they renovate the property so they drop a new pad because you guys use that language of putting up new pad, which is to me a new like building on the lot of the plaza that’s right like a new retail establishment. So, so vertically integrated means that you know your investor you give a company like this money, they they find the assets or they have acquisition steam, they have construction development team which fixes the asset, they have property management team, they have leasing team which back fills the vacancies and increases the revenue. We have accounting on this right into front of you. There we go. We have accounting, accounting.
Within within our within our company as well. We have tax so Alan is privately owned privately owned privately owned their customers who like who’s buying the so they are selling these two like reads hadn’t no pension funds pension funds private pension funds, no public pension public pension funds we have and that’s that’s the business where we’ll be potentially looking to to to grow as well as as
taking private you know, high net worth individuals money and investing in in these value assets. Dr. Allen buys the strip mall, the rundown strip mall, fixes it up and then sells it to a pension fund who wants that as part of their real estate, the real estate component of their portfolio. That’s right. Okay, got it. And and and these these would be are the riskier types of real estate holdings. So every pension funds has certain allocation of from their capital to towards real estate typically would be 10 to 15% of their
Total capitalization those guys are missing out good don’t tell them about real estate 10 to 15% enough let them have everything else and out of that 10 15% and you know 70% would be for something that is very stable like your Dale or share way gardens you know the triple A assets and and some of it would be for allocated for the riskier assets and that’s what we deal with. Okay and that is what specifically smaller strip malls smaller communities it’s in secondary tertiary markets yes smaller communities okay so like a strip mall in Sanford Ontario correct. Okay, got it. So yeah, and and the rationale is that you’re You are the reason why the way they are parking money with us is because we can achieve higher returns than what the triple A properties would because those are bid up and so much competition the price on it so the capitalization rate is driven down because people are just bid everybody wants a piece of York, they all mall and your
buying it halfway Can you fill up the vacancies you bring in quality tenants you do risk the property you secure longer term leases with these tenants and that you know the risks the property compresses the cap rates or final value. I have a whole bunch of questions for you but they consider this a risky or piece of real estate because it’s a strip mall like what what is it like or give me the breakdown what’s not risky real estate, your cocktail? Your it’s? Well part of it is to me not really risky real estate is like our residential single family home. Well part of it is location. So So the big five the big cities the group, okay, the job growth Okay, yeah, and demographic growth is so that would be one okay. So income and population growth, it would be the tenant mix as well. Okay, now right now. And the type of asset and close Oakland Cheesecake Factory is in New York Dale Cheesecake Factory can pay their bills, so they’re good, they’re alone. It’s also Is it an enclosed
mall is it not Is it a power center or is it is it you know food store anchor strip so the food store anchored strips are perceived as the least
risky just because they’re necessities based as opposed to a discretionary based and so the rationale is people always have to do their groceries they’ll go
they all need to do you know you have $1 store usually have a discount tree of the hair salon nail salon medical.it so that if it’s not anchored, so if there’s no grocery store, no shoppers, Nick by the way has joined us Nick, can you say something? Yeah, this I’m looking at this new cold. I know it’s crazy. Oh man. It’s spring loaded and I haven’t adjusted the spring so I’m
gonna smash you. You know it’s gonna smash Peter. Okay, so if you’re not careful this thing this thing’s gonna whip over and smash him in the head. Oh, she had this on video. So sorry. I’m sorry. I’m interrupting Oh, hell but so if it’s if it’s food based, it’s pretty safe. What about a Shoppers Drug Mart Is that considered
A great day anchor. It’s, it’s, it’s more, it’s like when you’re buying stocks, right, you’re in when you’re risk averse, you’re buying stocks that are focused on
the necessities as opposed to discretion is if you’re if you’re if you want to get into riskier things and you would get into discretionary so fashion is a prime example of a discretionary type of use and they’re they’re getting punished right now by e commerce by the fact that people are you know, cost sensitive. So if you’re if you were to go with with a tenant that is kind of fashion oriented or from that cohort, you will probably go with somebody like DJ x or winners marshals, you know, somebody who has a discounter right to make sure that they are here tomorrow and it’s it’s a reflection of what’s happening to the society. Oh, I mean, you guys are talking about the no more middle right and then that’s that’s really what what we’re seeing all these
malls are just going to basically services food based. You basically have your shawarma Place your pizza, pizza, the bank, a daycare, sushi, sushi, sushi. You’re going to have maybe an RBC or Yeah, like, like I said a bank and you’re never going to have in a small strip ball anymore. The menswear store the shoe repair guy, the guy who sharpens your skates, like all those kind of places are gone. The ladies store the ladies fashion store is gone. The little jeweler, the little local jeweler that used to be there, those are all gone. No I wouldn’t, I wouldn’t know. Let’s Let’s go negative. Let’s just say they’re all gone. It’s just everybody, every us you really have to on top of it and kind of see how these users are changing. Right. So. So any fashion 10 fashion will always be around. It’s just the tenants who are not really don’t have omni channel offering. They don’t have online presence. They don’t participate in social media. They don’t
cater to all you know five senses like the speed yeah the small like you said that the local community guys are harder to come by there’s a place and Tommy mentioned the mall by one of the malls by our place there was like a linen store that moved in I don’t know 18 months ago and I walked by that store I’m like how the heck and it’s a struggle like it’s an outdoors from on like how the heck is this place even still here even after that short time I’ve maybe ever seen one person in the store and all the times have walked by but I think it’s those places. They don’t really kind of, I guess some people put them in if they have to, but there’s not much value out there.
