Have you avoided investing in real estate because it seems too costly and complicated? My guest this week explains how you can own real estate in Canada’s biggest cities for as little as $2,500. Khushboo Jha is the CEO of Buy Properly, a platform for fractional investing in real estate that makes it possible for regular folks to be real estate owners through fractional ownership of properties. In this episode, Khushboo explains exactly how fractional real estate investing works and who should consider adding it to their portfolio.

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Do you prefer to invest in companies that are socially responsible? If so, our sponsor Wealthsimple will help you build a portfolio that focuses on low carbon, clean tech, human rights and the environment. To get started with socially responsible investing, head over to maplemoney.com/wealthsimple today. Now, let’s chat with Khushboo…

Tom: Hi Khushboo. Welcome to The Maple Money Show.

Khushboo: Thank you, Tom. Thanks for having me.

Tom: I found you online. I think it might have been Instagram but I don’t recall. I thought this was an interesting new business, an interesting new way to invest. I wanted to have you on so we could walk through this because it is new. It’s new to Canada and it’s new to me. The idea is fractional real estate. I guess the big question is, what is fractional real estate?

Khushboo: Fraction real estate is about owning a slice of a property. As you can imagine, in Toronto, Vancouver—any large city, real estate is really out of reach for everyone— millennials, GenZ’s, young professionals. You just can’t make it happen because the down payment (in Toronto) is $500,000. So if you’re talking about a down payment, you’re talking about more than $100,000 for a one-bedroom condo. Which means that it is out of reach for a lot of people. You’re constantly saving and chasing but never getting there. Real estate investment allows you to add real estate to your investment portfolio at very, very low, minimal capital. For us, we are doing it at $2,500 for starting. Let’s say it’s a $500,000 condo. You would basically get a proportionate share. And if you invested $2,500, it’s $2,500 divided by 500. So you might effectively own a window. We rent these out. You would get rental income from the property in proportion to your investment. And at the exit (in five years) you will get the share of the exit price. We manage all of the operational hassles. What fractional investment has done is allow somebody with $2,500, $5,000, $10,000 in savings to become a landlord effectively versus having to save $200,000.

Tom: I have a lot of questions based off of that. First of all, when I think of traditional real estate investing, I’ve had some great episodes in the past where people have broken down how they can hire out management and things like that to make it work. But yeah, the minimum down payment is going to be an issue for a lot of people. Even if you had $50,000 or $100,000 to invest, through something like this you could invest in different properties and spread it out a little knowing that management is covered. I kind of get the main idea. It beats going the regular route of being an actual landlord.

Khushboo: Yes, all of what you said is true. If you had $50,000 you could actually split it into two or three condos. You could put part of it in Toronto, part of it in Calgary and part of it in Montreal. That way you’re not risking it all in Toronto not knowing whether the market will do well. Associated with the whole process of owning your own real estate is also the hassle of it. You have to find a town, deal with lawyers. First you have to find an agent, identify the property. Then you have to do all the paper work, all the legal, then find a tenant. It’s full of hassles. It’s not easy money. It’s not passive investing. What we’re saying is we’re making it convenient. Not only are we making it accessible, which is making it available to everyone irrespective of how much you’ve saved up, but also making it easy to do. It’s not a burden on you. We are taking that on. You come in like you would go to Amazon. You’d click on the property and say, “Okay, I’m putting in $2,500,” and that’s it, you’re done. You can track it on your dashboard and just watch the money grow.

Tom: I love the idea that you have a dashboard. You could do something like this and have it in an old school way where maybe someone calls in to make their investment. But the idea that there’s this dashboard where they can track everything really reminds me a lot of a service that I’ve been part of (and currently am still) called, Lending Loop. They allow you to invest in businesses for small fractions. And again, you can dip your toe in all these different businesses and everything. It sounds like you’re going down a similar path. I really like the idea that you can see a dashboard, see your investments, make a new investment and just kind of keep on top of it all without actually having to do a whole lot. It’s all just there ready to go. The next thing I wanted to break down is how the numbers work. I saw on the site there’s rental yield. Can you tell us what that is and how that affects the person that’s investing? What are they getting from rental yield and what makes that up?

Khushboo: In any real estate, whether you own a million-dollar property or own a $10,000 share of one, you would have two companies. One is the rental company. If you rented it out, there’s rental income every month. And these are not high on debt properties. They are cash flow positive. Every month, after costs for maintenance and all that stuff, there is net rent generated which is distributed to the investors on a quarterly basis. What is important is there may be months where there are more expenses and some with less expenses so it evens out. Once a quarter you would get, money in your bank account of the net rental the property generated. Of course, will have the total which is based on not just the rental but also the price appreciation. If you were in Canada, you would probably see price appreciation of some sort. And if you’re in Toronto, Vancouver or Montreal, it’s probably quite a bit. It’s at the end of five years when you exit the property that you would see that appreciation. As an investor, you would not only get monthly dividends, you’d also get the total appreciation.

