Wealth Creation Through Real Estate (with Patrick Francey)

Welcome to the Frugalpreneur podcast. I am your host, Sarah St.John, and my guest today is the host of the global top 100 podcast in entrepreneurship, the Everyday Millionaire, and he's the CEO of real estate Investment network. Welcome to the show, Patrick, Francie, Sarah.

Thanks for having me join you today.

Can you give us a little bit of your background? How did you get into real estate?

I've been in business over 40 years, so I've got lots of history, and real estate is just one part of that history. I started my entrepreneurial journey in about 1984.One of my businesses, which is a bricks and mortar retail business in Alberta, Canada, specifically in Edmonton, just celebrated its 40th anniversary. So that's one part of my business. And back in the day, how I got into real estate was really kind of straightforward.I was looking at those individuals who I admired in business because I was looking at them as and seeing their success.And I noticed that regardless of how successful their businesses were, and many of them were making many millions of dollars in revenue, they all had a tendency to take some of that profit and invest it in real estate. And I decided that that would be probably smart for me to follow that lead.That was also guided by a mentor or a good friend of mine who said to me, you know, Patrick, you're building a great business. You're doing really well, as well into my business.When I started investing in real estate in about 1999, so 15 years into my business, and he said to me, he goes, you know, at some point you'll want to exit your business, because that's just what happens. You know, you get to a point in your life where you go, okay, I've built this asset, maybe I want to exit it.But you never know what that exit might look like. You don't work for a large corporation. You don't work for the government.Your retirement plan is your responsibility, and real estate is a part of creating a financial future. So that's really what took me on that journey and I started investing in real estate.Back in 1999, I came across a company called the real estate investment network, and I became a member of that community, learning the how tos and the economic fundamentals that drive real estate so that I could build a great portfolio for future state. So I wasn't looking for active income. I had great income within my business.But when I looked into the future income, that's why I wanted to invest in real estate.And as I sit here today at 66 years old, real Estate has served me well over the years and has gotten me out of a couple of tight spots because I had that portfolio, especially through the lockdowns of the pandemic, etc. But back to the real estate investment network. I became a member of that community back in, like I say, 1999, 2000.I got to know the owner of the then business, Don R. Campbell, who's a best selling author here in Canada.And ultimately I bought the business about a dozen years ago and have been operating it ever since.So we have a national community of those individuals, seemingly ordinary individuals, who are trying to and are on the path to creating a financial future and using real estate as one of those tools.

Oh, awesome. I'm curious, I'm sure the real estate landscape has changed quite a bit since 1999. Can you give some insight into that?And I assume you still recommend investing in real estate regardless of whatever state the economy is in at any given time?

Well, we often, and I often use the phrase that there is no bad times to invest in real estate, there's just the wrong strategy given what's going on in the real estate cycle. So when we look at the global macro conditions that are happening these days, we look at inflation. What we see is inflation.We look at real estate prices that have gone up. Of course, in parts of the US And Canada, we're seeing a pullback and some would argue a meltdown of real estate.And while some of that is true, it's not a blanket statement in any business. And certainly real estate is no exception. We have to look at what the economic conditions are.And then when we say, well, it's melting down, there's a bubble, blah, blah, blah. First thing we have to realize is that real estate is not a national thing.There is no such thing as the average US Real estate price or the average Canadian real estate price. The headlines use it, but the reality of it is is real estate is regional.What is happening in Houston, Texas versus Dallas, Texas are two different regions, two different cities, two different economic conditions. So you can't say, well, what's the average price in Houston versus Dallas? You can, but it is really meaningless in terms of a comparison.So when we look at real estate, we have to look at it regionally.Then we have to say, well, given what's happening economically, what would be the best strategy to use is buy and hold a good strategy in these economic conditions? What are your goals? And so sometimes when we look at, let's say a very popular strategy is fix and flip.Well, sometimes the economic conditions don't really translate well into a flow fix and flip strategy. Rent to own agreements for sale.There's many strategies that accommodate the very different real estate cycles that are going on and speak to the different economic conditions that are happening. Certainly when we look into the US and look at what's happening politically and economically, let's say California versus Texas. Wow.Two large states, two totally different economic and political views of the world to different and very different real estate and economic conditions.