Again, the art of commercial real estate is is looking at the location and and location is typically determine all this right in front of your mouth and turn it if you want your bullet like
There we go. There we go. Now we got stereo. So there we go. So the everybody says you know location, location, location and you know for for a typical strip center in the
factor determining whether it’s a good location or not as is obviously access to a major artery.
But if if you’re dealing with a neighborhood Plaza or which is convenience based, most of the tenants you have in there are, you know, are, you know, your drug store, your bank, your dollar store, your Tim Hortons, your grocery store, it will be all about proximity to the roofs to the residential. So and so is that how strong you guys so I want to back up and ask you some questions about your history in a second. But is that how you guys will look at an opportunity to flip a mismanage strip mall? It’ll be something close to what you call roofs, close to residential housing. But let’s say like if you’re out in Brantford, what are you looking at you’re looking at, it does it’s not doesn’t have the population base of Toronto but has a growing population. It doesn’t have the income levels of Toronto but it has good income. So you’re looking at good income, good population and
Someone has just not put the right tenant in there you guys feel with your leasing team, you can step in there make the facade of the strip mall nicer and put in better tenants that that’s that’s certainly part of it
renegotiating some of the operating operations contract with snow removal contracts, okay, so reducing so you’re going to increase income, reduce the expenses. That’s right in looking for new, you know, adding density adding more grossly civil area. Converting if you have any clothes mall may be turning the enclosed mall into a strip center, reducing the operating costs, we look for assets that have lower, you know, under market rents. So that’s another example of adding value through our relationships with some of the national tenants securing longer term leases with them, okay, you’re getting all the little things that compound it together, right? really change this asset, because what you’re doing is you’re bringing your years of experience to play here, there much and
Understanding how the tenants operates because you can at the end of the day it’s a very small industry so if once people and similar as in your business once people trust you and I’m talking about tenants trusting the landlord they know they can deliver certain kind of product and Anna Anna in a timeframe that you said you will deliver it and to the specification that they they require and and you can if they know that you know how they operate, you will not do anything that would you know, hurt their operations and the way they make money. So that’s that’s the first thing you guys do when you buy a strip mall you couldn’t communicate with the existing tenants of like, hey, look, we got your backs here. Sure. Yes. And and a lot of a lot of it is is is really
leaning back on on our history with with that tenant and saying Remember, we’re even recycling some of the some of the leases that we have with them the precedent forms because at the end of the day, everybody so
Busy, they need to do now 30 stores a year, wouldn’t you want to deal with a landlord that you know is not painful to deal with? You have already established precedent form. So it’s, it’s a fairly straightforward process to conclude the transaction. And then what happened? Have you? I guess what happens if you screw up? Like if you screw up on a residential flip? You’re kind of screwed. Because not really because if you think you’re going to buy a property for a million bucks and you’re going to sell it for like $2 million or whatever, but the market changes or you just can’t build in that value. You can lose you can lose all your profit you might even go negative, right? Maybe you can only sell it for 1.6 you thought you were going to sell it for 2 million and you know all the profit you thought is wiped out and it’s over in a strip mall. Is it the exact same risk? Well, the the it is,
it is in a sense that you you can if you overpay for for an asset, then it’s you know you have to you know amortize
over a longer period of time so you have to find a vehicle or way of holding it for a long period of time okay like anything yeah, the long term if you can survive the long term you can crawl out of your mess The one thing that you cannot control is is you know the I guess the bankruptcy of your tenants you know sometimes you have to target everybody thought there are rock stars and everything but everybody thought they were going to be great yeah and and then they had you know, great covenant on the leases and if you were smart even the the US entity and then and then it went sideways and and they spent you know a lot of money improving the spaces to the tenant specifications and to your what so what happened to that so like there was a mall in Oakville I think hope Dale mall, I think they put in target and I think they fixed up the store and stuff. What happened to target just escaped from mobiles leases unscathed. But I think it I mean, a lot of the information was going to proprietor Yeah, but if you had to guess let’s pay Peter. You know what if you could just tell us what happened? What do you think happened? Well,