Tom: Over time or is that at the end of the five years?

Khushboo: At the end of five years because it’s not like we’re generating fake returns when the property exits. Whatever the market price is, you will be part of that share.

Tom: So you actually sell the property in five years? That is what you mean by exit?

Khushboo: Yes and no. We have a lot of analysis to help us determine whether the property is going to perform above, below or in-line with the market over the next five to 10 years. So, at the end of five years we can make a decision to either exit the property completely if it doesn’t have as much growth potential in the coming five years. Or if there is potential, we still want to give the existing investors a way to get out and liquidate so we just recirculate to new investors who want to get in on that time.

Tom: Okay, if you’re a current investor and you’re five years coming up, is it an appraisal that sets that value?

Khushboo: Yes. Once every six months we run that appraisal because we also want to be on top of it. Every six months we would evaluate and do the estimation again. We have some help doing that now. Last year it was just us doing that. But now we have the appraisal models so every six months we would run that assessment to know how it’s trending. And we share that with our investors. The latest assessment shows how your property is doing in the market. The reason we do it every six months is because real estate prices in any shorter term wouldn’t be a fair assessment because they’re would be based on what happened yesterday and not the true value, as such. That’s why we do it every six months. We’re actually also building a secondary marketplace with allows you to exit before five years. You can actually sell it to another investor out there, just like you trade shares in the market. That assessment helps guide investors, because what we don’t want is for them to get an unfair price in the market either. That gives them some guardrails on how it’s trending.

Tom: I like the five-year term on this. That way you don’t feel locked in for 25 years, 30 years of regular real estate investment. Granted, with regular real estate, you could sell but there are a lot of complications to that too. If someone wanted to go longer than five years, what’s the next step then? Do they have to re-choose that thing, or is there a way to just flip it over into another five years?

Khushboo: They can kind of reinvest that in the next lot and adjust their investments accordingly just like the mutual fund industry would do. If you have mutual funds with a certain time and you want to extend, your value is adjusted so you don’t have to do anything additional.

Tom: You mentioned the money every month would end up in their bank account, I believe. So you guys don’t just hold the money? It actually deposits to the account of the person investing.

Khushboo: Yes. We don’t hold the money. We only hold it until we do the distribution. And every quarter it goes to the customers.

Tom: Okay, I just wanted to check because I could see it might be beneficial if you did hold the money. Maybe they’d reinvest it, build up that $2,500 and put it into a new property. But I guess they can still do that from their account anyways.

Khushboo: That’s an interesting concept you bring out, actually. There is a drip scheme or dividend dream investment. We don’t have that yet, but we are planning to launch something like that to allow people to not withdraw the money but instead put it back in so they can keep it growing rather than just take the cash out every quarter. A lot of our customers have actually asked for that because they don’t want to take it out every quarter. They would rather let it grow.

Tom: Yeah, sometimes that’s nice. Going back to the Lending Loop, for example, one of the things they do is keep it in—you can reinvest it. You can also do it automatically. In your case, giving people the option to automatically invest in the next property could be an interesting thing. Granted, this is $2,500 and not just $25 so maybe people want to take that extra look and actually pick the property out. But the more hands off it could be, I could see some people preferring that.

Khushboo: Yes. So for that, later this year we’re actually launching something called, E-warrant. It would still require confirmation from you but what we would tell you is if there’s a property out there that’s taking investments right now and meets your criteria. You could set up criteria upfront saying you don’t want anything in Toronto because Toronto is too expensive so you only want non-Toronto areas. And this is the minimum rental yield, I want. These are the minimum things I want. If it meets your criteria you’ll say you’d like to reinvest and let us know by just clicking confirm. That way the investment can happen through the E-warrant. We are hoping to launch that later this year as well.

Tom: Those will be great features. I think leaning on the technology you have, the AI and all of that, again, is going to make this even better for people that that want to get into this. Now, we talked about how little they can invest which is $2,500. Is that the same across the board? Any property is $2,500 at the minimum?

Khushboo: It’s the same.

Tom: On the other side of that, how much can they invest? Is there is there a limit to that in one property?

