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episode # 294

Where the Smart Money’s Buying with Justin Smith

Past Guest and Fan Favorite™ Justin Smith last joined us on the show in 2018 and it’s safe to say a lot has changed since then. The President of Hawkeye Wealth sits down with Adam & Matt to survey the post-Covid investment landscape & his prognosis may surprise you. Where should you buy when most asset classes look frothy? What real estate makes sense in Vancouver currently? And how can you make big real estate moves without taking on more mortgage debt? This is a bird’s eye view on some of North America’s best investments. Grab a notebook!

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Episode Summary


Please tell us about yourself.

I’ve been in the Lower Mainland for over 10 years having grown up in Northern BC. I did my undergrad at UBCO, lived in Quebec for a couple of years and then moved here to get my MBA. I got into real estate and haven’t looked back since. 

What were you doing in Quebec?

Volunteer service. I did two years of full-time volunteer service after university. I was working with the Spanish community so I learned Spanish in Quebec. 

Why real estate?

I got into it sideways. After I did my MBA at Simon Fraser, I found the job market quite soft. It was a challenging time and I found myself with a six month gap on my resume. So I applied for a volunteer position in marketing and received an email that I had not been selected to work for free. That was a real low point. My landlord at the time told me he was going to a real estate conference. So I went with him and I was blown away. There were 700 people in the room and I had no idea this world existed. It really opened my eyes. I liked the energy! 

I handed David Steele a resume, we got coffee, and a few weeks later I got into the business. I started selling real estate for Western Canadian Properties Group. When I first started working for Dave, it wasn’t going that well. It was 100% commission-based and I wasn’t making much money. My wife told me I had to get a job but I didn’t want to go backwards. So I promised her I would make $10,000 in commissions that month and I did it: I made $10,035. So the joke is I was $35 away from not being here.

Once my confidence grew, I was able to sell 14 units in the next project. It was a great time of growth. 

How did you go from selling homes to founding Hawkeye Wealth?

In 2014/2015, things were hopping up in Northern BC and that’s the area I worked in. At the same time, I was getting involved in raising capital for multi-family projects in Phoenix, Arizona. As 2015 rolled on, the resource market was taking a breath but Phoenix was on fire. So it made sense for me to spend more time there. Things went well and I did a lot of deals with our investors in that area. 

In 2017, I realized I would need to get registered to continue raising capital. So I could join someone’s exempt market dealership, like a brokerage, or start my own. It’s much easier to join someone else’s because it takes a while to start your own and you get audited every year. But I did decide to start my own so I could have control over the product; I didn’t want anyone to tell me what I could offer investors. I also wanted control over the client experience. I wanted our clients to love doing business with us. So I started the process in 2017 and by May 2018 I got the notification that we were ready to go.

What does Hawkeye Wealth do?

We help people get involved in private equity real estate and debt deals. We help clients identify strategies that will perform in the long term. We look at what cities and what asset classes we want to go after. We’re trying to find opportunities and things that won’t change in the next 10 years. It’s easier to create a strategy around something that won’t change. 

We then identify the teams that can best operate those strategies. This is the most important decision we can make as our brand and reputation are on the line. 

Lastly, we vet the deals those teams put together. We do our due diligence and work for the client. We want to make sure all of the assumptions make sense. 

How does the client process work?

We don’t manage client funds directly. Our job is to find the deals. Once we’ve found them, we ensure they make sense for the client. We also have to ensure clients are eligible to invest, not just that the deals are suitable. Many deals require clients to be accredited investors. There are three main ways to qualify: 1) you have over $200,000/year in income for the previous two years and expect to make it this year (or $300,000/year with your spouse), 2) you have over $1 million through the net financial test, 3) your total net worth is over $5 million.     

If the client is eligible and the deal is suitable, the client would then write a cheque to the issuer/operator of the deal. We are the point of contact.

How does Hawkeye Wealth make money?

We want the client to pay no more to purchase the deal through Hawkeye than they would if they went directly to the issuer/operator. So far we’ve been able to do that in the vast majority of cases. Generally we’re paid by the issuer for raising the capital. Our value proposition is that we’re independent and a one-stop shop for all types of deals. 