There was there was just dependent on what type of Covenant you had on the lease. If you had just the Canadian entity, then that entity went bankrupt. And you know, part of the problem was that the Canadian entity was liquidating the the inventory and the profits went back to the US mothership. So you would have it easy to think anybody had a US covenant on the lease? They I know of landlords who did and the prudent ones did. Okay, got it. So some did some didn’t. It sounds like yes, geez. Okay, I want to back up just for a quick second. You said in the Czech Republic you did some kind of paper or something on why Canada didn’t break up when the Soviet Union did and when Czech Republic it What’s the answer? Why didn’t Canada? Why hasn’t Canada broken up? Why is Quebec and Ontario? Why are we still all friends and why in these other countries? Did it break up? What’s the answer? The the the answer is
It’s my 32nd Give me the 30 seconds I don’t want to go through years of research Just give me the 32nd answer. What it comes down to is is trust and and the fact that Canadians, the different parties who are fighting with each other,
whether it’s the capital, and the Anglophones or the First Nations and and the majority society or or or the individual provinces and their regional interests, they do trust the
I guess the judicial system the legislative system, and they believe that it’s not rigged in favor of one or the other that the problem with a lot of the the Soviet Union the new the slavery and the and sugar Slovak
system was that it was heavily favoring the Central Powers the central power being Communist Party so when it came to the renegotiating the Constitution,
The way people were
cohabitate again, the different ethnic groups, people felt that it was favoring, you know, one or the other. And and a lot of the breakups were over, over discussions, what will be the new way of negotiating our differences? What will be our new constitution? That’s interesting. Okay, got it. And and the other reason is that, so Canada’s long term and 150 years worth of liberal democracy and, and, and kind of civility and also the fact that there’s plurality of alliances here and it’s not you don’t have just angles versus skeptical. I have there are times when when I get back walk or less with First Nations against, you know, Ontario, there’s Alberta again in coalition with the Ontario against get back and and so it’s it’s it’s not you don’t get stuck in kind of the beaten tracks of, you know, us versus them. It’s it’s more
fluid and Horus and you don’t have histories of just outright slaughter between the people like I don’t know between the Czech Republic and the Slovak Republic but my seeing it right Slovak Republic Yeah. What is their history of just like annihilation of those two people? Not not really okay so it’s not like the Croats in the search and just go at it I mean there there it was even more complicated because you had islands of different it was very it was not the ethnic
the ethno geographic layout of the community was was not as homogeneous as it was in Czechoslovakia because, you know, you would have pockets of Bosniaks and herbs and he’s a disaster so so disaster so couple that with the couple that with lane disputes and mixing religion, land, disputes, politics all together, and then hundreds of years of history saying that family murder this family over here, I mean, you couldn’t put more ingredients together.
You’re in a smaller piece of land disaster. Yeah, it was. It’s sad. It’s sad. Yeah. Okay, so that that was just so the checksum Slovaks were a little bit more cordial. We call it the velvet divorce. Yeah. Okay. I got a question. I walked in a little bit late. I apologize. I was, I had to sign some checks. I’m sure some people in the office are happy that I was late. So I do apologize. But I you guys were talking about the value of these these commercial real estates and different tenants and stuff, and maybe you touched on it. So if I did just ignore me and move on. LC Bo, and beer store, to those are those like, what, how are those considered by landlords because it used to think that those bring in traffic, and you’d think they were pretty stable as tenants because I mean, the government, you know, they’ll just, they’ll just tax more if they need to make their government for LCP Oh, not for the beer store their private right but still pretty big corporations behind them. Any any experience with that because I’m thinking of this one mall with all the different tenants. I’m like, I just wonder about those types of things. Ya know, they’re
very much sought after.
Great traffic generators relatively stable covenants. I mean I’ll Cabos is a great comment and I believe the beer producers are backing the beer store as
they’re experiencing changes as well with grocery stores introducing. Yeah, that’s right and wine, right. So there it’s not, you know, headwinds free, but still great traffic generators Now, obviously we have those the Greek buffalo over, you know, the marijuana licensing who will have it will Yeah, through LCP or not and then we know what happened in Ontario. And that was the next thing I was gonna ask you. So those ones seem like decent ones. I guess marijuana might be too new to know, because you would think that over time, those things might bring in traffic to malls as well. Different clientele I don’t know. I know the beer store like even though the supermarkets have it now. Your habits at least my habits because for so many years, I went to LCP or beer store I still never think to go to like a grocery store to pick up some beer.
I need it. Right. So the habits are kind of ingrained. But I’m just curious with the marijuana thing. Any any thoughts about that or people just still waiting to see kind of how the dust settles with that set type of stuff? Well, it’s I personally think I mean, it’s depends on where you stand morally I leaving that debate. Sure. Yeah. I think from landlords point of view, it’s, it’s great news, because we were, there’s, you know, tell me who was growing right now in this environment.
