CMHC (Canada Mortgage and Housing Corporation) isn’t just a government agency. It’s the backbone of Canada’s housing market. In this episode, Ava Benesocky and August Biniaz chat with Gaurav Sobti, a finance expert navigating the complexities of CMHC financing in Canada. Gaurav shares his journey from the Alberta Teachers Retirement Fund to private lending and mortgage brokering, offering unique insights into the complexities of CMHC programs. As they navigate the current housing affordability crisis, Gaurav sheds light on CMHC’s pivotal role in multifamily housing finance. Join them as Gaurav discusses CMHC financing, its market impact, and his optimism for Alberta’s real estate.
Get in touch with Gaurav Sobti:
If you are interested in learning more about passively investing in multifamily and build-to-rent properties, click here to schedule a call with the CPI Capital Team or contact us at info@cpicapital.ca. If you like to co-syndicate and close on larger deal as a general partner, click here. You can read more about CPI Capital at https://www.cpicapital.ca/.
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About Gaurav Sobti
Gaurav brings top-tier experience from an extensive background in private equity and lending. He has conducted hundreds of millions of dollars in commercial lending transactions. And previously, he was part of a team overseeing a $3B portfolio for a major public sector pension fund.
Gaurav is a licensed mortgage associate through RECA and commercial mortgage brokering is conducted through Create Commercial Mortgage Services.
CMHC Financing In Canada: A Deep Dive With Gaurav Sobti
Gaurav’s Career Journey
Welcome back to the show. We’re going to have a great topic to talk about. As real estate investors, it’s the most exciting thing that we love to discuss and it’s debt. If it’s not one of the most important aspects, I believe it is the most important aspect of real estate. We’re going to dive into that.
It’s location and then it goes, how are you going to structure the deal? The debt is the most when it comes to the capital stack, the debt is probably the most important part. That’s why certain real estate asset classes have beaten the S&P 500 over the last however long it is because it leveraged. Leverage allows it to maximize returns. We’re going to be discussing that.
What differentiates the conversation is going to be the type of debt that’s available in Canada and CMHC, which is the Canadian Mortgage Housing Corporation. A lot of our audience have an understanding of agency debt lenders like in the US, Fannie Mae, Freddie Mac, and CMHC, which is the Canadian version of Fannie Mae and Freddie Mac. We’re going to dive deep into that. Before getting into the show topics, we never warmed up our audience about how things were going. We got right into it. Beginning of October, it’s a fall here in Vancouver. We’re going to be making our move like birds do. Birds go over this, depending on where the weather is. We’ll start migrating.
We’re going to be migrating back to Florida.
I was in Texas in Dallas at the Brad Sumrock event and it was great and made a bunch of content, and interviewed a bunch of experts, including John Chang and others.
Your favorite part was the ribs.
They were expensive. We went to a barbecue house, we spent $100.
Every time?
That’s like $140 Canadian.
Was it worth it?
I don’t know. $140, I could go to Costco and buy a frozen lamb, chop it up, and cook it up.
That’s so true. That’s right.
Back to the show here. Why don’t you tell our audience who’s our guest and his background?
Guys, we’re joined by Gaurav Sobti. Gaurav brings top-tier experience from an extensive background in private equity and lending. He has conducted hundreds of millions of dollars in commercial lending transactions. Previously, he was part of a team overseeing a $3 billion portfolio for a major public sector pension fund. Gaurav is a licensed mortgage associate through RECA and commercial mortgage brokering is conducted through Create Commercial Mortgage Services. Welcome to the show, Gaurav. We’re excited to get into things.
Welcome, Gaurav.
Thanks for having me.
Gaurav, you’re a CPA, you’re a CFA, to say you’re a pretty certificated person when it comes to financial analysis is probably an understatement. Let’s talk about things. When it comes to your background, as mentioned in your bio here, you were part of a team overseeing a $3 billion portfolio for the major public sector pension fund. Can you talk to us a little bit more about that? Can you give us more information on that? What role did you play in this pension fund?
