Oliver Foote, Author at Oliver Foote

Is Now a Bad Time to Enter The Workforce?

Statistics Canada Thinks It Is

I have been hearing from many people recently that they are having a hard time finding work. This is not just anecdotal, Stats Canada came out with their most recent labour force survey and the unemployment rate is sitting at 6.4% as of June 2024 and has increased 1.3% in total since April 2023 which was a recent low (low = good). Among these groups, returning students (those who are going back to school in the fall) are at their lowest June employment numbers since June 1998. You may be saying not a big deal, students still have time to figure things out. While this is true, they are also the future of the labour market, and one of the most common ways for students to find their full time employment is through their summer internships or other jobs. If there are fewer students interning and less work for students overall I think this is a concerning development.

I think this lower student employment rate, and the overall high unemployment rate are leading indicators that we are heading for stagnation or even some form of a quiet depression. After having conversations with people from many different industries and hearing by word of mouth from friends of friends, a lot of companies are holding off on hiring right now, because there may be some level of uncertainty about whether their clients will continue to be in business in the coming year or two. This is leading to hesitation across the board regarding hiring people, and especially for new grads. This is making it even more challenging since companies that are shrinking their workforce or looking to hire would rather hire one senior person who can do the work of two people rather than hiring two junior people who need training.

Signs of a Drawn Out Downturn?

Of the types of economic downturns, in this case specifically a job market downturn. It is almost better to have a COVID-like situation where people get hit very hard but can bounce back relatively quickly. A long, slow, protracted downturn, meanwhile, may be felt by fewer people as a whole, but for those who do feel it they will not get a lot of relief in the coming years. It has become apparent that although the Bank of Canada has cut rates, the effect of the rate cuts will be fairly muted, as borrowing power only improves marginally for those looking to take out loans such as a mortgage and businesses are still hesitant to borrow money in order to invest. Because leverage is expensive as a whole right now, we will likely see less economic growth. In order for a business to get a good return on their investment they will need a rather high ROI to justify their cost of borrowing and justify a higher risk investment when a relatively risk free investment is still hovering around 3-4%. With inflation coming down below the risk free rate, there is almost no reason for businesses or investors to look towards higher risk investments which means that less money overall will circulate through the economy.

Canada is also in a special situation because we are always welcoming new highly skilled workers into the country, this could be a good thing for businesses because if there is more demand for their jobs they can theoretically pay a lower rate and get the same output. From the workers side this puts them in an unfortunate situation, they will have to find a way to stand out from the crowd or accept a much lower wage at a time when the cost of living is not improving much.

Real Estate Indicators of Slowing Growth

From the real estate side we are seeing some relief in the rental market, as a recent rentals.ca report showed the year over year rental prices in June 2024 were similar or lower in some of the larger metro areas compared to this time last year. We can also look to the resale market and the pile of inventory that is building up, especially in some segments such as condos. This has yet to manifest in much lower prices, but there are some individual great deals for those who are looking. The market is a whole isn’t seeing much price pressure likely due to the fact that owners are finding a way to hold on until they get the price they are looking for and aren’t in a rush to sell. The number of truly “distressed” sales has only increased marginally anecdotally speaking and banks have been instructed to help those who are in distressed situations to manage their real estate. We likely won’t see a significant decline in prices in the coming years, but prices may slide slowly downward until borrowing becomes a bit more affordable.

I do foresee a time in the next 3-5 years as things improve with respect to borrowing costs that prices will jump up due to the lack of new construction sales. New condo projects have been taking longer to sell and fewer people have been purchasing them. This also corroborates my previous point about lower investment as we’ve reached a point in Toronto where about 50% of condos are owned by investors which means that they are soon to be the majority of the potential buyers, if not already are, and if investors are not investing their money, condos are not going to be built. If condos are not built, there will be less housing while more people continue to come to the Toronto area which simply supply and demand says higher prices.

Potential Improvements in Student Economics

Another interesting development has been the cap on student visas. On balance I view this as a positive development as I believe the intention of capping them was to prevent predatory “career” schools from taking advantage of students and not providing them a proper education. I quite frankly see nothing wrong with this, although it may inconvenience people who were all but too happy to take advantage of these students whether for cheap labour or for absurdly high tuition fees. The only potential downside to this is that some reputable institutions may lose some of the funding they were anticipating from international students and have to make cuts. But again, I see nothing wrong with a little competition, and competition breeds innovation, so maybe in the end this will turn out to be a positive development across the board. I also see positives when looking at student adjacent market such as the student rental market around campuses.