So certainly great traffic generators as well. I was looking at some of the data that is publicly available through the branches that are owned by governments. That’s Prince Edward Island, and that’s where government owns it and, and the, you know, small 25 30,000
square foot unit would generate equal amount of traffic as a 17,000 square foot Shoppers Drug Mart. Oh, wow. The the sales are incredible, as well.
but I were everybody has to see I mean I know I’m not sure if you follow the media about the the emergency room now being filled with with teenagers who are kind of overdosing with edibles. Yeah, so it’s I mean we do live in a in a Puritan society yeah after all so we’ll see how the government what kind of stance they will take towards that. But I think you know, it’s it’s it’s what people thought of liquor you know, the morning after prohibition was was was abolished. Sure. Yeah. Right. So I know if I owned the hasty market next to the next to the marijuana shop that opened up I’m pretty happy stock up on Sure. Yeah. Yeah. So so so to sum up this commercial real estate for someone listening to it’s just done as multi unit residential, you basically analyzing the net operating income so you’re taking all the income from a plaza, you’re looking at that income, trying to increase it where possible. You’re trying to get better covenants. If
Can you get trying to get better tenants if you can maybe extend their leases if you can. And then you’re trying to reduce expenses, snow removal expenses, landscaping expenses, whatever you’re doing. And then if there’s a big parking lot, perhaps you’re going to put down a new pad. I don’t know I just like saying that for some reason, put down a new pad. And you’re going to drop into Tim Hortons in there or Shoppers Drug Mart or new building of some sort in there and your restaurant and that’ll be another way to increase the income obviously on that. Sure. Am I missing? Are those are the main components correct? Yes, I mean, you can you can add value through better financing as well. If you if you typically and when you’re when you’re buying an asset, sometimes you you can either buy it free and clear which means there’s no financing on it or you can assume the mortgage. And you know, if you have a skillful broker, they do mark the market adjustment which means the going interest rate is lower more than what the mortgages he
find its way into into the purchase price that that that you’re paying for that for that asset, but you can once you financing was crap, you’re going to get a better purchase price. That’s right because he can he can say I’m playing I’m leaving money on the table or I can and and if you’re a covenant is great as a new owner you and you have relationships with banks again you can you know, maybe get better, better financing and again depends on who your investor is if they’re looking for cash flow then you’re probably going to stretch the amortization period and and you’ll you’ll try to you know calibrate your your your mortgage differently than if somebody is just don’t doesn’t really care about
cash flow and they just want to okay and then we’re most of your work is done in the Ontario area right now. We’re actually across Canada we’re from summer side p it New Westminster British cold
Okay, so I’m curious what are you guys seeing around population trends in Ontario then you must be looking at some data that I know we briefly talked about the stuff between you and I I’m obsessed with this data. But what are you seeing? Well certainly migration towards the greater Golden Horseshoe migration from the smaller communities to their communities following jobs.
There is a lot of kind of North South migration as well people moving from the from the the sub breeze of the world down towards you know, south where where it’s sunny here and but it’s really really nice as the South Peter But okay, I always thought where the North But yeah, I get I get what you’re saying but to me it’s all relative, right Ontario as as as a whole as a great recipient of outside Immigration Canada as a whole as as you know, I think it’s a 1.4% of its population is, is being added through external
immigration, we see a lot of movement towards Toronto and GTA and again, fueled by job creation. And I think I mentioned to you the forecast for, for just that little corridor between Church Street and and, and university and Wellington and for a Front Street is you know, 80,000 jobs over the next four years just through the Office towers that are mushrooming over there. You’re that some commercial real estate forecasts, thinking 80,000 new jobs into that core it just looking at the office inventory. Okay, gotcha, gotcha. They’re extrapolating, they’re just seeing the offices go out and I’m assuming that those are all tenanted with commercial buildings. That’s how many new jobs will be created. Oh, sorry. With commercial tenants. That’s how many new jobs have been created. That’s insane. Yes, that’s insane. Yeah, no, it’s, it’s those are high paying jobs. Yeah, they were I mean, they’re not as high paying as an S in Silicon Valley. I there about a third or fourth
percent of what people get in Silicon Valley. And so between Trump effect and that’s a day we get heard about a son that they get in California, so I don’t care that, but I understand what you’re saying. Okay. And that’s the attractiveness to different places like LinkedIn and Twitter and some of these companies that are down there. I think Google did Nick you know if Google announced they were going to put 1000 new jobs in Kitchener no they know that I saw that I saw that someone Why do we have that in our head someone that I know that works up there may mention that that’s what they were looking at I I couldn’t even I couldn’t even got that number incorrect. So our
spreading this number around Okay, God Yeah, yeah. And that wasn’t for public sharing. I’ve tried to No
no, I was like I was pretty sure that’s what he said but I’m forget I forget what it was was early and I wasn’t sure. And then how you’re so you do this on a full time basis in your in your, your the leasing arm, basically, of what you do, correct? Yes. Okay. But I now your segue into real estate
yourself, what the heck are you doing? Like I just assume people in your situation are already in real estate for like 1020 years, but you kind of surprise me to like, Well, I know, I actually know cap rates and net operating income expenses. I can drop into Tim Hortons shoppers document here. But this is something that you haven’t been doing for 10 and 20 years, but you’re going to do this now yourself, correct? Yes. I mean, that’s, that’s the irony of it
is there’s been people like us, Peter who don’t know what we’re doing. I’ve been out here doing it for like 20 years. And there’s people like yourself who know and you’re sharpening the pencil and you have all these different calculations and you’re now going to jump in? Well, I’ve been jumping in for the past four years, or three years, but it was you put your finger on my saying, you know, there’s
it’s a lot of there’s a lot of people who may be working in commercial real estate, but they don’t have the mindset to really get involved personally and I was
was one of them. And when you’re busy, it’s easier to do some stock market stuff. You’re building your career, you don’t have the time and a lot of it’s understandable. Yeah, but I think it’s it’s more than that. It’s, it’s, there’s something about, you know, the mindset that we’re socialized into as, you know, being groomed to be salaried employees. And,
and that’s, you know, part of the school system that we grow up here just preaching to the choir. Yeah, no, I get it. No, but you know, as you’re saying, dealing with real estate is a little bit degrading. Well, let me put it this way. I like their two formative moments. In my life one was growing up under socialism and kind of seeing the aftermath like when what happened when the wall came down, he basically somebody pressed the reset button. And and overnight, you know, he changed from socialism to private so everything was state owned, and obviously the state needed to get the capital flowing.