If someone is interested in like getting into real estate, what would you recommend kind of the first step be?

Well, you know, there's a lot of people that want to get into real estate and they don't want to take the time to get educated. Rain has been around for 30 plus years. We've been teaching real estate investors how to invest in real estate for over 30 years now.We don't sell real estate, by the way. We are an education and we'll call it an economic research company.So as investors, our job is to look into the future and say, where is real estate going? Because I want to invest for appreciation, I want to invest for cash flow.Which means that when I buy or invest in a piece of real estate, I want to know that the price of it will go up and that rents are going up. Well, what drives prices and rents? For example, first off, gdp.So gross domestic product, we're all familiar with the term without getting complicated. GDP is just an economic snapshot of the health of any given region, of a state, of a city.And so when we look at positive gdp, gross domestic product, it means that things are going well. It means that people are working and that when people are working, they're of course making an income.So they spend money, the economy starts to churn. That's why we want those strong GDP growth numbers. Now when we look at gdp, what happens is that the GDP will use Dallas as an example.If the GDP is strong in Dallas, which is your backyard, then we start to say, well, that's cool. Why would real estate prices go up? Why would rents go up?And the reality of it is, is that when there are jobs, people move into that region to go to work. And as they come into that region, they need a place to live. And so most people, when they move into a new city, they rent.And they rent for a number of reasons. If it's a new immigrant into the country, number one, they don't have a credit rating. Number two, they aren't really even sure if the job is solid.They don't know exactly where in the city they want to live because culturally they want to hang out with their people, they want to eat their food, they want to speak their language, they want to have those whatever cultural, religious practices that they have. So that all takes time. Generally, by the way, historically and by the data, it takes a immigrant into the country, into a new city about two years.So what they do is they come in and they rent.Well, when you have high demand for rental properties and limited supply, or a inequal proportionate share of supply if you will, of course the price of rents tend to rise. And we see that happening not only in parts of the US but certainly in Canada as well.We have a lot of immigrants coming into both our countries, by the way, and that ultimately puts a lot of pressure on the rental demand. Well, as an investor, if I'm treating my real estate investing like a business era, what do I want to know?Well, if I'm going to invest, I want to know that I've got a steady lineup of clients that are going to want to rent my property. So therefore I look at that rental market and I go, you know something, there's a lot going on there.So I can look at my investment strategy over a period of let's say 5, 7, 10 or even more years and be confident in the fact that because there's GDP growth, because there's population growth that will in fact drive rental prices and then after about two years, those same individuals who are renting will start to want to buy. That puts pressure on the upward pressure of appreciation as demand for newer or for a new home or a first time homebuyer increases.That in fact creates that demand and drives prices. Now that's all looking into the future based on the economic fundamentals. So I look at, I'll use Dallas as an example.I go, what's driving that economy? We know oil is popular in Texas. Dallas is known as one of the head centers, if you will, for the oil and gas industry.But there's technology happening, there's all sorts of development happening. And so it's a strong economy, which means people are going to want to live there because they want to work.And that in turn shifts the demand for real estate and drives prices.

Okay, yeah, that makes sense. What are your thoughts about like Austin?I feel like Austin, a lot of tech companies are moving there and I'm curious if you know much about the real estate market there.

