Helping Healthcare Scale
Imagine you're friends with multiple CEO's of billion dollar organizations. You can call them anytime you like and ask them all that they've learned about real estate and investing, including some of their biggest mistakes.
That's the mission of this podcast, to teach the insider strategies used by the big guys to everyday healthcare operators in order to get access to the best strategies and real estate at the best prices.
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Helping Healthcare Scale
The Canadian-American Economic Dance: Tariffs, Debt, and Real Estate Implications
The intersection of geopolitics and real estate creates both challenges and opportunities for savvy investors. Canadian investor and real estate coach Terrie Schauer joins us to dissect the potential impact of proposed US-Canada tariffs on real estate investments across North America.
Terrie provides fascinating contrasts between the US and Canadian economies that challenge common stereotypes. While Americans are often portrayed as debt-happy consumers, Canadians actually carry significantly more debt—$1.74 for every dollar earned compared to America's $0.82. This disparity stems largely from Canada's sky-high housing costs, as the country never experienced the 2008 housing market correction that reset US prices.
We dive deep into the critical process of vetting real estate operators when considering passive investments. Terrie emphasizes looking beyond simple return metrics to understand the macroeconomic context of past performance. A 100% IRR during the frothy markets of late 2021 might be less impressive than breaking even on a deal sold during today's challenging interest rate environment. The conversation reveals practical strategies for evaluating potential partners, including speaking with their previous investors and asking pointed questions about deals that didn't perform as expected.
For healthcare professionals balancing demanding careers with wealth-building, Terrie challenges the notion of "passive income" in real estate. While property investments can be "passive-er" than running a practice, truly hands-off returns only come through carefully selected partnerships. We explore the opportunity costs of capital allocation decisions and why emotional reasoning about taxes often leads investors astray.
Whether you're considering your first real estate investment or looking to diversify across borders, this episode provides crucial perspective on navigating economic uncertainty while building wealth through property. Subscribe now for more insights on leveraging real estate to scale your healthcare organization.
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So if somebody said like, yeah, I got 100% plus IRR, but I sold in November of 21 or March of 22. Okay, great, like everybody was printing money back then. But, by the same token, if you said, yeah, we had a 0% IRR, like we just got our investors back, but you sold a multifamily deal in early 24 or late 23 even, it's okay, I get it right. Nobody foresaw the rates getting cranked up this high for this long. And so, like macros, you can give somebody a grain of salt, take their losses with a grain of salt if you know the macro circumstances, and you can also take their wins with a grain of salt if there's a lot of force behind them. The goal of this show is to help healthcare organizations scale by leveraging real estate strategies and interviewing high-level healthcare executives in order to pull out lessons learned along the way. If you'd like a free site selection analysis from our team visit us at wwwreuniversityorg and drop us a line.
Speaker 1:Hello everybody, Welcome back to Helping Healthcare Scale. I'm your host, Austin Hare. Our guest today is Terri Schauer. She's a Canadian investor, real estate coach and author. She's the founder of the Equity Builders Club real estate coaching community, as well as the founder of MRG Property Management. It's very timely to have you on the podcast, Terri. I know there's a lot going on between the US and Canada right now, so let's just dive straight into it. I know you've been researching on this, reading about it, talking about it.
Speaker 2:Give us the lowdown. Absolutely, that's a real straight jumping. So I'll do my best to encapsulate this and I will say there's been like a lot of anger and frustration up here and having a lot of conversations. Everybody's very bent out of shape over not being the 51st state and the tariff menace or the threat that your current president has been wielding against Canada. With the scale of our economies and the degree to which Canadian exports go to the US, that is going to be, if it does come to pass, really quite damaging to the Canadian economy.