I worked for the Alberta Teachers Retirement Fund. They managed the money for the Alberta teachers. Essentially, they were expanding into private investment, so real estate and private equity infrastructure. Before that, I was an accountant. I didn’t understand all these assets. With real estate, you can understand infrastructure. When I first heard it, I didn’t even know what it was. I joined the group back in 2012 and it was a new program because, at that time, there were some other pension funds that were already heavily into the sector. Alberta teachers were expanding into it.
They were allocating between real estate infrastructure and private equity. The target was 45% of both. I worked on the private equity and infrastructure team, primarily private equity. We invested in funds, so we would give blank checks to top-tier GPs across the world. We would also invest in co-investments alongside those GPs. This would allow us to hopefully generate some more alpha, but also to reduce our fees. The thing is also you get to know the GP better.
Any famous names you can share as far as the GPs you guys partnered with?
It was publicly listed. Trying to think, I know we did TPG Asia. That was a fairly large commitment. We focused more on the middle market because we wanted to have a meaningful voice. Frankly, my old boss, I’m still in good contact with him. He’s no longer there, but that was a top-performing program because we had a very concentrated approach where we didn’t give it to like a hundred different managers overly diversified. We tried to be a meaningful partner to these GPs.
Talk to us about your transition into what you do now, primarily, which is mortgage brokerage. That’s why you might be overqualified to be a mortgage broker.
When we first met, you did mention that. I remember that. Mortgage brokers come in different shapes and sizes. It was a great role. Alberta teachers, I learned a lot. That’s where I learned my finance training. It exposed me to a different world. I wanted to be more on the ground and more involved in deals. Long story short, I left that role. I ended up working for a private lender here in Alberta. That’s where I got exposed to real estate.
Before that, I wasn’t even that interested in real estate because everybody said, “You buy a house, it’s going to go up.” Whereas I was a little more contrarian. It exposed me to development. I didn’t even think about development before I joined that private lender. It exposed me to development. It exposed me to income-producing properties. I don’t know, I fell in love with it because part of it is the simplicity of it. It’s a little bit easier to value real estate.
That doesn’t mean it’s easy to generate good returns. Mortgage lending was quite attractive too. You can get some good risk-adjusted returns as long as you lend properly. You don’t blow up. In 2016, I joined that lender. I was there for about 3 or 4 years, moved into a business development role, wanted to learn more about CMHC, shifted over to a national real estate finance company for a few years, and then ventured off on my own as a broker about three years ago, coming up in February.
You have a certain focus on CMHC. Before the show we were chatting, but CMHC seems to deals make more sense. Thinking about commercial deals, apartments or multifamily, it makes more sense to get CMHC loans or have CMHC involved in the deals. It’s very common. In the US is a bit different when it comes to agencies, Freddie Mac and Fannie Mae. Here in Canada, when it comes to CMHC, the government body, it’s a lot more conventional. It’s much more common.
I heard a stat. It was thrown out there, but somebody said that maybe 80% of deals happening right now talk about real estate in general. Like in Canada, 80% is multifamily. I would say the majority of that is CMHC. I couldn’t tell you exactly how long the program has been around. It’s been around for a long time for sure but essentially, people think of CMHC when you’re buying a house. If you put less than 20% down, you need insurance. They’re one of the providers of insurance.
There are a few private providers as well. For multi-family, they are the sole insurance provider. They do have some direct lending programs. I’m not going to focus on that. I’m not involved in that as much. They do have some direct lending programs. On the commercial side, they’re the only insurance provider. The majority of multifamily deals, apartments, and row housing are being done through CMHC.
CMHC
We’ll get into that in a moment. We’ll break down the mechanics of it, but let’s tell our audience what CMHC is if you want, Ava.
We want to break down the Canada Mortgage and Housing Corporation financing, CMHC. What is it? How does it work? How does someone qualify? Before doing that, we did some research before the show about CMHC and we wanted to discuss and I wanted to break down the mandate of CMHC. There are three different points here. The first point is housing finance solutions. CMHC offers solutions to enable access to housing financing and ensure housing finance system stability through all economic cycles.