Khushboo: It’s not quite the limit per property as such. It is more dependent on how much they are earning. What we would try to do with aligning ourselves with securities regulations, is to ensure that people are not “owing” investing. If you have a certain income, the guidelines on how much you should invest, if you’re going over, our system will actually prevent you from doing that unless you’ve spoken to an adviser or a planner. And we have a roster of planners but you cannot auto reinvest beyond a point. We try to ensure people are not just going overboard on the investments because even though we would love for them to invest on our platform more, we also want them to make wise decisions. Because ultimately, the objective is, in the long run customers make money, are happier and are not regretting their decision later. That’s how we will limit that. For people who are what we call accredited investors, which means they have assets or income above a certain threshold, it’s okay and free for all. But regular people we would typically limit after a certain amount until they speak to an adviser.

Tom: It’s a great point you brought up about accredited investors. I know in the past I’ve looked at some of the services down in the U.S. with different peer-to-peer lending. And one of the big things in Canada were these whole accredited investor rules that were provincial. I don’t want to say get around those, but how are you able to offer this to people that aren’t accredited investors?

Khushboo: So there are two things. One, a lot of those regulations have undergone changes even in Canada in recent years. And yes, you’re right on the fact that Canada is behind the Us will be right on that. The Canada is behind U.S., the U.K. and a lot of other countries on this front. But you’re getting there. The second thing is, you’re not quite getting accredited because we have those limits. So, if you’re not an accredited investor, we let you invest, but not beyond a certain amount. And that’s what most of the guidelines are. That basically means that if, for example, you came to us and you wanted to invest $100,000, we’d say, “Sorry, but we can only take $30,000 from you unless you have an adviser on board that certifies they’ve done the analysis and all of that stuff. If you’re limited to $30,000, we’re obviously not letting you invest the whole amount no matter what decision you make because we won’t let you go beyond a certain amount. Those guidelines normally would require conversation and an adviser would attend. What we are saying is, we’re just being conservative in limiting people to the safe side—the safe bet. Through our automation we are being able to do it more effectively.

Tom: That’s great. I’m glad there’s options like this. I remember as far back as 10 years ago, I was looking at some of these peer-to-peer lending options that just weren’t available then and still aren’t really available here yet. We’re getting closer. You mentioned how much people can lose. How does some of the negative sides of this look? What happens if there’s an extended vacancy, for example? How does that affect these investments? Can there literally be a negative? Do people have to put more money in? How’s that look?

Khushboo: For all things investment, yes, it is subject to market risk. Even Canada’s money. All of that said, it’s actually backed by a real asset so there’s only so much you can lose. You may lose your rental, yes. But overall, the chances of you losing all your money is small because there is a real underlying asset underneath the entire investment. In terms of rental vacancies, we actually have insurance. For example, if the renter doesn’t pay or leaves early in the year, the insurance covers it. We have that insurance policy in place. For vacancy or unforeseen expenses, what we do is typically in the beginning when we are setting up the property—and every property has its own bank account, one trust account that is a separate entity and has nothing to do with us. If I weren’t there, the investment would still be around as a separate entity and continue to function. We collect a small amount of reserves upfront. So, for example, if you put in $2,500 and the property was about $500,000, you probably would have collected $510,000. That $10,000 is kind of like a resource to help us for repairs, like the AC going down and costing us $3,000. It’s for something happening that was not planned for. We would take that from the reserves. What we don’t want is people to have to go back to their properties to check and see they have to put in $20 or $200 that month. We don’t want that as far as possible. We try to make sure that, A, the properties are cash-flow positive so we don’t have the debt load too high so there is still some surplus cash. We also have the reserves, which means that if the surplus cash can’t cover it the reserves will cover it as well. Now, if all of that failed, then we might have to go back to people to say there is an additional expense. But chances of that are really low because you have insurance, you have reserves, you have some surplus cash, more or less. So between those three it’s been our experience that we don’t need to go back to people with all these problems to actually deal with.

Tom: It sounds like there are a lot layers of protection. I think of my parents. They once lived in a condo which was roughly $200,000. And their condo board decided that every person in the condo needed to spend $20,000 towards new siding on the outside. And I’m using rough numbers, but the percent is still the real thing. It was about 10 percent of the price of the place. It was suddenly assessed that they had to do it. It wasn’t about looks. I can’t remember what the reasoning was but they needed to get the outside redone on the condo. It was a sudden expense they had no way out of. So I guess it could happen but, certainly, that’s very rare. A lot of it could be covered by some of the layers you’ve got. It’s good that you have that because, again, people are going to want to be as hands-off on this and not have to come up with something extra at some point in the future. The other thing I was thinking is for people that don’t want to invest in real estate, a common thing is a REIT, a retail real estate investment trust. How do you compare to that? Obviously, that’s way more hands-off but maybe I’m guessing yours has more potential upside?