I don't know specifically about Austin, Sarah, but the thing about what the real estate investment network teaches A system for investing in real estate. And part of that system is what we refer to is the long term real estate success formula. And that formula is this.So if you said to me, patrick, I think Austin's a really hot city, you should consider investing in real estate, I'd go, okay, well, thanks for that. Heads up. So then I would go and I'd start doing the research into what's happening in Austin. I would say, well, what's the unemployment rate?What is the gdp? What is the industry that's driving it? Oh, gosh, man, is it ever blown up with tech? Well, tech, tech, engineers, those are good paying jobs.So then I start to determine what the demographic is. I look at the future of that particular industry, and it's only one of several industries that are driving the economy of what's happening in Austin.Then I look at, for example, what is the economic development of Austin?So if I see Austin is all of a sudden spending a lot of money in building out infrastructure, whether that be highways or rapid transit or whatever that might be, I look at, oh, look at that. They're building infrastructure. They're actually supporting the growth that is coming into that particular city.So as a real estate investor, I look, okay, when I look into the future, where do I see the growth of, number one, the city? How is accessibility changing? I know that, for example, if I buy a rental unit within a.In your will speak in US Language, I would say normally a thousand meters or a kilometer, let's say within less than a mile, we start to realize that the value of that property and the demand for those properties is higher because people are within walking distance of a particular station, whether it be rapid transit or even bus station, by the way.But anything that gets them moving, maybe it's just off a freeway where they can get on an off ramp or an on ramp and come and go within their neighborhood easily. Those are all very desirable things to look at.Then I look at the demographic and go, okay, given that, let's say my average household income is going to be $100,000 a year or $80,000 a year, whatever the number is, doesn't matter. I say, you know something, I want to cater to a specific demographic.So then I look at the property type and I go, okay, they're going to work from home. Gosh, what do work from home people want?Well, they need a den, they need a place if, especially if they have families, that they can put the kids while they work and they can work in silence.So we need to make sure that that particular property is set up that way and they need to get outside so they may want a backyard so they can get out and get some fresh air. So these are all considerations as you learn about the region and learn about the demographic.But certainly when I look at Austin without knowing it, those are some of the things that I'm going to look at. What is the jobs, what is the gdp, where are they spending money? What are the industries aside from tech that are moving into there?Like I look at Calgary, Alberta for example, big tech hub, growing tech hub.But another part of it is, is that believe it or not, interestingly enough, the movie industry is going into Calgary because of the mountains in the region and all the things that are happening.Well, that movie industry is going to put a few billion dollars into that economy, which drives jobs, which drives the economy because people are working either directly with the movie industry or they're being a supplier to it, a service industry, for example. So those are all things that I would look at when I was investigating a city such as Austin that I'm not familiar with.

Okay, yeah, that's helpful information.I think the biggest hurdle for people is at least they assume, and I assume that it is probably true that they need a decent amount of capital to invest in real estate. But are there ways to go about it that don't require, can you get a loan to invest in real estate and so on?

Well, you have to always do the math. You know, this is something that often happens is people get emotional, especially in a boom cycle. You know, everybody's a real estate genius.I don't know specifically what's happening in different cities within Texas for example, but as you look across, I know some anecdotal things, but when it comes to financing, one of the things that people bump up against, and I'm sure, I know in parts of the US you have the same thing as what we have going on in Canada where first time home buyers feel like they're shut out. There's no possible way they could ever afford a house. It used to be for me as a boomer, I could buy a house and it was three or four times income.My income to own that house, that was the price of that house. Those prices are now in Canada anyways. 10, 12, 14 times income.That's not that off the charts in the US but it's still a hurdle that has to be crossed. And we use what we call the self funding house strategy, which is not a complicated strategy, although some people are intimidated by it.And if you're not familiar with real estate, it can be intimidating. But the point is this.You can buy a house and if it's going to be part of your principal residence, depending on the mortgage and the bank that you're working with, you don't have to put necessarily 25%, 20%, 30% down. You can actually in some cases put as little as 5% down. Now here's the bonus and here's the thing about all of that.When you add a additional dwelling unit, so in other words, you add a suite or a laneway home, depending on the regulations of your region, then you have what's called a rental offset. And that rental offset, let's say you're getting fifteen hundred dollars a month for that suite.Well, the banks will use that calculation in the math. So if you need a $80,000 household income to qualify for a mortgage, many banks will use 100% rental offset for that.So all of a sudden your need of 80,000 annual household income gets bumped up by $18,000 a year. So now all of a sudden you're making $98,000 annual household income. And so you qualify differently for the mortgage. The point is this.There's lots of ways to buy no money down deals, but you have to be sophisticated. You have to be a little more savvy and a little bit more understanding and educated.The point is, yes, you can do it, but there's also a way to own your own home, have that renter in there, use that as a strategy for three to five years.You can then exit the property, keep it, add it to your rental portfolio, go on to build and buy a home that you want to live in on your own, for example. So these are all strategies, but they take education. There is.Everybody looks for a quick fix, Sarah, but the reality of it is you need to take the time. I say take the time it takes. So it takes less time. So in other words, learn, prepare, understand the system and then start to execute.