They had coupon privatization, everybody would get their bad batch of stocks, they would let people buy the state owned properties and you know, cents on the dollar because they needed to get, you know, the mortgage system going. So, I remember when, you know, in 1990 1989,
my brother was 18 at that time, came to my parents and said, Guys, we got we gotta, we gotta buy this. This is and it was, I think that the price was about $15,000 for two bedroom condo, thousand square foot condo, this is where your family was living, right? It’s Kingston size community downtown, like a very strategic location. So, you know,
that property here and in my pants, their response, and then they’re smart, you know, wonderful, hard working people. Their response was, are you crazy only lunatics going get into debt. Right. And so and there was not because as I said, they would not be, you know, savvy, but it was a complete
Concept between the old school mindset of not being in debt to anybody. And the the, the I guess the the novelty of of the private ownership. A lot of people stayed kind of didn’t act then take advantage of that opportunity. And what was the price of this place? $15,000 for for two bedroom. So right now it went up by 1,000%. It’s 150 $200,000.
And today years later in the mean, so they said he said return they, they continued renting. And guys, that rent went from 1500 check rounds to 10,650%. So my mom’s pension as goes towards paying off just the cost of housing, so any extra ordinary expenses so they live off my dad’s pension basically, which is another five to 600 bucks, so any extra ordinary expense, it’s changing tires are
Its property taxes or, or or, you know, the god forbid they wanted to come come to see us right is can theoretical break they’re practically break their back right so see and they’re the reason why I’m mentioning is that they’re not alone very interesting historical context that most people don’t have meter but Tom I go when the reason why it’s relevant to to listeners I when I travel through you know summer side you know rural communities or even urban communities in Canada you talk to people who are in you know, they didn’t grow up under socialism but but they have a similar mindset right and they’re being left behind and no everybody’s talking about you know, the affordability crisis for the first time buyers and all that and and it is a legitimate problem. But you know what, it’s going to be even harder and and the bigger problem that very few people are talking about is the elderly. You know, they they will
Half just just just think of improving health care, people will be living longer and longer. They didn’t really have the the mindset to do by assets that are generating income, so they’re relying on their savings. Can you imagine the anxiety that people have or will have, when they see their RFP shrinking and shrinking and shrinking? The cost of senior assisted seniors housing in Ontario is $45,000. And like, four to $5,000 a month? Yes. So So the concept that the notion of outliving your money is is a very real thing and the next 20 years, we’re going to see a lot of weird stuff after tax $45,000. So that’s a good point. Right? So even if you have additional savings, if you’re taking out too much, even from your RFP, you’re getting taxed on it.
Think I always think of the population growth coming? I never looked at it from a demographic point.
You have all the retiree, the people who are getting older, you’re 100 year bright, and at least the millennials, they can they can they have 3040 years to figure it out, figure it out. But people who are you know, elderly were sick.
That’s going to be maybe it’s maybe it’s No, no, you’re right.
Listen, there’s good parts to socialism. I’m not a pro. So I’m not really pro socialist. But there are good parts to helping your neighbor to making sure we all have health care to taking care of each other. Like there is really value. I don’t think any one of us here wants to live in a society where if Peter breaks his arm, he goes to the hospital because he can’t get get the right stuff, right. I mean, we all want that, you know, and I saw socialism and soda, Nick, when we went to go visit our family in in Europe and the weird parts of socialism, I think, are that it’s not exactly fair. The way most people think of it because of the corruption that goes through the system. You would see people in Yugoslavia apply for different housing or something and then they get approved and they’d say, Okay, you got
approved for this different housing, but you have to wait like 10 years. You don’t mean like Yeah, yeah, like you, you’re approved Peter and your family’s approved, but like, you’re not actually going to recognize that that benefit for like, 10 years and stuff and I don’t like having that kind of stuff shoved at me in a society. But there are good things to having equal access to certain social programs for everybody. Do you want to live in a society that that, you know, where people are not desperate where people are, you know, sinking into a situation where dignity is, you know, gone. Right. So, to have a sustainable liberal democracy, you need to have people with stakes in the society. And with I forgot to talk to a PhD in the subject. This is amazing. Yeah, okay. Yeah, keep going, keep going. But But anyway, but what I was trying to say is that that was that was extremely formative for me and that what what kind of between my strength and experience and seeing how we add value to properties and the
Kind of the financial literacy that I gained through that and seeing that you realize the advanced financial literacy that you have but there’s so many it’s just ideas right? Unless Unless you unless you start acting on it it’s it’s it’s nothing it’s just fan so what did you do what was your first stake in the ground? You did you bought a condo and it was a triplex and and close close to where we live on the Danforth and and it was I had no idea you have a try for a triplex just off the Danforth. When did you buy that?