The second point is housing knowledge and expertise. CMHC builds and shares its knowledge and expertise of the housing system to drive informed decision-making, stimulate dialogue, and improve outcomes in the housing sector. The third point of their mandate is housing programs. We deliver housing programs to increase housing supply, preserve stock, and contribute to affordable housing.
The main part is creating housing and making the process a lot easier in Canada.
More affordable.
It’s definitely. Yeah. If I were to put a tagline, I don’t know if this is their tagline, but it’s to create housing for everybody.
Canada is one of the richest countries in the world. It’s got a small population, still under 40 million, I believe, or around that number. Everybody should be cheap to own a house here, but medium home prices in Vancouver are over $2 million and medium income is around $100,000. That’s insane. Same thing in Toronto. That’s the biggest complaint for anybody living in Canada is housing. CMHC should do their job, in my opinion, probably better or broader.
Going back to differentiating between residential, which people are very used to or heard about. When you buy a piece of property in Canada, you get less than 20%. Out of a need, your lender, whoever you’re borrowing money from says, “I cannot give you this mortgage because too risky. You need to go through CMHC or a third-party insurer to insure it, to give you insurance, then I’ll lend it to you.” CMHC gets involved, pay them a fee and they’ll insure your insured at mortgage and you get your mortgage and call it a day.
For a lower downpayment.
That’s what I understood CMHC to be. CMHC is also involved in multifamily apartments when it comes to development or acquisitions for value-added deals for investors, which also makes sense, but we want to break that part of it down.
We wanted to get a crash course on the residential aspect for the audience, and then the commercial side of Real Estate.
The commercial part is pretty simple.
It’s pretty straightforward.
Let’s talk about the commercial part of it.
Perfect.
If an investor, an investment, the same investment group, a family office, or a high net worth investor wants to go buy a 100-unit apartment community or apartment building in Alberta, you’re saying that most times CMHC is involved in those mortgages.
I’m sure some of these groups could do the deals conventionally. If they did it conventionally, they’d be lucky if they got it, it depends on the interest rate environment, but like maybe they’d have to put 25% down. That’s a lot of trapped money. CMHC is known for providing much higher leverage, and better amortizations, and it leads to lower rates. It improves the overall economics of the deal, which allows these real estate companies frankly to do more deals. One, their capital is not as tied up and the economics make sense, so they incentivize them. CMHC will help with existing products, but they’ll also help with new construction.
Talking about existing products, a bit more here. You were going to ask a question.
Yeah, before that, I wanted to ask when an investor or developer, do they come directly to CMHC or do they go through the lender first?
There are some direct lending programs, but what is more common is the insurance side. Typically, you apply to CMHC first. You don’t apply to CMHC directly as a developer for their insurance products. That is done through an intermediary. Before September, brokers like myself could talk directly to CMHC. We’re still talking to CMHC on some legacy files, but now you have to go through what is known as an approved lender. Approved lenders include major banks, there are companies like MCAP. Pico Capital.
These are alternative lenders that also play in the CMHC space. Now if you want to get a commercial multifamily deal insured from CMHC, you have to go through those lenders. Brokers like myself are still involved because especially right now, there’s unprecedented demand for this product because we are in a housing affordability crisis. The human capital is stretched, whether it’s the lenders are stretched. They need brokers like myself to educate clients, package the deals, and guide clients through the process to make a more streamlined process and efficient process.
Got it. You’re talking about 25% is too much to put down. We’re used to putting much more in our US deals. In the current deal that we required, we put down 55%. That does lock up more funds. It also brings down the LP if you have investors. If you’re syndicating the deal, it brings down the LP economics because you put down more equity. You’re saying that with CMHC loans, they go up all the way up to 95% LTV, and then you have to put down 5%, and then the amortization also gets extended. When you’re extending the amortization and when you’re increasing the LTV, what that does is it brings down the DSCR, it brings down their return. The deal is barely cashflowing if it is at all.