I hadn't heard of that concept of adding on or even maybe renting a room out or something, but then adding that to your income, so to speak, together.

Yeah.The point here is that when you buy a purpose built piece of property, so in other words, you can buy a home that already has a basement suite in it or a laneway home in it. I mean, depending on what part of the U.S.you are, you don't have basements necessarily, but you do have additional suites and you can have what is called a carriage home or something that you can rent out. The point of it is that some would refer to it as a housing hack, a way to own your own home and have that mortgage helper, if you will.And that is a way to grow wealth. And it comes down to again, getting the education, understanding that it's a system, it's a process.It's all been done thousands, tens of thousands of times before. It's not a new strategy. If you're new to the real estate world, it sounds like holy cow and I don't want to deal with tenants.But even that, Sarah, is a story that people tell themselves.When you learn how to screen tenants properly, when you learn how to understand the municipal landlord tenant rules, really kind of mitigates those risks that so many people feel that they're at the effect of.And generally the horror stories that you hear generally are because people didn't screen tenants well, they took the first tenant that came along because they were afraid they weren't going to get it rented out.And then they learn the hard way that it's better to walk away from a bad tenant and a couple of months rent than it is to put a bad tenant in and get that two months rent that often comes back to haunt people.

Yeah, I don't know if you've heard of the, I think it's on Netflix called Worst Roommate Ever or something like that. And just these horror stories of people like renting out their rooms.

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Unlimited potential so speaking of screening and maybe even how to find a tenant, what tips do you have there?

Well, I think that there's some really qualified property management companies, property management experts. What happens is that people will often go, oh, but that's going to cost me 10% of rent.So if I'm making 50, if I'm getting paid $1500 a month rent, I have give up $150 a month for a property manager. That's true. If you don't want to take the time to learn, to gain the expertise, that will sound like an expense.I look at property management as an investment. I look at it as an investment in my time, my energy.I don't want to have to learn the rules, all the updates that are going on in any given municipality where I might invest in real estate. And I don't want to take the time.So for some it looks like an expense, for others it's a way to step over making common mistakes that rookies make when they're renting out a unit.So you do your diligence, you get references, you get referrals, and you hire a property manager that is an expert, has a system in a process for screening tenants, for managing the property to make sure it's maintained.And the good news is, is that if you're living in the property, let's say you're living in the main house, then you can cut a real great deal with a property manager because you are in fact on site dealing with the day to day activities, the comings and going of your tenant. And so that takes some pressure off the property manager. So you become a kind of collaborator, if you will, or a partner with your property manager.And so they even provide services where we'll screen the tenant, we'll get you a great tenant, you can look after it thereafter, we'll give you the lease, we'll get the lease signed. They often charge just a flat fee of one month's rent to do those kinds of things.So again, even in this conversation, Sarah, you start to see that it just boils down to learning, surrounding yourself with the right people. And it's where long term wealth is created.Yes, we may own some precious metals or some bitcoin or some stocks and bonds, but ultimately real estate is a hard asset. It is a store of value that held over the long term has a absolute track record of gaining appreciation, gaining value.And even if you don't get appreciation over the long term, somebody else is paying you or helping you pay down your mortgage.

Yeah, so let's say your mortgage is 1500 or because that's kind of the number you were talking about, then how much would you recommend that someone charges for rent?

