If you invest in Vancouver or Toronto, you already know that finding cash flow positive properties is tough. And, more than likely, you are currently addicted to the cap gain. But what if there was a way to have your cake and eat it too? Real estate investor and stock/options trader, Cody Yeh, joins Matt & Adam to offer a holistic approach to building a bullet-proof investment portfolio. Learn about BRRRRing in the big city, Cody’s best stock tips, and how to safeguard your portfolio against market conditions. Get out your notepad!
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Please tell us about yourself.
I grew up in Taiwan and moved to Vancouver at 18. I then went to the University of Toronto so I could live in a bigger city with more competition and opportunities. I got involved in stocks in my second year.
After graduation, I worked as a project manager at Honda and bought my first investment property in 2016. I bought another in 2017, two in 2019 and this year, the goal is to buy two apartment buildings 90 minutes outside of Toronto. I teach a stock options course and a lot of my alumni are interested in stocks and real estate investing.
How are stocks related to real estate?
Most real estate investors choose real estate because they think stocks are just gambling. And people who invest in stocks and options think real estate is too much hassle. Because I do both, I can talk about both. It’s hard to find cash flow in big cities like Toronto and Vancouver. A lot of my alumni in real estate are cash flow poor and paper rich. So in order to get that cash flow, they use the stock option strategy.
Let’s dive deeper into how you would use the stock market to generate cash flow.
People in real estate want to get off-market deals. They want property that is under market value, but that’s hard to find when the market is hot. It’s a similar story in the stock market.
Imagine you own your house and your neighbour, John, across the street owns their house and the market value of John’s house is $500,000. John is afraid the market is going to go down 20%. So you tell John, if the market goes down by 20%, you’ll buy his house 1 year from now at $400,000. So even if the value is only $300,000, you’re going to buy it for $400,000. You are insuring his house. The catch? You want $10,000 for the insurance. So John pays just $10,000 to you now to hedge the 20% loss. If at the end of the year, the house value isn’t below $400,000, you both move on. You keep the $10,000 and John keeps his house. You can even offer to insure it again for another term.
Let’s now apply this analogy to Apple stocks. Apple is now $145. Every second, thousands of contracts are happening off-market. If you like Apple for only $135, you can sell it at that price and you get a premium. If at the end of the month, Apple is above $135, you keep the premium and move on. If it’s below, you buy it at $135 but you still have the premium, which reduces the cost of ownership.
How do you become an insurance company in that way?
Anyone can become an insurance company as long as you have certain permissions and have the money to own 100 shares of the stock you’re selling. So if Apple is $145 USD, as long as you have the money to buy 100 shares at $145 USD, you can sell the option contract.
I have a PDF guide on how to get those permissions and I do all of my transactions online for just 30 minutes a day on my phone. Wealthsimple hasn’t gotten into option trading yet but Questrade has and the other banks offer it too. I use Interactive Broker because it’s geared towards more professional traders. I also like their mobile app better than the bank apps. The commission is also much cheaper; on Interactive Broker, the contract commission is $0.50-3.00 whereas the banks charge $15.
What kind of premiums can people expect?
I usually say 1-4%. If the insurance is closer to the current stock price, you get paid more premium. The reason being that there is a higher chance you’ll have to buy more stocks.
What are the risks?
This strategy is bullet-proof if you want to own the stock long term. I don’t pick risky stocks; I’m not trying to gamble. I focus on blue chips – companies that are consistently making money and innovating their products. So I know in the short term there may be choppiness but year after year the company is doing better.
If you don’t want to own those stocks, it can be scary. The stock can go to zero and the company can go bankrupt.
What happened when covid hit?
Apple was down 30%, Microsoft was down 20-30% and I wasn’t sure if my tenants would be paying rent. I always leave 6 months of cash aside for each property, just in case. Thankfully, everything went well. I then was able to move more money into the stock market. I knew this was historically one of the best times to get in. Apple then went up 120%.
Short term, I definitely did get stuck holding the bag. But the prices always come back to the company’s fundamentals. People get afraid because they want to make money and chase the return. But you have to look at things in the long term. Don’t panic. Educate yourself so you can be confident in your choices.
