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PRINT EDITION
Small investors climb on the real estate train
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Startup offers shares in Vancouver rental building, for which the average buy-in is $2,500
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By KERRY GOLD
  
  

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Friday, November 9, 2018 – Page H3

VANCOUVER -- Gerhard Maynard had been looking around for a property investment, but he wanted to go in with a group of investors.

Mr. Maynard already owns property in Vancouver, but he wanted another real estate asset, because he believes it's a far more reliable investment than products such as mutual funds, with what he considers their exorbitant and often hidden fees.

He also wanted something socially responsible.

Because he had been searching endlessly online, he says an ad for the new online real estate investment company IMBY - In My Backyard - came up on his Facebook page. He checked into it, as well as company co-founders Mike Stephenson and Stephen Jagger, and decided to invest in the startup, which is one of eight the entrepreneur partners have launched in the past 18 years. Those startups include Ubertor, an online website-development service for realtors that they sold in 2013.

Now, Mr. Maynard is a shareholder of a corporation that owns a house at 1956 E. 13th Ave., which has no mortgage and is rented for $3,200 a month. The renter, a single father, is also a shareholder. There are 286 shareholders who own the house, which backs onto John Hendry Park at Trout Lake and sits on a 33-by-133-foot lot. Last spring, the house was purchased by IMBY and eventually sold to the shareholders for $1.638-million, including the property-transfer tax.

Some of the purchasers bought in for $1. The highest shareholder paid $90,000. The average buy-in was $2,500.

More than 40 per cent of investors are between 18 and 25 years old.

"I obviously want to make money out of it, but at the same time, I like the concept that it opens up investment for the average person and is not just targeting the 1 per cent," said Mr.

Maynard, who invested $15,000.

Mr. Maynard is an example of the IMBY target demographic, which is the young urban professional. He is 40 and works in human resources for a Crown corporation. He says he was impressed with the concept because of the returns (estimated by IMBY at 35 per cent) and because it makes sense in the current shared-economy environment. It also felt accessible.

"From talking with friends, it's quite an appealing concept. Why can't we invest in housing the way we do with mutual funds?

But you don't get that kind of return on a mutual fund.

"And they could have filled out this project way faster. They could have gone to five or six people [for investment] and it would have been done way faster. But they put a barrier on it.

They set a maximum investment."

After three years, the corporation will develop the house into a duplex with a laneway house and then sell off their asset. Mr. Stephenson says the property qualifies for multifamily conversion and infill as part of the city's character-house retention guidelines in detached-housing zones.

The high return is based on the potential to increase floor density. The projected value of the project, once built out, is between $1,000 and $1,100 a square foot, Mr. Stephenson said. Of course, there is the risk the market will drop more than it already has by 2021. Mr. Maynard is not worried.

"I am prepared," he said. "It could be more or it could be less.

From my perspective, I've never seen Vancouver real estate not give a pretty good return on an investment."

It's nothing new to purchase real estate through a corporation, which offers major tax advantages. Mr. Stephenson says they are doing what the wealthy have been doing for years, but their way opens it up to average income earners.

"People do it to avoid property transfer tax. We are doing it because it's currently the only mechanism where you can have hundreds of owners of a single property."

He says the technology also sets them apart. A lot of the buyers are younger and comfortable with online investing and robo-advisers. They also feel shut out of the Vancouver market, which has created a divide between the "haves" and "havenots." Because the renter of the East 13th house is also a shareholder, it puts him in a more powerful position, Mr. Stephenson says.

"He's an investor and a renter - imagine how that changes the dynamic between landlord and tenant," he said. "All of a sudden, you have the possibility of true rent-to-ownership."

IMBY has bank and real estate industry executives on board, including director Peter Aceto, former president and chief executive of Tangerine, a subsidiary of Bank of Nova Scotia. One of IMBY's founders is Cam Good of Key Marketing, a marketer of major condo projects.

Not everyone sees the idea as a solution to the housing crisis. Associate professor of sociology David Madden from the London School of Economics says "it sounds like another step down the path of commodification that housing has been going through the past few decades, though in new ways and at new scales."

He worries that this model of investment will lead to investors who don't maintain the rentals and who push for higher rents.

"I'm sure it's promoted with all sorts of democratic language, like this allows anyone to become an investor in real estate, but that's not actually a good thing, first of all," says Prof. Madden, who cowrote the 2016 book In Defense of Housing: The Politics of Crisis.