About three four years that’s right you were telling me I bought it and you fix it up? Yeah, and But yeah, I was all happy even though working in in commercial real estate. I had no idea what I was doing. That was you’re like all the rest of us don’t worry. So so.
So it was it was very successful project. I bought it well and to this date. I don’t know why more people didn’t bid on it. It needed just cosmetic changes. We fixed up the bathrooms everybody thought it was overpriced.
Here I’ll tell you why people didn’t buy it because every year people tell me it’s over properties are overpriced but when you can generate income on the property like you know how to it doesn’t really matter and the prices of the price specifically it’s like when you look at a strip mall the price in and of itself isn’t the whole story it’s what are the income and expenses you just told me that right so in this triplex what was the income when you bought it was it was it max though you know it was two baseman two bedroom basement apartment for 600 hauling including utilities and again like it’s okay so it was well under well under but I had no I didn’t do any research I was you know, foolish and reckless. The main floor was also a two bedroom apartment was thousand dollars including utilities and the upstairs was empty. So 1600 new fixed it up with the help of our friend, spend 30 $30,000
fixing up all the bathrooms and kitchens and flooring and lighting all the kind of emotionally significant features of the house and
By, you know, I
charge I think we took the the income to about 5300 a month.
It was 1200 downstairs and the balance between a ticket from 1600 250 300
Yeah, so So I look at here so you’re all here you can do this. You gotta figure it out. No but the I, I looked at it, so it looks small freaking out. You’re still scared right now those numbers are great. Those are great returns. Yeah, you know, and since then I’ve been looking for a simple
Isn’t it funny, you don’t know what you’re doing? You took a leap of faith, it ends up being your best investment ever. Now you set the bar so high, you’re not going to find another word like that anywhere. Yeah. So at that point, a lot of my buddies started saying, well, I get it. You got to touch Peter, I gotta get in on the next one. And I say guys, keep your money. I don’t know what
God wants you to get her. But anyway, there was a critical mass of people who started asking me so I said, Okay, I always to to, to my cohort to my peeps together.
educated and, and I called up Quentin D’Souza. I started
doing podcasts, yours and a couple of others and and then eventually I called Quentin and he took me on under his wing for six months and with him I learned the basement conversion so I did the bad. I always tried to do something new on the next project. So the next one was complete gut with the basement conversion then I did a couple of flips one was a condo as well. So always something new.
I’m working on a 15 Plex right now with the one of the principles from from from our office, it has to retail units 1313 residential units. So always kept trying to see especially because we would always tell people, hey, if it’s got to commercial and maybe stay away from it adds a layer of complexity that you might not want to mess with. But with your experience, those route to retailer like nothing to you. That’s actually a comforting I mean that the big advance
of retail or commercial is, is that you can really force the appreciation very quickly. I mean, everybody says it’s not, it’s not get how’s that just on everything that we just share? Or? Yes, yes. So you can number one you’re passing through virtually on the commercial sign. Yeah, everything, everything through them, that’s to the tenants. There’s no rent control. The lender looks at the asset not to you personally, as much so the performance of the asset although you know, you’re gonna have to personally guarantee you, you do, but it’s really your operational were with all that is being tracked. Gotcha. Good point. Yeah. How much experience do you have? Can you handle this type of project and what’s your investment thesis? What’s your strategy? And you can negotiate the personal guarantee so it’s shuttle recourse or Yeah.
But it’s, it’s the fact that you can, every dollar like, let’s say on a six cap
properties, the capitalization rate where the six cap every dollar that you increase the rent by equals $20 worth of value. So I just want to walk through that with everyone. So the capitalization rate would be the net operating income divided by the purchase price. So the net operating income is the income minus the expenses, whatever that number is divided by the purchase price gives you a capitalization rate, right sit you use an example of six 6%. And now you’re seeing if you can now walk me through the rest of the example. So paint the picture for everyone. So let’s say you have a you have a vacancy of you buy a strip center, you have a vacancy a 50,000 square feet, and you sign a lease with with the dentist. That dentist is willing to pay you $20 based rent so they’re three for the streams of income for you as a landlord, if you’re in the commercial one is the base rent or minimum rent. Second one is the common area maintenance charges. So that’s all the operating costs.