It’s important to me to be able to afford to say no to a deal. So I do keep a lot in cash so we can afford to say no.

Is it hard to find deals right now?

It is hard. In March 2020 we had no idea what was going on. Things were looking up by the summer and then in the fall, the market started booming. It was a weird year! The government got to work printing more money. People believe inflation is coming and they want hard assets, like real estate. 

We’re primarily involved in multi-family and industrial. And those two asset classes got a lot of the money that would usually go into office or retail. So that has pushed up prices.

We saw one multi-family deal in February 2020 that was under contract for $120,000/unit. They decided to back out of the deal, which cost a bit of money. A year and a half later, the same deal comes back at $160,000/unit. 

I still think real estate is a great place to be. I think the government is going to keep printing money and that money is going to keep finding its way into real estate. But I don’t want to go all in. The world is weird so you need to  diversify and be prepared for the unexpected. One thing we’re doing to diversify is getting more involved in the debt side, such as mortgage funds. 

On the debt side: 

Equity and debt are completely different beasts. Let’s say you buy a house for $100,000 with a down payment of $40,000. You sell at $80,000, losing a bit of money. So you’ve lost $20,000 which is 50% of the $40,000 you put down. The person who leant the $60,000 for the deal has a very different experience. They’ve lost no money and earned interest along the way.  

So my view is that we need to play offense and defense at the same time. On the defense side, we’ve been raising capital for mortgage funds, particularly low loan to value ratio mortgages. This is a good way to keep your head above inflation. 

You can get returns in the mid to high teens if you’re really aggressive. We prefer to make our money owning real estate so we’re in less aggressive debt financing with 6-8% return. 

Are there any other areas Hawkeye is looking at? Can you tell us more about the asset classes and areas you work in? 

We like multi-family and industrial. The industrial deals don’t come around as often anymore. But I really like industrial. I believe the rise of ecommerce is going to support that. Vancouver is a movie production hub and those productions need industrial space. Vancouver has one of the lowest vacancy rates for industrial space in North America. We’re running out of land and it’s hard to densify with industrial. It’s difficult to build multi-story industrial in North America.

In the US, it’s about value-add multi-family. Big apartment buildings are priced similarly to businesses – the one that produces more income is worth more. So you want to find a building that is under-operated and add value through operations/renovations/etc. The US is more landlord-friendly, especially compared to BC and Ontario. In BC we prefer multi-family in the development space. 

How do you factor in climate change in terms of risk mitigation?

One of the best and worst things I ever did was subscribe to The Economist. With Phoenix, I read an article about how they divided up the Colorado River and how long the water would last. It’s important stuff. We go through a due diligence checklist on every deal we do and a part of that is climate and natural disaster. It’s a risk but it can also be an opportunity. I just read another article in The Economist saying that lucrative crops can now be grown here because of the changing climate. Obviously I’d rather the wave of opportunity not exist but the opportunities may be there.  

I look at probabilities. For example, you can almost count on forest fires in the Okanagan every summer. But Albertans flock to Kelowna every summer. So will that change? How many smoky summers before they find a new place? If you’re an investor and not calculating that into your risk, you’re not doing your due diligence. 

Let’s talk about areas you like. Are there any areas in BC you’re excited about?

On the development side we’re mainly in the Lower Mainland. Most of our projects are in the Fraser Valley. We do have one deal right now in Kamloops and the numbers are quite good. It’s not the place for me but numbers don’t lie. Industrial we like in a lot of markets but residential we’re mostly in the Lower Mainland and a bit on the island. We like major centres. 

I prefer to stay out of the resource market. I got started in Northeast BC, and I still own properties there. And while I think that market might make a comeback it would have been a lot less stressful and more profitable if I had bought in Vancouver. Because of that experience, desirability is a big part of our investment criteria. People have to work but with more jobs going digital, people can work from anywhere. So where do they want to live? That’s something all investors should consider. 

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