Speaker 2:Now, I'm a real estate person and to think through how this ends up affecting real estate investing is like one set of thought processes, and what was really interesting is I actually dropped an episode on my own podcast, the real escape investing podcast, yesterday, because I started researching this and I wanted to know, okay, like, how do tariffs, like typically affect real estate? And so, to project, what could me and my partners expect to have happened to us if this does come to pass? And so what happens is you end up in this trade war environment and so obviously the US puts tariffs, then our government of what there's left of it because, like, we really basically don't have a prime minister right now then came back with a package of retaliatory tariffs that are supposed to be then placed on various things that are coming from the US, statutory tariffs that are supposed to be then placed on various things that are coming from the US. And so, generally speaking, the effect of tariffs on real estate is to raise construction costs and make it more difficult if you're doing development and that sort of thing or if you're just like renovating units. Obviously, in COVID we saw the huge inflation around that, but if all of these free trade deals begin to unravel, I think the Canadian consumer, like the US consumer, is going to see prices go up, and so, from that perspective, it affects supply, because eventually it snarls the supply of new constructions that would come online Now, I think, realistically, if there were to be tariffs put on Canadian imports in the US like that.
Speaker 2:Economic slowdown is going to have a big effect on our economy, and so there's one thing to say that the cost of construction materials go up, but if we're losing two or three percentage points on our GDP, that has consequences all over the place, because if people are losing their jobs when we have in multifamily, we have higher vacancy rates, higher default rates. Actually, I researched the default rates in my market at the moment and I was surprised to find out that currently we have a 4.5% rental default rate, which seems to me to be really quite high. But anyways, if that goes up then obviously it makes life more difficult for investors.
Speaker 1:I heard one theory, I guess, that since your Congress or government was recessed until March and so by implementing these tariffs right now, they have to enact an emergency hearing and then they would have to either bring back Trudeau or elect somebody else on the spot. So the theory was this was done as a way to force somebody else in office that's not Trudeau. Is that accurate? Have you heard about that?
Speaker 2:So that's. I think we can put on our tinfoil hats for a minute. I do think that's something that people are talking about, and would it be crazy for something like that to be in the works? I don't think so. The Trudeau government is so unpopular right now, and so Trudeau actually, like he has stepped down, but he is still acting prime minister. Right now.
Speaker 2:The Liberal Party is running a leadership race, and so, like the person who then replaces him will stand in an election, but, like right now, he is still prime minister, but he's a bit like imagine Joe Biden at the end of his term Like he's still technically the one who sits in the chair, but nobody's really listening to him anymore. So you know, that's not the strongest position. And then is this a way to force the election to happen faster and then potentially to make it look like Trump has a better relationship with our conservative candidate versus the liberal one? Maybe, but for the moment, I just actually looked into what the polling is doing, and because the liberals have come back with such a bluster around what their retaliation is going to be, it's actually helped them in the projected polls, so wouldn't that be?
Speaker 1:the irony, but it's gone too far the other way.
Speaker 2:It's gone too far and I think a lot of the Canadian ego has been poked a little bit with this whole thing.
Speaker 1:Yeah, okay, there's a lot of things to talk about. I have not been paying too much attention to this at all personally, but I know you were saying that high level, the Canadian economy. You never had the corrective real estate prices and, as a result, the average percentage of debt that the consumer, the citizen, carries is drastically different. So I don't know what do you think of this? Some more second and third order consequences if this were to go through, and then maybe a follow up. This is a lot, but like a follow up question would be like what are the chances of it actually going through the way that it's proposed?
Speaker 2:I think so. Let's leave that to the end of the answer. But I think when I started putting my nose into that, I just initially wanted to understand what are tariffs. If they do come to pass, what's going to be the effect for me? Selfishly. But then what I actually discovered once I started digging is how in different positions our two national economies are. And just to paint you a little picture, because I think that this compare and contrast really allows us to understand, like the fish in the water right, the fish is not aware of the water, and I think when we exist in our own national contexts, we don't realize how different places are run differently, and that means that the actions that politicians take then make sense. So this is going to be a bit of a long-winded answer, but it's worth it in terms of the level of understanding.
Speaker 2:So the Canadian consumer right now is indebted. For every dollar that we earn, we carry a dollar and 74 cents of debt. Okay, so that's a crazy amount of consumer debt. By contrast, the American consumer for every dollar that an American earns, you guys are indebted only 82 cents, so you are basically carrying. The American consumer is carrying half the debt the Canadian one is Now. It's funny because we have this stereotype in Canada of the Americans as being like the credit card happy people who are charging everything and living on debt. In a sense, that's actually not false, because it's. What is that debt going towards? And the Canadian consumer carries all that debt because what our cost of housing is and so like it's all mortgage debt.