"[In London] there are all sorts of schemes like this. I think there is a general trend towards making investing in housing as frictionless and easy as possible for people, which speeds up the whole process. You don't want real estate to be a frictionless process.

"Whenever real estate markets become rationalized and more efficient, there is always residential suffering and housing injustice results."

Mr. Stephenson understands the criticism, but defends their model as set apart from speculative behaviour. He says they do their best to know where the funds are coming from. They have three models of investment, including crowdfunding. In order to deter speculation, the maximum a single individual can invest in their crowdfunding developments is $1,500. The maximum amount on the East 13th Avenue property was supposed to be $20,000, but they made exceptions.

And he says the company must answer to a triple bottom line; each investment is supposed to have an economical, environmental and social piece. In the case of the East 13th Avenue house, the goal is simply to provide more ground-oriented housing for families, which is already happening around the city. The units will be at market price.

Mr. Stephenson aims to bring other properties on board that may have less of a return, but offer a greater social value, such as housing that is only for single parents.

For example, an apartment might have a return of 6 per cent instead of 9 per cent, so that they can eventually offer it for sale to a low-income earning single parent.

He's partnered with Eli Fast for that purpose, because Mr. Fast and his father are using the model in Vernon, B.C., where apartments are selling for around $100,000. They purchased one, kept the tenant and reduced her rent because she's a single mother. They will soon open the purchase up to shareholders. The tenant will also have the option to buy.

"We lowered her rent and it still made sense with what we had to pay for it, the mortgage and stuff," said Mr. Fast, who is 24.

"We made a commitment to rent to only single parents. We really wanted to help them. I want to be the guy who brings these little social components to it." They see their model as inclusive, bringing in buyers who'd otherwise never be able to afford a house such as the one on East 13th Avenue in Vancouver. Mr.

Stephenson says one of the shareholders is a single parent from Abbotsford who invested RRSP money into the house.

"Now, they feel that they are in an asset class that they always wanted to be a part of, and now they feel they own a piece of the city," he said.

"Any prudent investment portfolio should have a portion of it in real estate and we are opening it up for the first time to people who have never been able to get into real estate."

If owners want to sell their shares at any time, they can do so easily, Mr. Stephenson said. He says there is a waiting list of potential buyers that sellers can choose from, as long as they qualify according to B.C. Securities Commission rules. Shareholders can choose their own selling price, within reason.

The money currently collected in rent is going toward the future development and a Vancity credit union loan of $1.2-million will fund the project. If the shareholders do sell after three years and make a profit, they would have the option of rolling that money into another project. IMBY takes a share of the profit instead of a management fee, Mr.

Stephenson said.

Because they purchased the house last spring, when the market had already cooled, Mr. Stephenson believes they are less exposed if the market does drop further. He gives other reasons, such as its unique location.

"[The market] could continue to go down. It may," he said. "If you look at what the city of Vancouver is doing at Commercial and Broadway, [with] increased amenities in there, this area will only get hotter for your urban professional.

"And the great thing is, since there is no debt on the property we have the luxury of waiting for the right opportunity to sell.

There's no hurry if we finish the units and the market is not where we want it to be. As a group we can decide, 'You know what? We are going to rent out these homes.' We have that flexibility, we don't have the urgency of high interest or penalties to force a sale when it's not an opportune time to have that sale."

That said, they are turning their sights away from the cooling Vancouver market and looking to "high growth areas" for their next property purchases.

Mr. Stephenson and Mr. Fast just returned from Phoenix, where they looked at three-bedroom townhouses for around US$140,000. They are also looking at Seattle and elsewhere in Canada.

"We want to give Canadians exposure to U.S. real estate to make it really easy. So you can put US$500 into a property into Seattle or Phoenix, so you have some Canadian and U.S. dollars, and jurisdictional diversity. Obviously, if there is the global lull, everything is down, but we figure this is a prudent way for Canadians to invest in the U.S. and eventually for Americans to invest in Canada.

"What motivates us is that real estate is generally an asset class held and invested in by the rich.

I'm a great believer in universal basic assets. It doesn't matter what you earn because assets compound. It's passive income.

But we have to nail it so that it's democratized, and it's currently not."

Associated Graphic

IMBY co-founder Mike Stephenson, left, seen with business partner Eli Fast in front the company's investment property at 1956 E. 13th Ave., says selling shares of houses his company owns, particularly to tenants, offers 'the possibility of true rent-to-ownership.'

KERRY GOLD/THE GLOBE AND MAIL


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