That’s for sure. Now, the one thing CMHC does is that they make you use some benchmarks in your underwriting. Depending on the product, those benchmarks could be conservative, but you’re right. Generally, the DSCR can go up to, can be 1.1 on an MLI select deal. There are standard rental deals, where the DSCR is like 1.2, or 1.3, depending on if it’s a 5 or 10-year deal. Like 1.1, that is pretty tight.
If there is some hiccup, you’re right. You might not be cashflowing. This is under MLI Select. I would say what I’m noticing now is that rates have been volatile. They were low during COVID. There were some deals where I was hearing people were doing deals like 1% interest rate, which is crazy. It would have been a great time to lock in ten years. Rates went up. At that time, people were maxing out loans and DSCRs were 1.1. Now as rates have been coming down.
I’ve been seeing DSCRs start to improve because of MLI Select, which is the program that most people are talking about these days. If it’s a construction deal, you’re capped at 95% of the cost. If it’s an existing asset, you’re capped at 95% of the purchase price. You are starting to see some DSCRs that are higher than 1.1. It all depends on what you pay for.
Going over that value-add type of deal where it’s an existing asset, you’re looking to go in there and possibly force appreciate it or you’re buying this thing, hoping to sell it for more in the future. It’s conventionally amortized over what period?
Conventionally, you’ll get maybe 25 years, whereas you can get 50 years.
What’s the term?
Terms are typically 5 or 10 years. A lot of people are doing five years right now. Typically 5 or 10 years.
At that time, you go in and you renew. Is it a pretty simple renewal process or do they have to reapply fully for the loan? How does it work?
You can renew the deal. A lot of clients probably always looking to try to see if they can get more leverage. They might want to reapply, but the one thing you have to keep in mind, especially under MLI Select. There are three pillars to MLI Select. Affordability, energy efficiency, and accessibility. It’s a point system. You have to get 100 points in order to get the maximum benefits under MLI Select, which is 95% leverage and 50-year amortization.
CMHC: The three pillars of MLI Select are affordability, energy efficiency, and accessibility.
There are some chances of having some limited recourse because you typically have to provide guarantees whether corporate or personal. If you hit the max points, there’s a potential to get some limited recourse, but I’ve been seeing on my deals lately, CMHD has been pushing back on that. They’re not going to give you zero recourse after twelve months of the property being stabilized, they might reduce it to 40% of the loan.
When you say recourse, you’re talking about personal guarantees?
Personal or corporate, yeah. That’s the one thing and that’s a very big difference between the US market and Canada. In Canada, loans are typically with recourse.
In the US, they’re mostly non-recourse.
That’s the difference. For MLI select, you have to have 25% of the loan as a guarantee, whether that’s in the borrower, corporate or personal.
25% of the loan, you need to have it as a personal guarantee and does that need to be?
To qualify, that’s the minimum.
The minimum is 25% of the loan and does it have to be liquid or it can be in assets?
It can be in assets. CMEC does a pretty deep dive into the person’s network. Everything has to be supported and they get pretty granular. They want to even see all the mortgage statements. They want to confirm that you own the asset. If it’s a construction deal, they’re looking for some more liquidity. If it’s an existing asset, then you can have less liquidity, but they’re going to look at your overall portfolio, how much borrowings you have with them, and then they’re going to use their judgment. They can always use their judgment. If they think you’re over-levered and maybe have some more liquidity tips, you are in favor of getting approved versus not getting approved.
It’s a lot different in the US. In the US, the rule of thumb is when you’re getting a mortgage, you need to have the total mortgage amount as your net worth and 10% of the mortgage amount liquid.
They throw around this 10% liquidity as well, like generally for a construction deal. Liquidity matters much more in construction. It all depends on the situation. If it’s your first asset. It depends on the borrower’s experience. There is a chance that if you have too many deals on the go and you’ve moved too fast. They’ll say, “This person doesn’t have any liquidity. If any hiccup happens we’re going to decline this application.”
Let’s spend a bit of time on our firm, CPI Capital. We’re a real estate private equity firm. Our main focus is achieving certain LP economics for our investors, and our limited partners. The way that I’ve looked at CMHC deals on these value-add deals that exist, number one, if the deal is being acquired in Canada and certain provinces that have rent control, which is most provinces.