Speaker 2:That is the real difference. And the difference is that our assets whether you're talking typically about what an average homeowner takes on as far as debt goes we in Canada did not have a readjustment in 2008 because we only have five banks and banking regulation is crazy, and so that means we don't have this whole subprime situation. But it also means that our prices weren't adjusted down, and what they've actually done is they've extended those financing terms out further, and a typical homeowner can now get a 35-year term on a mortgage. So it means that by extending the debt, you're able to increase the prices of homes more, because people are indebting themselves out to forever. So then you begin to understand.
Speaker 2:Justin Trudeau enacted this foreign buyers ban and so, in order to control, canada's market is seen internationally as a safe haven for foreign capital. Our real estate has performed very well and, like Justin Trudeau, enacted a foreign buyers ban. So now, for example, you, austin, couldn't purchase a single family property in Canada at this time. That ban has been extended up until 2027. But that a way to try to control the capital inflows into our real estate market.
Speaker 2:In this Canadian reaction to be angry about the conversation of tariffs, like if you hold up the mirror for a second, you will actually see our government debt per capita is about half of yours. So the US has a huge government debt problem. Our budget I can't say, but we're definitely not in the same position as the US, and so we don't need to cut government spending, but we do need to address our real estate prices, and so that was what our government did by enacting this foreign buyers ban. So in a sense they're controlling capital flows coming in. But then the Canadians are all angry because Trump is trying to address his government debt problem by increasing tax revenues.
Speaker 1:Basically, so yeah, I guess it's an interesting way to frame it. It brings me to the question. It seems like it will make it harder to invest in Canadian real estate. So the only way to get truly passive income is you can invest in an ETF like the S&P, or you can invest as an LP or, in your case in Canada, joint venture operator or joint venture like non-managing member, I guess is the correct terminology. But then the question is who do you trust? Maybe give some insights on how to go about vetting different operators?
Speaker 2:Yeah, A really awesome question Because, like in my real estate coaching program, often I have people come in and they're like yeah, I want to invest, but I'm not sure. Do I want to be on the passive side? Do I want to be on the operating side? And then, if I do decide to go the passive route, how do I make sure that I'm vetting an operator who is honest and who knows what they're doing? And I think that's super important. Among my colleagues, I also have a ton of conversations with passive investors who've gotten involved with the wrong people. And then the cap calls keep coming, if not the lawsuits, if certain things are done bad or unethical ways. So how to go about vetting the operator? I think a past track record is super important.
Speaker 1:Yeah.
Speaker 2:Looking at what kind of projects they've done, the size of projects that they've done, how long have they been working for, what is their professional experience? Because, I'll tell you, my initial hat in real estate investing was actually as a property manager. So before I started taking on outside partnerships, I had a property management company. I managed over 150 units not a huge portfolio, big enough to really understand in my local market some of those property management challenges and difficulties that face us. And so when I started taking on outside partners, I had that 10 years of experience of managing but also of doing the administrative aspect of it.
Speaker 2:And where I hear people have bad experiences is like sometimes there are, like, maybe, construction people who have a construction background or who have some kind of other, maybe less business related, background that then start operating deals and then things go sideways, understanding what is the background of your operator, what does their track record look like, and then talk to some of their previous partners. You know and that's what I do at this point now like my vetting process for people that I take on is really extensive, but one of the things that I tell people is go and talk to my old partners and see what type of returns.
Speaker 2:What was it like working with me? And even if there's things that are perhaps less pleasant about my style, I would rather the person knows that before we get into a deal together, because the reality is then things can go south and you want to know who you're in the boat with.