They will likely become somewhat less competitive with this change. I recall from my time at university that it was truly a crapshoot trying to find a half decent student house. The number of questionable landlords who didn’t take care of their properties was high, the inability of students to clean up after themselves was bad, the SERIOUS lack of supply was horrendous. Overall, there were frequently poor outcomes and often just plain unsafe living conditions. So some relief in that regard is well overdue in those markets. Although, I’m not certain that this will affect the larger universities who may not be as highly affected by the student visa quota. Interestingly, Graduate level visas have not been affected at all which is in line with the concept that Canada is interested in highly skilled workers. (although arguably our problem is with trades workers not highly skilled workers).

Signals from The United States

Interestingly though, if you look to our friends in the south (the US) their stock markets are continuing to do well, which is arguably signaling that things are improving over there and there is confidence that they will continue to improve. The US employment rate is still hovering around an all time high (a positive development) and since they have a more diverse economy they are more resilient overall. You can’t predict the market, but generally when I look at my portfolio and get very happy that is usually a sign that it’s time to sell some of it and cut down on the risk. However, I’m more of a buy and hold type of investor rather than a time the market investor, so I’ll probably just ride whatever wave comes and try to build up some cash in order to purchase any opportunities that may come along in the next little while.

It will be interesting to see how all of these different aspects of the economy develop in the next couple of years, I will be following them closely and doing my best to keep you up to date on them. Hopefully you found this discussion interesting. Feel free to let me know your thoughts any time, I’m always interested to talk economics.

Keep investing,

Oliver

Sources:

Stats Canada Labour Force Survey June 2024: Click Here

Student Visa Cap News: Click Here

My last post: https://oliverfoote.ca/dont-invest-in-stocks-or-real-estate/

Don’t Invest In Stocks or Real Estate

Don’t invest in stocks or real estate. I know, probably controversial, allow me to explain. I recently read a business book that really brought home an important point that has been living rent free in my head for a while. Investing in stocks (less so in real estate) when you’re young is not going to make you wealthy. If wealth happens to be your goal. Now allow me to substantiate my claim. Surely investing in stocks and real estate is a good idea, surely I should save money from my job and invest it? People get rich all the time investing in stocks and real estate, right? Well, that depends. If I spend 40 years saving a bit of money from my job every week, and retire with a million dollars or two, sure, maybe I’ve done well. But, the elephant in the room is always inflation, which will eat away at my buying power. The $1 million dollars 40 years from now, won’t be worth $1 million dollars in todays money.

Real estate is a bit better because the power of inflation is working for you not against you, it tends to be a bit of an “inflation hedge”. If you increase your power to pay down a loan over the years (i.e. earn more), the loan value 20 years from now will not be worth as much and you’ll have an easier time paying it off. For example, if you can borrow money at 0% forever but inflation is 2%, the loans value drops 2% a year. Hence why lenders tend to lose money in a hyperinflationary economy, while borrowers tend to benefit. A very important concept that is overlooked when giving retirement and investment advice is the time value of money. Basically, inflation. Also, inflation during a high inflationary time is deceptive. Because when you go through a few years of close to 7-8% inflation, and then drop down to 3% a few years later. In 5 years time since the start of the pandemic the compounded TOTAL inflation has been close to 20%. So if your stocks aren’t keeping up, you’ve at best broken even.

Whenever there’s a story of some 25 year old who made it big did they work a regular job for 40 hours a week, then diligently save 15% of their paycheque and invest in stocks, and boom 5 years later they’re a millionaire! Unlikely, if not impossible. There are sound statistics and facts showing that the people who are young (and also how many older people made their money) did so by building a business. The capitalist system is built around rewarding those who create something the marketplace wants. There’s only one Apple (inc.), but MILLIONS of us buy their products. Simple math says if you sell a million of something you’ll be a millionaire. In the system we are in you have to be a “producer” in order to make it big. Sure, maybe once in a blue moon someone hits it big on crypto (assuming they don’t lose it all in the next crash), or managed to time an investment that went up 10x in value. But the large majority of people who speculate on stocks hoping to get rich inevitably get burned, just ask my friends and I.

For some people, they may not have any ambition to be wealthy and they may just want to have a decent job, and enough money to have a decent life. But for the people who want to be wealthy, they have to realize a few things. 1. No one cares that you want to be wealthy. What can you do for me? That’s what drives buying decisions. Generally speaking, I don’t care that a corporation is profit motivated, I care about the thing I’m buying or the service they are providing me. Maybe, I make my buying decision emotionally because they have built a brand that makes what they are selling desirable to me. 2. No matter what business you’re in, you have to sell. Whether “selling” means getting to the top of search rankings, creating a marketing campaign, or paying for ads. You can have the best product in the world, but if no one knows about it, it’s as good as having no product at all. (Luckily, nowadays social media is a strong method of selling and brand awareness that is largely free, Google My Business is valuable, and word of mouth is also very much still alive).