I believe Alberta is one of the only provinces that doesn’t have rent control. It makes the process of value-add unfeasible because the value-add model is you buy a property, you put a mortgage on it, you go in there, you do renovations, and you conduct the management more efficiently to increase the NOI. The way you do that is you turn over units. When the leases expire, you bring in a better tenant demographic, you increase rents, and so on.
In Canada, they pay the tenant to move out.
In some provinces, it’s very hard if not impossible.
Let’s look at it for Alberta. When we look at a deal and our team underwrites a deal, our starting point is our LP returns. We want to hit those 20% average annualized returns, which is the cashflow combined with the capital gains. It has a 20% average annualized return. We want to double our investors’ equity over five years. When I looked at these CMHC types of deals even in Alberta, there is appreciation. We know that over the next 10 years, the next 20 years, this property will appreciate a significant amount, but because the cashflow is non-existent, you’re banking on the appreciation alone.
If something happens, the immigration policy changes, it could change all those numbers. Are you seeing any groups syndicating these deals? Do you have any clients who have a group of investors that are coming in or is the majority of the investors more family office, high net worth person who’s buying this? What is the demographic of people buying value-added deals in Canada using the CMHC mortgage structure?
I don’t have a ton of clients that take investor money, especially syndications. They might have the odd partner here or there. I’m just one segment of the market. There are syndication groups, but I can tell you why there are probably a few challenges associated with that. One is when you submit a deal to CMHC, you have to submit who the owner is.
It might be a little bit different for a very large REIT or something. Let’s say you put together 10 or 20 people, they’re going to want to know those people’s names. When you’re trying to put together syndication and you’re trying to apply to CMHC the processing times also can become challenging. Right now, it’s probably 3 to 4 months before you submit a deal to CMHC, and 3 to 4 months before you hear from them. It fluctuates.
Are the sellers open to having the closing that far down?
It can get challenging, especially in Alberta right now, which is a hot market. No one is going to give you enough time to close on the deal. People want maybe 60, 30 days due diligence, 30 days close. You might be able to stretch it out to three months. If you’re trying to put together a syndication, where you have to pitch these investors. Logistically, it becomes challenging. I’m sure there are groups out there that do it but you’re right, it’s going to depend on the market.
If you're trying to put together a syndication, where you have to pitch these investors, it becomes logistically challenging. Share on XThere’s no cashflow, another thing Gaurav, aside from the logistical and administerial issues that exist and as far as the structure being used, LPs, and in a moment, I’ll tell you how we circumvented that concern when it comes to US lenders, but you’re also looking at cashflow.
I can see that under MLI select, the cashflow is tight. Keep in mind that you’re putting in less money, so you might still get a decent cash-on-cash return. There’s not a lot of cashflow. Like when you have 1.1, there’s not a lot of cashflow there. Multifamily cap rates are lower typically than in the US. In Alberta, you’re looking at maybe 5% for new products. It’s probably declining. Even older products don’t always trade on the cap rate. It trades on dollars per door. You’re right, I can see why it would be challenging for syndication groups, for sure.
To get it back to the way that we mitigated the concern when it comes to a lender not wanting to deal with a group of investors is that we created an entity that was the borrower entity, which was a single-member entity. It was a limited partnership with us, ourselves being the GP and the LP. That was a borrower entity. We then had the syndicated entity sitting above that, and that owned the ownership stake in the borrower entity.
CMHC Approved Mortgage Companies & Changes
As far as the lender, the lender only dealt with one entity, which had the executives of CPI as the borrower of that entity. The US lenders don’t want to have to deal with 50 or 60 investors in case something goes wrong, having to have litigation with 50 or 60 people involved or even more. That’s how structurally we would mitigate that issue. Let’s keep going. We discussed a bunch of important points, but maybe we can briefly touch on them.
In the US, when we got our Freddie Mac loan, we went through CBRE, which was our lender. CBRE then was a servicer to Freddie Mac. That means they’re qualified or they were able to get a Freddie Mac loan for us. When it comes to yourself, you touched on this briefly as well, but certain mortgage companies are CMHC-approved. You said from this September, something changed, Talk to us about it.