It's not based on your payments. So let's say you buy a house, okay? And whatever the dollar value you put on that house, it's got an additional dwelling unit.Now the fifteen hundred dollars a month, I just put it out there.But ultimately what you charge is the going rate within the market conditions of the city that you're living in, of the neighborhood that you're living in.Certainly some neighborhoods, some rental units command a higher rent, others, depending on what part of the city you live in, what is the neighborhood known for, etc. It's like anything. It's like the value of a property.The exact same property in one neighborhood can be a big difference, 100,000, 200,000 difference in price of another neighborhood. And rents are very similar.When you get into a desirable area and you're renting out a very nice property, and your demographic is a higher paid tech engineer, for example, they want to live in a nice neighborhood, they want to live in a nice home and they will in fact be willing to pay a premium for that rental unit. So is it $1500, is it $2100 or is it 850 or 1250 because you're in a different neighborhood?So ultimately, when you're making these decisions about the piece of real estate that you want to own, then you have to do the math and say, okay, well my mortgage payment is $2,500 a month, but I'm in the neighborhood I want to be and I can get fifteen hundred dollars a month for rent in part or for the carriage home or for that other additional dwelling unit that's on the property, well, that then leaves your mortgage payment going from $2,500 a month to a thousand dollars a month. And of course you got taxes and insurance, those kinds of things, but again, it's fifteen hundred dollars a month less coming out of your pocket.

So if you were to purchase a, a house that you don't live in, so you're renting out the entire house, I, I mean, I assume that you would want to charge over whatever your mortgage payment is.

This is the fundamental mistake people make, okay? What you want to charge, what your mortgage is doesn't matter. Here's the ultimate thing that people make the mistake.When you buy a piece of real estate, it's a mathematical equation. So if you are buying that property, and let's say you're paying $250,000 for it. There's a rule of thumb and there's different ways to look at it.Some would call it the 1% rule. So in other words, you look at that property and at a high level you say, can I get 1% of the purchase price for rent?In this case, that would be $25,000 a year. So a little over. So call it two grand, 20, 50amonth in rent. I need to be able to get that at least to break even on the property.So when you buy that property, you look at it and you create a pro forma. Now you've paid $250,000 for that property. You put, let's say 25% down just for round math, means you're carrying a mortgage.That mortgage amount is, let's say, going to be $2,000 a month.And then you look at the taxes, and then you look at the insurance and you look at maintenance and you say, okay, well, given all of those conditions, can I charge enough rent? Because the market conditions say I can to cover those expenses. And the answer is either yes or no.If the answer is no, then you walk away until you find the deal. Because ultimately that deal has to cash flow. So forget about it.What you think it's worth or what you need to rent it for, need to rent it for has got nothing to do with market conditions. And that's one of the fundamental mistakes people make.

Okay, yeah, that's helpful, that 1%. A lot of people can get a loan for a property and rent it out, but what about when someone starts investing in multiple properties?Because I assume you can really only have one or two outstanding loans. I would think. Would you then need to have cash flow to outright cash, buy other properties to be able to rent them out?

There's a lot of different ways to achieve a goal of multiple properties.And while you, for example, might buy a single family property or perhaps a duplex, when you go to the bank, they look at that particular property and they say, well, how much money are you making? And they look at debt service ratios and they look at what you can afford to carry.To get into that world of multi properties that you own, you have to get out of the single family space. So when you go to buy a house, they look at your ability to pay, your personal ability to pay.So they look at your annual income, they look at your debt service ratios. Do you own a, do you have a car payment, do you have a spouse payment?What do you got going on and they say, okay, well, based on your financial background, this is what we're willing to lend you money for. Now, many people can usually buy two or three properties that way. Mostly then the bank goes, nope, you're out.So generally people seem to run out of the cash they need and the financing they need at about three properties, two or three properties. But when you get into the multifamily space, which is five units or more, the bank looks at that loan differently.They don't look at just your income.As a matter of fact, as important it is as that is, they actually are looking at the property and they're saying, okay, well this property is 5, 10, 20 units, 50 units, whatever it is, will the property carry itself?Now they're more interested in what are the operating costs of that property, what is the annual rent of that property total, and what is the possibility of raising rents, and is there a way to bring rents or operating costs down? So they look at what's called the net operating income, net operating income of that property.And so they then assess the property based on its ability to cover the cost of a mortgage versus your personal paycheck and how much money you take home.