Imagine if you had an appraiser go through your house every single day. It could be worth plus or minus $50,000 depending on the appraiser, the day, etc. And imagine you could swipe right to sell your house instantly. That’s the stock market. That’s why you can’t focus on the short term gains or losses.
How does the stock option strategy relate to real estate investing?
I have alumni from 24-65 years old with different goals and different real estate portfolios. For the younger group, this strategy can help them expedite the saving process for their first down payment. For the older group, this is a great source of income that’s low-stress and high-return on time. It’s more comfortable and less of a headache. Some of the older investors want to liquidate and diversify outside of real estate.
What is your real estate investing strategy?
My first property was a bungalow in Toronto and it cost $526,000. I didn’t have enough for the down payment so I went in with my mom and chipped in $37,000. In 2017, I had more money saved up as I had been working tons of overtime and I bought a single family home.
Now we do the BRRRR strategy to add value. We try to find off-market deals or deals that have been on the market for a very long time. We know our capacity as project managers and get creative with strategies, such as adding a secondary suite to create a cash flow positive property. If there’s ever a market downturn, we can hold onto the property and not be pinched, since we have the cash flow.
Where are you buying?
We have properties in Toronto but to get positive cash flow in Toronto now, you have to convert something into a triplex or fourplex and only in certain pockets. The cap rates are going nuts. I like to buy something within a 90 minute drive of Toronto like Barrie, Hamilton, Belleville, Cambridge, etc. You can find deals there. We might not be able to do a full BRRRR but if we have to leave $10,000-50,000 in there, we’re okay with that. As long as you know your numbers, there’s always ways to make deals happen.
How do you find a deal? How do you monitor markets?
I’m also a real estate agent but I don’t broadcast that. I only help out friends and family. But because I’m on the floor, I see a lot of deals. We need to know the numbers based on our strategy: What is the price we need to buy at? How much money do we have to put in? What’s the ARV (after repair value)? How much money can we pull out? With that kind of confidence, I know what number I can offer. If they say no, I walk away.
My main focus is in Barrie. But I’m seeing similar numbers in Hamilton and other areas within an hour of Toronto. Each city has their own history and structure, so different strategies work in different cities. Barrie is more blue collar; it used to be a GM city.
Let’s talk about cash flow.
We focus on positive cash flow because that protects us from market downturn. That’s why I go out further from the city. I want to be able to scale and protect myself. When the market is going up, I have multiple exit strategies. I can flip it, hold it, sell it to another investor, etc. If the market goes down, we’re able to hold it and not get pinched since we have the cash flow.
Most of my real estate cash flow is left in the bank. I leave six months’ rent in the bank in case the roof goes or the heater goes. If another covid hits, I know the money is there. I leave a large margin of error. That’s why I use the stock option for my own cash flow.
A lot of people will say they have $500-1000 of cash flow but are they really getting that? A lot of it gets eaten by expenses and management. So overall, I’m more reliant on mortgage paydown, appreciation and a little bit of cash flow. When we run the numbers, I only use 3-5%.
Are you doing mostly dividend paying stocks?
Sometimes. Most of the tech companies don’t pay much dividends. Dividend stocks are great because they perform better in the long term if they can keep up their dividend. But faster growing companies are not paying dividends because they want maximum growth. It’s a give and take. So we have a mix in our portfolio. Overall, we know we want to own good companies in the long term. That’s my safety net.
What does a balanced portfolio look like to you?
For a lot of wealthy people, they have a hard number of how much should be in which categories. For your average person, it’s harder to keep track. Everyone is different – they’re more comfortable in stocks or real estate. All I can say is don’t have all your eggs in one basket. The stock market reacts right away whereas real estate lags a bit.
A lot of people don’t even know their net worth. That’s the first question. Once they know that, they have to ask themselves if they’re comfortable with where they are. Do you want another 10% in cash? Do you want to be 50/50 between stocks and real estate?
Where are the opportunities right now?
Warren Buffet said to be greedy when others are fearful and fearful when others are greedy. But that’s easier said than done. Don’t try to time the market. Don’t wait for the dip. As society grows and the economy grows, there will be choppiness in the short term. But if it’s a good company, it will work in the long term. Just take action.
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