There you are passing through the proportion share basis to the tenant, and then is the property taxes.
So, let’s say the tenant as Let’s leave aside the cam and property taxes, the tenant is willing to pay $20 and their proportion Chair of property taxes and common area maintenance. So, you have 30,000 square foot unit, which is empty. So you do you have 6060 $60,000
worth of annual income that you that as new money, right when you capitalize that at a 6% you have created a million dollars worth of value, obviously there will be transaction costs, your income just went up by $60,000 without the math, and then at a 6% six cap rate, the value of that building has now gone up by a million dollars. You have to net off of that you have to support all going to get into flipping strip malls. You have to subtract from that, you know, you’re paying the
broker you’re giving them some some kind of 10 allowance, there’s a downtime, the tenant may ask you to, you know, Ruffin the plumbing or so they may be associated costs with the transaction. So let’s say it will probably be, you know,
$30 per square foot all in. So you would subtract the cost of running. So when you buy a strip mall or something with potential commercial in it, the price is there not using a hypothetical rent amount to come up with the capitalization rate, because in your example, right now, you just increase the value by like a million dollars. But wouldn’t the person selling say, Well, hey, I know that’s fake it right now. But technically, I know you could get this much so I’m not selling it for a caps of 6%. Like I said, you know what I mean? Yeah, I mean, and it because in your example, you increase it by a million dollars, but I’m sure who’s selling it purely vacant and not recognizing the potential well, it comes. So then again, it comes down
What type of market you’re in? So sometimes the broker, the seller would say, well, it is your downtown Toronto you will you’re okay. Not a real estate taken. But if you’re in Saskatoon and the outskirts of Saskatoon and it’s been vacant for two years, you’re they’re not going to recognize that income by you being the savvy mall mismanage mall flipper, you can take it now and find a tenant for that place. So the key differences are you are you buying it on in place income or stabilized income in place income is what is on the rent roll today audit as opposed to stabilize when everything is you know, Pritam you know, least and fixed up ok. So the seller obviously wants to sell it on stabilize you, as a buyer want to buy it and in place if you see okay, but I didn’t residential, it’s usually stabilized because there’s such low vacancy rates. We’re usually buying it on the stabilized income not on the in place. Got it. Okay.
I places like in Alberta, even the residential, when the oil industry was booming, and places like Fort McMurray, you can buy you bought places for cheap, and then rents just skyrocketed, people were able to turn over those buildings and either refinance or flip them, because the values jumped because there was no rent controls, even the residential space. The downside was when, when the industry dried up, and the rents came back down. This is like residential, small town residential that was really dependent on one industry, but when the rents came back down, the value of those things drop pretty fast as well. So in that case, when you’re purchasing that asset, you would actually want to go after step by it on a stabilized basis, right? Because you see totally falling knife, right and you don’t want to buy today’s dollars because you know they will be the revenue will be lower down, you know, few months down. Yeah. And so Okay, so this is all then you are going to steadily add to your own personal portfolio. Yes. So I’m doing
That and so I’m using it as an educational tool as well kind of coming full circle so seeing you know what happened to my parents obviously I want to improve my financial literacy but I also want to make sure that our kids have have that so well elder your kids they just turned 10 and seven boy and a girl and and we get them i mean i’m sure yours are bleeding by now but because I play podcasts every time we travel through hockey game or but but you know what they’re they’re like kids might listen to this thing. What are their what are their names guy on the chi India yeah hi any if you’re listening to this your father’s a really smart man. You listen to him okay? He’s the smartest guy we’ve ever ever interviewed so you make sure you listen to him I’ll pay you later
it’s But all kidding aside we actually started the company named after them Chi in the Properties awesome and and we’re but we’re using
The assets as as a tool as a kind of playground for them to to learn to gain financial literacy and and you’re somebody from academia who’s actually coming out into the real world you know what kind of rare bird you are you understand how rare you are
no No, no it’s a good thing or but but you know your role what you what you get and and we like just recently we had a situation which actually kind of only reminded me how important it is to have them around we were were like anytime there’s a lender that comes to our house, I kind of sit them around the table, I need them and this is what the tenants are paying this is what we have to pay the bank because we don’t have enough money. So just you know, in an age appropriate manner, kind of make them rehearse their math skills, but also start understanding starting to understand the concept of a mortgage and property taxes and all this and but we also bring them to to the showings because I want to get the social
element to it you know when they’re meeting with the contractors or when when we have an open house and we have so we have the application form that they that tenants complete and I give it to the kids to do you know gal Tell me who would you pick I get turned it into a game right so and they and then I challenged them you know and they because they always want to take the person with the biggest dog right
so not so fast but but anyway and I bring them in because it lightens up the the atmosphere like I people see that we’re not the Heartless landlord then and I told him that this is you know, it’s actually for a guy in the that will be or if you get hit by the bus. Anyway so we went to a showing and we saw this this couple fantastic you know people they they they checked all the all the all the boxes, you know, they remove their shoes, when they enter they are very personable. They asked a lot of maintenance questions they they were very well you know, soft spoken
Really presented really well and we check their you know credit and everything we’re ready to go I was literally about to draft the lease and then then I then I just bad habit I google you know the gentleman’s name and this this article that came out that you know he was involved in the head and Ronnie escape and canine unit when looking for him criminal record oh boy and and I was like holy smokes like but I tell him like I deal with people on daily basis and and like you establish a gut feel for somebody and that gut feel was telling me like these are good people like there. So anyway, so I turned it into a dinner conversation I said like what are we going to do? And the kids were saying, Well, I don’t know. And you know, on the one hand, massive red flag on the other hand, like your gut feel. So I said, You know what, let’s call it. Let’s Let’s call him and see what what happens as a speaker and the kids will please don’t tell him that we’re here.