There are more intricate rules and considerations to think about if you are building a business. Do you want to build a business that can eventually work without your inputs, would be nice huh? But you have to remember that at the beginning the business needs you to be the one forcing it forward, building it up, and doing the stuff that no one else wants to do. A thriving business isn’t magically going to appear on your doorstep because you “visualized it”. You have to be actively out in the world providing input to the machine so it can start cranking its gears. Spend less time thinking and more time doing. Speaking of stuff no one wants to do. That’s a great way to choose an avenue that is ripe for disruption. There are a million different businesses you could start, but it’s important to consider if there is a need in the marketplace (the world probably doesn’t need another personal trainer, or blog for that matter, owch…).

It’s a much better idea to begin a business in a market that doesn’t have a ton of competition, that being said, you’ll almost always find someone who’s “already doing it” and if that business is smart they’ll do their best to deter you from even thinking of competing. But if the barrier to entry is relatively high, and building that business would be “hard” and you think you could do it better, then you’ve got an opportunity to innovate. The higher the barriers to entry, the better the potential idea, you want to be in a space that is “hard” to work in (or where all the current options suck), because that will act as a moat to your business.

You also have to consider the scale of the business. Would it be feasible for this to be a national or international business? Or am I just going to open one restaurant on the street corner. Not saying you can’t have a thriving restaurant, but notice that the chains who are global have found a way to replicate their formulas using the franchise model. Again, depends on your motivations. Do you want to be global, or are you stuck thinking local.

As a bit of personal experience allow me to divulge a bit of an internal battle between two businesses. When I was originally thinking about real estate sales as a business, I was noticing a lot of the warning signs that this book pointed out and that I’ve mentioned above. Does the world need another realtor? Quite frankly no. Unless, you have a super innovate or weird business model, it’s an oversaturated market. Can the business be global? Not really, unless I was to start my own brokerage like Re/Max or Sotheby’s. Can I detach from the business in the future? Not really, unless I build a team of agents who handle all my clients for me, but even then many clients would likely just prefer to work with me if we have built up a relationship. Do I have control over my own brand? Somewhat, but also not really. I work under a brokerage company, and I have to use their brand in all my marketing. They are probably the one making the big bucks. 1400 agents under their belt. Yeah, that’s a nice business. But I will say, the owner/operators are VERY involved in the day to day operations, and the business needs their constant inputs to grow and build relationships otherwise it would likely fall apart and agents would begin to leave. But, eventually, they could train and hire people to handle their roles if they so desired, it’s a pretty well oiled machine.

Then I started to muse about my YouTube channel where I posted engineering content for a period of time and now sits at 25,000 subscribers. I decided against posting about real estate content on that channel in the worry that I would upset my current audience 99% of whom subscribed from engineering videos. So I started to post some real estate content on a second YouTube channel and I had this realization of how brutally limited my market is. If I’m just talking about “Mississauga Real Estate” MAYBE at most 1,000,000 people are interested. But considering the demographics of Mississauga and that most of them aren’t on YouTube daily, it’s probably closer to 100,000 people who are relatively active on YouTube. Of those people, VERY few of them will be buying real estate because the average price of a home is $1 million dollars, and most young “Mississaugite” is probably not thinking about buying (or selling) anytime soon. That leaves the intersection of my online, “social media” market in “Mississauga Real Estate” to at most maybe 1,000 people. What a terrible business and waste of time. (If I sold houses to 1,000 people I’d be laughing, but social media and real life are very different). AND YET, I’ve been to so many “marketing training sessions” harping on how you should be posting to social media daily and how making YouTube videos about real estate is “essential”. But the market is inherently limited, unless you are building a separate online media “brand”. One way to overcome this limitation would be to focus on a larger market, all of Canada for example. But then your strategy won’t be relevant to the hyperlocal markets that all of “real life” real estate lives in. Two streets in the same neighborhood have very different dynamics, and that expertise is very boring to everyone except the clients you are working with at the time. The upside is that even if you get 1 sale from social media marketing you’ll probably see an ROI since commissions in real estate are so high. Real estate is a relationship building business, an “in-person” relationship building business, a local business. So if you can simultaneously build a unique online media business, while also working on your local real estate business, sure go crazy. But I don’t think from a strategic perspective a social media strategy is a good use of time for the average realtor. You’re better off just picking up the phone and calling people.