Khushboo: Conceptually, it’s the same. You take a big piece and split it into small pieces. I think that’s where the similarities probably end. The one big thing between REITs and ours to publicly traded REITS is because they are easy to identify and transact. With publicly traded REITs, the problem is they’re highly correlated to the stock market. So the core objective of real estate is not to give you outsized returns. The objective of having real estate in your portfolio is to ensure you have a good, diversified portfolio that protects you. With REITs, when they started back 20, 30 years ago in the 1990s, they were great for diversification because there were different stocks. But we’ve done a bunch of analysis and it’s as high as .7 to .9. Whereas, with private deals, the correlation to the stock market is .2 or .3 which is as uncoordinated as possible. Even if you look at the house prices. I will give you a Toronto example. The market was crashing, but it didn’t bother the housing market. They just shrugged it off. And it’s because the fundamentals haven’t changed in the sector. The property that you’re investing—it’s not like people are going to suddenly stop needing housing. The reason the REITs are more volatile is because they’re being treated along with the shares. And people want to take money out of the shares. They want to take money out of all kinds of shares. That’s one big problem. The second problem is, of course, the number of layers that you have. In our case, you are the investor on the platform which is basically automated and has a property on it. That’s it. You have one middle layer that’s making this whole thing efficient. If talk about REITs… I have one REIT so I can tell you from my experience, they’re not making money right now. But an ETF has REITs under it. Each of those REITs then have funds of funds that are invested in private equity funds, that then invest in developer funds. So if all of these people had put in time and effort in getting that whole thing together, you can imagine that even those who have taken their little bit of cut, the return you would actually get would be much lower. And the third big difference is just the nature of investment. For example, we are trying to invest in neighborhoods. We have an investment in Oakville, in Ottawa. We have a new investment in Hamilton and the GTA. So we’re are as close to an actual deal that you would do as possible. In fact, when we put a property up, we usually give people two days of open house if you want to actually see what you’re putting your money toward. And we would show you around after you’ve close the property and before we rent it out. We keep it up for two days for people who want to see what it looks like. But that’s not the case with the typical REIT because you are investing in a fund and it’s basically up to them to how to manage that. It’s an overall real estate investment that could lead towards property management companies, residential, commercial or construction—any of those.

Tom: That’s what I was thinking, the amount of people involved and the management expense ratio on top of that in all this. If you’re going to a REIT ETF too, it adds one more layer of expense on top. I like the way this is something that you can kind of feel a little more hands-on about. You can really take a look at the property and see how it’s doing over time to the dashboard.

Khushboo: What a lot of people don’t realize is how easy and simple it could be. There sometimes is a huge mental block for people. They imagine this being a long-drawn process, dealing with agents, mortgage advisors, banks, paperwork, legal—all of that. Before Amazon, people were buying retail stuff for hundreds of years. It was nothing new, as such. But it makes the whole thing so much easier when you just order from Amazon. And I think that’s kind of what we’re doing. We’re making it literally, one click. You go in and you can finish the whole transaction in seven minutes. We’ve timed. It takes seven minutes to finish the whole thing end-to-end. That’s it, you’re done. I feel the convenience of it is not replaceable by any other option. We are doing a lot of hard work on our own end but a lot of the automation helps us make this very, very easy to do so you can include it in your portfolio very actively.

Tom: This has been great. And I’m glad you walked us through this because it is something new. You guys are still new to it and continuing to grow it as you go. But I just wanted to make sure people kind of knew this thing existed and that it is an option out there. Can you let people know where they can find you online and tell them about your business?

Khushboo: Sure. You can go to our website, buyproperly.ca. And you can always reach out to us through our contact information. Our offices are at Dundas Square in Toronto but COVID means that we are all working from home. We do a lot of webinars and educational sessions so if people go on the website and sign up, they’ll actually get access to a lot of these free webinars. And our webinars are not promotional. It’s completely educational. We either have industrial experts or professors taking these sessions, teaching people on how to make real estate investments and investments overall. It would be a great resource if you were thinking about real estate or investing in general. So that’s one place to find us.

Tom: Great. Thanks for being on the show.

Khushboo: Thank you.

Thank you, Khushboo, for showing us how fractional real estate works. You explained it so well. It holds a number of advantages over REIT investing. You can find the show notes for this episode at maplemoney.com/121. Are you a member of the Maple Money Show Facebook community? If not, I’d love to connect with you there. It’s a great place to ask a question or share recent money win to encourage others. To join, head over to maplemoney.com/community to share with the group. I look forward to seeing back here next week when we have Ed Rempel on the show to discuss the high risk of bonds.