So anyway, so we called him and I said, like, Mr. So and so I were we really like you as a prospect, but I found this article what what do you have to say it says Peter,
I’m very sorry, but it it was me it was it was a bad decision. Geez. And I’m actually we had an argument my wife and I that I didn’t disclose, but I really liked the property and I didn’t want you to disqualify us because of this. And I can tell you there’s not a day in my life that I don’t regret the poor decision that I made and and I get, you know, discriminated against when I look for a job or when I look for houses, you can tell. So anyway, so we took that in and, and and I said, I,
again, we had our little counsel and I said, you know, we’re trying to teach our kids you know, how to be generous and how to be forgiving, and here’s our opportunity to really put our put our money where our mouth is. So let’s
Let’s give it a try. What do we have to lose its apartment Neil few bedrooms. So anyway, so we told him as much as we trust you, we trust your integrity, we want to give you a second chance I told them about our kids that we want to kind of. And
guys, they have become the best tenants we’ve ever had awesome, what a great story they have, they have been they, they check with us before they change the light ball, they they have, you know,
they maintain the property they they look for ways of saving you the very best I another 10 and, and to me that will and the reason why I’m saying that is is that it just it reminded me how important it is to have the kids around because you know, we are learning ourselves and they are learning with us as this as life happens, right. And so,
so kind of seeing them, you know, respond to this, this will be you know, they will remember it for life, right because it was it was either you have set your own story and you know growing up
getting educated and coming to Canada and then going to Hungary then coming back here and then working here and then buying properties here and now helping out families here. I mean, what a crazy amazing story. Thank you for sharing this and listen, we have to wrap up I want to ask how people can reach out to you or what but next time you’re on I want to talk to you also about some of the immigration stuff that you did your PhD on because in Canada we get a lot of educated immigrants in here and I know you studied how we can maybe Is it better kind of leverage some of the immigrate immigrants or why was it just avoid wasting human capital? Yeah, people yeah comes in with driving cabs. Yeah. Somebody coming in with a doctor or a doctorate or something and and making better use of that. Okay. How can people reach out to you what’s the best way?
I think the best ways probably my my gmail account. I’m, I mean, there’s different ways I which I think Strathallan can help.
People if if someone’s listening, so what is it? What is it that you can help people with? outline it? Well, if people have existing assets, our company offers property management services for commercial assets. So if somebody has a strip mall in Hamilton right now or something, they could reach out to Strathallan, you’ll step in and see what you can do to to bring the property to a higher level. I personally can help people with if they want to, you know, set up a leasing strategy or asset management strategy, how to optimize their how to increase value in their in their asset, I can I’m certainly happy to chime in.
I always look for JV partners as well in the residential stuff. But, you know, if you just want to have a second opinion and run something by me, I’m happy to do that. Okay, that’s very kind of so you’re going to share your Gmail account. So remember, we don’t know who’s listening to this podcast, so you have to screen people who might reach out to you. It’s all like, we know everyone who’s listening to this, but Okay, what’s the best email address to reach
P as in Peter p, Kafka. Kafka is my last name k f k 75 gmail.com.
So P Kafka p k f. k 75 at gmail at gmail. com Peter, we’re going to do this again I have more to talk to you about but thank you for sharing all this yeah so happy we cry and and thank you guys main reason why I wanted to come out it was to thank you guys for putting this together because this is this real estate is one of the few avenues that is left for, you know, middle class people and working class people doing gain financial independence. So kudos to you for spreading the word. Thank you, Peter.
Appreciate it. Appreciate. Thank you.
Hey, everyone, it’s Tom Kratz, and this is my third time trying to do this little ending of this podcast so I’m going to make it quick. Peter is a great guy. I hope you enjoyed that podcast, we put together a report it’s on no more middle calm is where you can get the report www.no more middle calm and you can
See income levels maps the map against property prices there. I just cannot speak today. And what you will see in that report is absolutely shocking. So you can get your own copy of that@ www.nomoremiddle.com. Thanks to Peter for doing that. We’re going to have him on again to talk more about immigration and the use of human capital in this country and how we might be under utilizing all the great people who end up coming here. So I’m fascinated with that topic. Definitely want to have him on again to talk about that. But that’s for another time. Until next time, your life, your terms.