Well, that makes sense. Yeah. Cause I was wondering, how do people do that without a whole bunch of cash? So sure, yeah, thanks for breaking that down.I had no idea about that. Can you tell me a little bit more about the real estate investment network, what you do and how you help?

The Real Estate investment network has been supporting real estate investors to learn how to invest in real estate the right way, following a proven system. Now, the system again has been around 30 years. We've had over 200,000 people go through our different programs.We have a community, what we call of like minded real estate investors. So within our community, people are very collaborative. They want to support each other.And what I mean support is there's no naysayers, there's nobody in there going, you know, you're stupid for real estate. Investing in real estate, don't you know there's a bubble. There's none of those stories, because we understand those stories.We understand that people and being naive of or even ignorant to what real estate is all about, we just have a different understanding. It's like a business owner, a small business owner in some people's eyes, is a big risk taker to that individual. It all makes sense to them.Real estate's no different. So within the real estate investment network, we say, okay, let's take the emotion out of real estate so that we don't make mistakes.Let's look at the data that we can use to understand a given region and a strategy to use when we're investing in real estate. The point of it is, is that real estate is about growing your financial future, your net worth.A couple of mistakes that many people make is they go, okay, I'm going to buy this property. It's going to cash flow $1,000 a month or $500 a month, and I'll just add income and I'll just take that $500 a month.That's just one of the biggest myths out there now is that a future that you can have that 500 bucks a month go into your jeans. Yeah. But in the early on, the first five, seven years, that money just stays in the pot because you're going to need it for maintenance.You're going to need it for when there's a vacancy. You're going to need it for different things that happen.Now, if you're looking at real estate and saying, well, my goal with real estate is to generate active income. I want to leave my job. I don't like my job. And so then you take on active income, which means you're going to perhaps renovate and sell a property.You're going to renovate and refinance, and then you start to use different strategies where you can actually pull active income that you're going to use today. It's part of how you're going to pay your bills today. That's called active income as opposed to future income.So when I started investing in real estate, I was making a good income. I didn't need income.What I needed was to make sure that my financial future was more secure, more certain, and I would even have Perhaps financial freedom 20 years down the road, 25 years down the road. That was my strategy. That was my plan.Along the way, I've had opportunities to generate some active income in terms of doing a fix and flip and doing a renovate. Those kinds of things show up. But that was never my strategy. Business was my strategy. Real estate was my future state.That's a fundamental that people get confused around often. So you have to look at what it is that you're trying to achieve as a real estate investor and then start working backwards from that outcome. Sarah?

Yeah. That's awesome. Well, I really appreciate your time today. I feel like I've learned a lot about the real estate market and financing and all of that.Where is the best place for people to go to learn more about you and the real Estate network.

You can go to raincanada.com so r e I n canada.com and that's our website. You can follow me. P Francie P Francy France. Francie spelled France with a Y. So F R A N C E Y. You follow me on Twitter and on LinkedIn and Instagram.I have all those things. The Everyday Millionaire CA is my podcast. I've had a podcast for over eight years now called the Everyday Millionaire and many follow me there.So lots of places to get a hold of me, lots of places to DM me. I'm very active in what I do and respond to questions and comments and that's what I love to do.For me as a small business owner and as a business, a multiple business owner, I like to engage with people. And at this point in my life, with 40 years of business experience, I bring a lot to the table and love to support. That's part of my purpose.Part of my mission, if you will, is to support people in being their greatest selves, living their best life by design and building businesses, investing in real estate, whatever that might be.

Well, thank you so much for your time today. I really appreciate it.

I hope this has been beneficial for your listeners and thanks for having me on your show.