They go through the lender first, and then the lender puts them through CMHC, correct?
How do you guys as a broker get involved?
My world changed after September. Before September, approved correspondence who were sponsored by these lenders could submit applications directly to CMHC. The typical process was once you got that certificate of insurance, that’s what CMHC issues. It’s called COI, short form, and then you would take that to a lender to get funded. After September, they said that the lenders now have to apply directly to CMHC solely.
Lenders were applying before as well, but there were certain lenders, like some of the banks weren’t set up and they’re not even set up right now to take on those direct applications. Brokers are still involved. I’m still actively doing CMHC deals through lenders. There are all these rules. As I said, the human capital is stretched in this industry right now because there’s unprecedented demand.
Lenders still need brokers, first of all, to help source clients but also to put together the packages and organize everything. CMHC is going to look for a lot of details on you. You cannot just give them a net worth statement. It has to be substantiated. You have to collect all those documents. You have to make sure it all matches up. You have to put together the borrower’s story. Typically you need five years of property management experience if you want to self-manage. You have to sell the story on that as well. There’s a lot of work that goes into a CMHC application. That’s where brokers are still involved. That answers your question.
The MLI Select Program
The MLI Select program, explains how that works, particularly on a value-add deal on the acquisition of an existing asset. Can there be updates made when it comes to efficiency?
That’s the whole point. Incentives are available for new construction or existing properties. If the investor or developer is committed to social and environmental outcomes. They are incentivized because they get better incentives.
The three pillars are affordability, energy efficiency, and accessibility. I have more experience with affordability and energy efficiency.
Tell us a little bit about the acquisition deal in Alberta. How can you make it energy efficient? How do you get those points?
This is the thing about the CMHC route, programs are always changing. In June, they made some changes, which led to an influx of applications because they reduced the points you could get from energy efficiency. It’s a point system, 100 points get you the maximum benefits. Before you could get all your points from energy efficiency alone, but because we’re in this affordability crisis, the government likely wanted to incentivize more affordability.
Affordability means what? They go to medium household income in that area and then they cap your rent?
Median renter income.
Median renter income.
It’s published in 2019. I couldn’t tell you exactly what it’s like in Vancouver or Toronto, but in Edmonton, it’s 1665, and in Calgary at 1735.
Does that get grandfathered in the building and you cannot increase your rents even if you sell it? Does it go against the title? Is it only when you’re in the program or when you have that mortgage?
We’ll specifically talk about Alberta-type deals. In Alberta, depending on the market, like Calgary rents have appreciated quite a bit, so I’m not sure if it makes sense, a lot of deals were getting done on affordability alone. Under new construction, if you’re doing a new construction project, if you designate 25% of your units as affordable, you can get 100 points which gives you the maximum benefits. For existing properties though, you have to designate 80% of your units to get the maximum benefits.
At what number, at what price?
In the end, it cannot be more than market rents. The threshold in Edmonton is 1665.
80% of units are capped at 1665. How long does that cap stay? Does it stay?
You have to make a ten-year commitment.
Ten-year commitment.
You can make a twenty-year commitment and get more points but you have to make at least a ten-year commitment.
1665, does it go up at least by inflation?
There’s some minutiae on it. It depends on the province. If the province has rent control, then you’re limited to the rent control increases. If a province like Alberta doesn’t have rent control, it’s like Statistics Canada inflation. It won’t tell you exactly how to calculate it, but it’ll reference what you need to look at for less inflation though.
What type of benefits?
Under MLI Select, which is the hot product right now, you can get up to 50 years of amortization and you can get up to 95% leverage. If it’s an existing product, 95% LTV, or purchase price if it’s an acquisition. If it’s construction, 95% of the cost. Also, CMHC rates are lower because the government is taking on risk. They’re insuring it. As long as the lender follows the program and does their due diligence, then essentially, the government’s backstopping that loan in case there’s a loss. Because of that, rates are also lower. On a very small deal, I locked on a rate maybe two weeks ago at 3.7%.