Now let me analyze my Engineering channel. What a great concept. My target market is high schoolers and university students. Who just so happen to be chronically online and advertisers love selling to the young crowd. Universities and colleges have never been more desirable, they are degree printing machines in the modern era, so channels with “studies” as their focus have the opportunity to grow. I also found a niche in Mechatronics engineering, since there wasn’t really anyone making videos on the topic online, yet the google search queries were quite high. Again, perfect unmet market need/opportunity. I hardly realized all this at the time, and it took me about 4 years to really put this all together. As a business with growth potential, and something that actually meets the needs of a market, an engineering YouTube channel is not a terrible business plan at all.

Now, one of the challenges of building an “influencer” business is that you are often at the whims of an algorithm that can be challenging to predict. So you don’t REALLY control the means of production, and control is important in a business. Likewise, for real estate you could say I don’t REALLY control how many clients I can get, but in theory you have more options to gain some control over your real estate business than you do in an “influencing” business.

Additionally, you really need NUMBERS for it to be a viable business model. Over the past year I got around 750,000 views, which worked out to an average of $300/month from ad’s that played over my videos. Now an extra $300 a month is fricken sweet (pardon my French). Especially considering that I’ve all but stopped posting to that channel and 99% the views are coming from old videos. But unfortunately, no one can live on $300 a month. If I didn’t know better I’d say this YouTube thing is screaming into my face “HEY THERE’S OPPORTUNITY HERE!” And you know what, it might be right.

The creator business model almost always has multiple components for generating revenue, and like any sound business requires a component of sales. Whether that’s building a product and selling something you think your audience may want, creating a course for people to take, or doing a “brand deal” and selling someone else’s product during one of your videos. Building an online brand requires a little more than just ad revenue to be sustainable. But the great thing is, that if there is demand for your content, those other things can often fall in place. Some other positives is that your reach is global, you have a lot of creative control, and once you make a video once it can continue to get views (hypothetically) forever. Creators often branch out to build traditional businesses around the “influence” they hold. Anything from merchandise, to experiences, to streaming platforms of their own, or “exclusive content”.

So, where do we go from here. Hopefully amongst all the rambling I was able to put across the idea that if you want to make money, you have to make something that other people (“the market”) wants. Once you’ve made a chunk of money, THEN I would highly recommend stocks as a passive income and wealth preservation tool (but if you don’t have any grandiose plans then, yes, please save and invest for your future). If you are doing something because “you love it” or “you want to work for yourself”, you’re doing it wrong. You work for the customer, you work for your audience. Once you meet their needs, then and only then will they help you meet yours. The world is a selfish place, work selfishly hard to build something other people want or need and become great at it. How do you know if other people want something? Throw it into the world and see what happens. Call up your friend and see if they’ll give you a $20 deposit for a service business, then provide the service and get feedback. Call 20 professional’s or small businesses in your market and ask them what they struggle with, then solve their problem. Look at your YouTube comments and find a common thread amongst requests and complaints that can help guide your future content. It’s not “what you can do” or “what skills do you have”, but “what can you do for me”. Give the people what they want.

Keep Investing,

Oliver Foote

Investing in Real Estate With Only $5000

Private investment funds. That is the topic of todays discussion. You may have heard of something called a REIT or Real Estate Investment Trust, often these can be public companies who might raise money using capital markets. The goal of a REIT, like a normal “company” is to provide it’s investors a return on their investment, specifically through Real Estate. Frequently, the reason that people invest in Real Estate is due to tax benefits, and REITs tend to benefit from tax benefits as well. However, you don’t necessary have to invest in a public REIT, if you know the right people (*cough cough, call/email me), you can find private companies, some of them quite sizeable with hundreds of millions or billions of dollars in assets under management who operate like a REIT.

The benefits of investing privately rather than on the open market is that it is less costly to operate privately than it is to operate on the open market. The open market has very stringent accounting and financial reporting regulations which becomes costly. But, just because a private company doesn’t have these regulations doesn’t mean they are a bad investment or that they aren’t regulated at all. Many private companies, especially those that are sourcing funds from large numbers of investors, will create internal reports similar to what you would get on the open market, maybe monthly, maybe quarterly, as well as your usual MD&A (Management Discussion and Analysis) discussing what their plans are and how they plan to invest going forward. There is also governmental oversight, and securities regulators that get involved when a company is sourcing funds from investors, so generally they are quite safe to invest in and can provide better returns than open market REITs.