Speaker 1:Yeah, and it's like everybody's got to start somewhere, but it doesn't have to be with you as the investor. I think, generally when you start with friends and family for a reason, because there's trust there If you're getting started as an operator and you're starting to raise capital, there's no way to tell if you're going to do what you say you're going to do. Right, it'd be hard for an investor to come in and look at an operator with no track record and just bet on this horse. They start out with their friends and family because they can vet to their character, and really what you're doing when you're investing your money with somebody is, yes, you have a very stable asset it's real estate but you have to trust them enough to be able to operate this as a business. Still, when things go well or not, when you have employees, you have contractors, you have tenants, which are clients, you might have marketing costs and there's a whole plethora of things depending on which specific asset class you're in. We do healthcare backed real estate and our clients are the tenants, and then we also do short-term rentals and wedding venues and so, like, our clients are guests that want to come stay overnight, and it couldn't be more different. One of them is signing a lease for 10 years. One of them is there for a night, and so, as a result, the workload will vary drastically, too between those two asset classes. But having that track record is going to be like you know you're going to be able to look and see quickly do I want to get in bed with this person? Because it could be you're gonna be along for the ride, and you just really have to trust that they've been doing this long enough to know how to weigh the ups and the downs.
Speaker 1:I think another thing to think about too like to get more granular on the track record.
Speaker 1:I like getting dates, because we still invest in some deals or we look to partner with people, and so if I see a track record, that's great, but I want to know what is the date, because there's a lot of macro circumstances that affect your returns a lot, so it swings both ways.
Speaker 1:So if somebody said like, yeah, I got 100% plus IRR, but I sold in November of 21 or March of 22. Okay, great, everybody was printing money back then. But by the same token, if you said, yeah, we had a 0% IRR, we just got our investors back, but you sold a multifamily deal in early 24 or late 23 even. It's okay, I get it. Nobody foresaw the rates getting cranked up this high for this long, and so you can give somebody a grain of salt, take their losses with a grain of salt if you know the macro circumstances, and you can also take their wins with a grain of salt if there's a lot of like force behind them. So I think knowing all those variables are super important when it comes to deciding who to put your money with.
Speaker 2:Yeah, no, I think you're absolutely right, and I think it's like there's times when you'd have to be an idiot not to make money, and then there's times where the very intelligent people lose money, and so then to understand, what does that look like and has that person gone through a downturn and what did they do? Also this is another good question to ask is on deals that have gone less well. Tell me about a deal that didn't go well when things didn't work out how you thought they would, and so that's also interesting. And maybe then you talk to the people who invested in that deal to see is this actually accurate and how did the person really deal with that? And to your point.
Speaker 2:So my real estate coaching business is that I typically take people from that mom and pop level to the point at which they can become a competent operators, and the typical trajectory is for them to run a deal or two actually probably more like two or three deals, either with their own money or with love money, so friends and family and then, once they have that track record, then that becomes the portfolio or the results on which you can begin to take on outside people, and then it's typically like sort of concentric right like it's. Unless you have some kind of crazy business background, it's very rare that you're going to be going and raising capital from, like, some rich people or some very family office in another city Right, like it starts close and then it gets bigger as you yourself grow.
Speaker 1:Yeah, On that note. What kind of deals are you guys doing?
Speaker 2:Yeah. So I mean my business model is it's quite local, so I invest pretty much only in Quebec, which is the French speaking part of Canada. My sweet spot is, let's say, six to 12 unit buildings, typically D class. That then with my property management skills I'm able to bring up to a C and the returns on that are, like, really quite fantastic. Let's say, if I'm buying a property around a million dollars Canadian, I'm looking to up the value of that by, let's say, 300k within a two-year period.
Speaker 2:So then it depends on the financing and like how much money you're putting down and whatever.
Speaker 1:How much can you put down in Canada? In the US so variable SBA you can put 10% down if you're occupying it for your business. If you're getting a DSCR loan, you might have to put 25 or even 35% down with where interest rates are. What is it like for you guys on this type of project?