3.7% for 10 years.
We did five years there.
It’s almost getting paid to borrow money.
It was 3.7%. This was a small deal. If it was a bigger deal, it might be 3.4% or 3.5% at the same time, whereas a conventional deal is going to be at least 1% to 2% higher. Even on construction, you can get deals where your interest rate on construction is prime minus 0.25, prime minus 0.5%. Whereas if you were to get a conventional construction, it depends on your experience and your net worth, etc., but you’re looking at anywhere between prime plus a half, prime plus two. You also get benefits. Here’s the catch, you have to pay premiums. On MLI Select, the premiums might be 2.8%, for example.
It’s an insurance premium.
It’s an insurance premium. It gets tagged onto the loan, but it is a cost. It is still a cost to the deal. You pay it in the form of higher payments. Like you paid over time.
You can do standard rental deals, which you don’t have to make any affordability criteria. You get up to typically 85% of value. You get 40-year amortization. Over the last couple of years, those deals weren’t making as much sense because we were in an elevated interest rate environment. They’re starting to make more sense again, but the premiums there, I haven’t done one recently. I did one earlier this year, but the premiums can be, if you’re getting the max benefits, 5% to 6%. You have to factor that into your analysis.
5% to 6% of the loan. I said premium you pay.
It gets added to your mortgage payment. It gets added to the debt.
It gets tagged to the total.
Amortized over the 50 years. I have one more question quickly.
I have one more question after that.
Perfect. Gaurav, the rules and regulations for the MLI Select and the CMHC, is it different for every province? Is it provincial or is it federal? Talk to us about that.
There might be some nuances, but the rules are general. Rents are different by city. The general criteria are the same across the country. It is subject to underwriting, depending on who the underwriter is. They could have an impact on the deal like it’s not supposed to. It’s not like it’s a computer that’s making the decision.
Maybe one day.
Ideal Client Profile
Gaurav, let me ask you something. Aside from the discussions we’ve had so far, we talked about syndication groups, investment groups, and REITs that the model might not work perfectly for them. When you’re talking about your client profile, maybe we might have somebody tuning in to our show when this goes live in a few days. Who is this program best suited for?
If somebody wants to buy, I know smaller apartment communities fair enough, but something bigger like 100 units. Who is this best suited for? Does it need to be an investment firm? Can a few high-income earners like a few doctors or dentists get together and buy an apartment building in Alberta? Who is the perfect profile investor for these loans and buying apartments in Alberta? What are you seeing?
Investing groups are taking advantage of this for sure. I’m not looking under their underwriting to figure out how they make it make sense. I’ve been getting more calls this year from people from BC and Ontario than I have ever been before. People call me out of the blue. You’re right, because you can buy a multifamily product with only 5% down, you can do a $2 million deal with $100,000.
You’re right. It is making multifamily investing more accessible to individuals, people who I wouldn’t consider high net worth either. I have clients for who we’re doing their first project. They might have a net worth of $500,000 to $1 million. I have some clients who have over $100 million net worth. MLI Select in particular has made it much more accessible. You see on social media or Facebook realtors are advertising, “Buy products with 5% down.” People are buying duplexes and single-family houses, putting them together as rental products, and using MLI Select. Everything I say is a little bit more with an Alberta lens. The majority of deals I do are in Alberta.
Alberta makes more sense anyway.
Especially because of the affordable rents and houses are cheap. I was talking to someone about duplexes. You can buy a duplex with a basement suite for $550,000. You put four of those together, over $2 million, put in $100,000, $200,000 including fees, and you can make it make sense. That doesn’t make sense in Toronto or Vancouver.
Never.
10 Championship Rounds To Financial Freedom
We enjoyed the conversation. Let’s get to the second segment of our show.
It’s my favorite part, the ten championship rounds to financial freedom. We’re going to ask you a series of questions.
Lay it on me.
Here we go. Here’s the first question. Who’s been the most influential person in your life?
Influential person in my life. I would say, my wife. I hope she’ll watch this.
Every married guy in the show says their wife.