Usually these privately run REITs will have a variety of offerings. The one that I’ve connected with in the past offers a minimum initial investment as low at $5,000, and this “segment” of their business exclusively invests in large multifamily rental apartments. They aim to purchase well, fix up, and create a consistent cash flow as a dividend to investors and have a track record to back it up. They also have another division which focuses on development projects, think new construction condos. But the minimum investment for this is closer to $25,000 and you do not get your money back until the project is fully completed. But the total returns on these projects can sometimes be a doubling of your initial investment. You are effectively a source of funding for a well managed construction company and once the properties all get sold you get a payout. The downside is your cash can be locked up for extended periods of time, but it’s almost as passive as real estate investing gets.

Now you might be wondering, well how do the people who run all this stuff get paid? The answer is that there is a management fee baked into the return that you get back. This management fee depends on the type of project, the sector of real estate in which you are investing and various other things. But this is really where smaller, (i.e. Less than a billion dollar) companies tend to shine. They tend to run leaner operations than public companies and can choose to undergo things like development projects that take multiple years without the investors being able to pull out at any time when they fell like it. There are multiple other ways in which private real estate investing is superior to public REIT investing and I would highly recommend this route for people who want some exposure to real estate, but don’t want to manage it themselves and want to get good value for their investment.

There is no such thing as a guaranteed investment, but real estate is a tangible asset so you know your money is backing something that actually exists. The goal of many REITs is to provide cash flow, as mentioned above. Which means that the market fluctuations shouldn’t have a significant impact on the amount of money that you see, because the price of the real estate only matters when they go to sell it, and as long as they manage the properties well and continue to improve them and attract better rental prices, your investment will pay you dividends for years to come regardless of what the market is doing. Every investment has risk, but well managed real estate can be one of the lowest risk investments out there if you know where to look.

Now if you do have a higher amount of capital, you could do something like this yourself, or even if you just have a few hundred thousand dollars you may after some analysis that you can get better returns if you do it yourself. That’s fine if you have the time invest the money yourself, often if you’re making a high income, you may not time outside of earning that income to put the money you’ve made to use, and in that case this is a perfect win-win situation of you’re that type of person. You may not get as high of a return as doing it yourself, but it’s not a bad way to invest your money while you build up more capital to make your own moves.

Additionally, considering the real estate industry in Canada is so robust with high immigration rates, constrained supply, and interest rates that will (eventually) come back down. It’s a pretty good bet that going forward you will continue to make money in real estate. The only caution I’m going to throw in here is that there is now a concerted effort from all levels of government to get more homes built, which in years to come could slow down the appreciation we’ve seen in prior decades (you may only get 5% growth rather than 10% growth like we saw from 2010-2020). This I think overall will be a good thing as it will get more people into the homeownership market, and I know that myself and lots of other young people still would like to own a home some day so any relief in pricing will be appreciated.

That being said I also do think that a bigger issue is going to be rental prices. As more investors enter the market (which is the trend we are seeing). These investors will want rents to cover expenses and make continued cash flow. But valuations are so high, that from the POV of many investors rents just aren’t keeping up (high interest rates aren’t helping either). So investors either will have to become more creative, or they will have to pool more of their money together to purchase with less debt, since debt is so expensive right now, and this is again, where crowd sourced capital is a very neat idea.

In a way these high valuations and low rents make sense because there is this principle of highest and best use in real estate. The principle asks if a certain lot is being maximized and put to the “most profitable” use within the current laws. If the answer is no then your investment will look like a bad idea and rents won’t cover expenses. Often in order to achieve this highest and best use, you have to take on risk, do some redevelopment of a property (which has city council approval risk) or have private investors that will lend you their money at below market rates and expect a good ROI. Highest and best use can make it more challenging for individual investors in places like the downtown core since competition will continue to heat up for rental properties. The only people with the money to take on conversion projects might just be larger companies like the ones I mentioned earlier in this post.

If this sounds interesting to you and you just want to test out private investing, I encourage doing so with a small amount of money (as little at $5000), into a private REIT project, and then increasing your investment if you like the results. If you send me an email mentioning this blog post I’ll introduce you to the CEO of a company that operates out of Toronto and throughout the greater golden horseshoe area doing basically exactly what I described in this post, he’ll give you a much clearer and concise rundown of how they operate and what their strategy is. They are top notch and very professional and I would highly recommend them to anyone.

Hope you found this interesting.

Keep investing,

Oliver Foote