Speaker 2:Yeah, it's similar If you have a business that is purchasing the asset, you can put only 10% down. But now the business has to have a track record obviously, and if you're just doing, multifamily, businesses are not going to be occupying that and we need to put 25% down. But then there's like all kinds of twists with. You do need that 25% capital initially to do the deal, but then you can refi very quickly either out of a private money situation into one of our government backed mortgages. So, even though it's called CMHC, but it's like a Fannie Mae, freddie Mac equivalent that if you can optimize the value of the building quickly, you can almost recover all of that down payment money within a year.
Speaker 1:And on the exit side, are you guys exiting or holding?
Speaker 2:It really depends on the asset. Like I just exited the most problematic property, actually about 14 days ago, and was very happy to get out of that, if the asset makes sense and the partners want to continue on for another term. So the other thing about Canadian mortgages is we renegotiate them every three to five years. You guys sign on for whatever 25, 30 year mortgage and it's locked at that rate. For us, the mortgage renegotiates every three to five years. New interest rate, new everything.
Speaker 2:We'll refi at that time, or it's an excuse to sell.
Speaker 1:We should distinguish Commercial, you got to refinance every five years. Also in the US, it's only residential that you get locked in for 30 years.
Speaker 2:We renegotiate everything every three to five years, and so it depends on the quality of the asset. If there's a great building and there's more value to go grab, why not continue to hold it?
Speaker 1:You can refi anyway, pull a certain amount of the capital out and then use that to start something else. So it really depends on the quality of the-. We were always traditionally buy and hold guys because we didn't want to pay the taxes, because you got to pay capital gains. But we've gotten a lot more nuanced with our approach since then. Somebody offers you above market or higher than you underwrote the deal for, like you find out that you can sell for a higher price than you originally underwrote at. You'd probably take that opportunity. And then at the same time do you have another opportunity where you could roll this capital into for a 1031, which that's in the US? 1031 exchanges mean you don't pay capital gains on the upside if you buy another property within six months, or replacement property is technically what it's called. So it's like with those two because the thought is, when you're selling like you're flipping out of it, it looks really good on paper because your IRR is really high.
Speaker 1:Investors use IRR, the primary metric, to track deals, but it just doesn't account for the capital gains tax. We always kind of had a problem with that. Depending on the opportunity, there's a lot of times never say never, I guess is our approach now, or it was what we say. So it's like there's always situations. So in a great ideal world, you'd buy at a great price, interest rates would not be so high, you'd refinance, you'd get a lot of your money back, you'd still continue to hold and have good cash flows, but with interest rates being higher, there's less cash flow month to month, and so you've got to either refinance or sell to get a really significant capital event and just change the numbers a little bit. But long story short, we still buy and hold and we do flip, and it really just depends on the situation. I think just what you guys do as well.
Speaker 2:Yeah, but I think I also just do want to like bounce off of what you said about capital gains tax and I think that like sometimes people like have again this ego reaction of not wanting to pay taxes. And look, Canada is like, imagine California, imagine like way left of California tax. It's insane. But like at a certain point, like the tax is just a cost of doing business and I think people sometimes like want to bend themselves in four to avoid paying like a dollar more in tax that they need to, but ultimately they don't make important business decisions that mathematically would be better than them, because they don't want to kick. For us it's a 25% capital gains tax. We don't have a 1031. We don't have a possibility to roll anything into anything you sell, you're paying capital gains, there's nothing. And they've upped the inclusion rate now.
Speaker 1:So, yeah, there's a lot of moving parts and everything. It's like 3D chess there's second and third order layers of strategy and then also consequences. So it sounds like from the service level, high taxes, tariffs are going to increase the cost of real estate, which would bring down the returns in Canada. My question is like why would somebody invest in Canadian real estate right now?
Speaker 2:So, like you say, there's a lot of moving parts, right, and so one of the things is that, just with the conversation of tariffs, the Bank of Canada dropped rates again.
Speaker 1:Okay, so our interest rate is what are rates right now?
Speaker 2:So I think the current bank rate is just under four.
Speaker 1:I want to say you can take on financing at 399 right now for your projects. Yeah, we're at like seven and a half to eight and a half in the us right now.
Speaker 2:It's brutal and then the exchange rate because, like the canadian dollar, just keeps going down and down. That means that to pick up an asset here when I travel the states, I'm like, yeah, just to throw me the American. That's like the value of a Canadian dollar. It's exaggerated how far your dollar goes right now to pick up discounted Canadian assets. If I were to ask you, is 2009 a good time to invest in the US Depends? You just went bankrupt and lost everything. Probably you don't have the capital to do that. But if you're picking up discounted properties in 2009, is it a good time to buy? Yeah, I would say so.
Speaker 1:Yeah, that makes sense, and I think there's always a lot of discussion around real estate being passive income, right, like? We hear that a lot. I think the gurus have told us that, but one thing that we talk about in the show is that, first of all, it's not passive income. Look, it's not passive income. Look, it's passive-er. Everything operates on a spectrum. When it comes to buying a single family house that you can rent out on a 12 month lease, yeah, that's more passive than running a dental clinic. But at the same time, there is stuff you have to do, and the only real way to get passive income is by working with a group that you trust to invest money alongside with, and then they're the ones doing the actual work, and then, of course, like, there's going to be a lot more value add in that sense. Okay, terry, so is there anything that you want to talk about, maybe, that we didn't get a chance to talk about before we come to the end of our time here?
Speaker 2:Yeah, to really speak to your audience who, from what I understand, are people who are maybe thinking about investing with their business as a vehicle, you know, trying to cut on their rent costs or eyeing those maybe passive returns, I would say be as scientific as you can about really what the numbers are going to be. And we just mentioned that tax piece of like. Sometimes the right answer is to sell the asset and pay the tax. Sometimes it's to keep renting and maybe invest somewhere else. Or sometimes it's to passive invest, get a lower return but not have all of that operating headache if that's not your main gig. And I think people really need to evaluate the opportunity costs and be as scientific as possible and not go with this like sort of emotional thing of, oh I don't want to pay taxes or oh I don't want to pay rent. Take out your calculator and make the best business decision and that's ultimately the best practice of how to make those decisions, as opposed to doing some sort of emotion-based reasoning when it comes to those issues.
Speaker 1:Yeah, when it comes to taxes, that's a good point. Do you never want to pay taxes at all? Of course, like that would be great to not have to. But the question is okay, after I account for taxes, is the IRR so good that I can still afford to pay them and still be better off than having held it? And so that's like the business decision that you have to make. And then your point about buying your own real estate.
Speaker 1:The question we always ask is compared to what? Okay, you want to own your own house? Great, like we were talking offline. It's probably a good investment, but not guaranteed. Where do you live? The question is what could you do with that down payment? And the same thing with the business. You want to own your real estate for your business? Okay, it could be a good investment, absolutely, but it takes a lot of capital on a down payment. So what could you do with that capital down payment? And what would that IRR be, or your ROI, if you didn't buy your real estate, if you just continued to lease? Would it be more or less than if you bought it? You got to do some work to figure that out, but it's not always cut and dry.
Speaker 2:Yeah, the opportunity cost of those decisions, because if you're using that down payment to house your business versus using that down payment to maybe invest in a market that is on a more upward trajectory, that's the question that you need to ask yourself, and so it's always an opportunity cost question.
Speaker 1:Absolutely Cool man. This has been really good. I love hearing about a Canadian's perspective on all this craziness that's going on in the news. So people want to reach out and learn more about what you're doing. What's a good resource for that?
Speaker 2:Yeah, so absolutely, my social media of choice is probably LinkedIn, but you can find me at Terry, instagram, linkedin, facebook, whatever you want. I do also have my website.
Speaker 1:Can you spell shower for everybody?
Speaker 2:listening book whatever you want. I do also have my website. Can you spell shower for everybody listening? So it's Terry T-E-R-R-I-E, shower S-C-H-A-U-E-R, and TerryShowercom is my website. So if you wanted to check out either my podcast or my book, you could find it there.
Speaker 1:Awesome Thanks so much. Thank you. If you need help finding the perfect location for your practice or you're ready to invest in commercial real estate, email us podcast at leadersreecom R-E as in realestatecom, or go to leadersreecom and fill out our form. See you next time.