My wife is a doctor. I get involved in some developments and some real estate. She asked me tough questions for sure. She asked me, “Why is this person selling?” I’ll be like, “Why does anybody ever sell?” She’s like, “You have to have a good answer for that.” My wife, but I’ve been quite influenced by Warren Buffett as well. I’ve read the majority of his letters. I’ve read tons of books on Warren Buffett as well.
Next question. What is the number one book you’d recommend?
The Letters by Warren Buffett. You can download them off the Berkshire website.
We’ve had that answer before, Gaurav.
Some other good books, anything by Howard Marks or Joel Greenblatt. I love reading books on value investing. I don’t read them as often as you used to, but those are some good books.
Next question. If you had the opportunity to travel back in time, what advice would you give your younger self?
Take some more risk. Right now I’m in more of an entrepreneurial role. I’m a mortgage broker. I don’t have a steady paycheck. When I was younger, I wanted to maybe go work for some big corporation or big investment firm but now I’m more excited about trying to build my own business.
Be a little bit more risk-taker. Next question. What’s the best investment you’ve ever made?
The best investment would be investing in myself. You don’t need to be a CA CFA to be a mortgage broker. All those experiences and education that I have give me an edge because I try to help clients analyze the deal. I like to treat their money like it’s my own. I only get paid if deals go through. To build long-term relationships and to build loyalty, I like to try to give them advice and be more than just getting them the debt.
The best investment would be investing in myself. Share on XWhat’s the worst investment you’ve ever made and what lessons did you learn from it?
I got involved in some fitness studios. It was a bit of tax arbitrage. In Canada, if you own a small business if you make less than $500,000, you get preferential tax benefits. I thought this would be a way to generate some active business income or pay less taxes. We opened this before COVID, and then COVID hit.
That decimated the industry. That was a franchise and they were opening way too many locations. What I learned is, one, don’t expand too quickly. We opened a second location, which was probably problematic. We may have stretched ourselves out after having some success with our first location. When you’re working with a franchise group, you have to be careful. You don’t have that full control. I also realized that I should focus on things that I have a competitive advantage in. I’m a go-getter and I’m a hustler in a good way. I was even making sales calls for this franchise, for this business that I had, but my competitive advantage is finance investments. I should focus on my competitive advantages in any business venture.
How much would you need in the bank to retire today? What’s your number?
I wouldn’t retire. I love what I do. I love talking deals. I love real estate. I love investments. I enjoy what I do. I like to go on vacation but I don’t think I would retire.
There’s no plan for that. Why would you if you love what you do? Slow it down a bit. Next question.
Maybe slow it down a bit.
There you go. If you could have dinner with someone dead or alive, who would it be?
Warren Buffett for sure.
I knew you were going to say that. If you weren’t doing what you’re doing today, what would you be doing now?
That’s a tough one.
You always thought about pursuing but you didn’t go down that path, like in sports or hobbies, race car driving?
I enjoy cooking when people come over. I like to be creative. I enjoy cooking. I like the praises that come after someone eats a good barbecue meal. My wife and I like to travel. We’ve traveled a fair bit. We always joked that maybe later on, we’d open up a store where we had foods from around the world like the best snacks that we found.
That is a good idea. I might steal that idea.
I hope she will. We’ll call it the Small Small Snacks Cafe.
I was going to say you and August should have a cook-off because he’s a big cook too.
I’ve seen some of his barbecue stuff.
Here’s my favorite question. Book smarts or street smarts?
I’m a reasonably educated person, but street smarts. Getting into this world, that’s what it’s exposed me to. Remember, I’m working at the pension fund. You’re dealing with people with the top-tier pedigrees on the other side of you. Some people would come to you on private jets, fly in, and talk to you like we’re talking Harvard Business School and all those schools, but getting into this space, I’m dealing with a lot more entrepreneurs. I’ve met some incredibly smart people who don’t necessarily have an education, but they know their thing.
That’s so true.
Education, what are we going to tell our kids? It makes that road a lot easier.
It does make it easier. There are some benefits for sure, but sometimes having that education sets you down a certain path. Maybe that’s not the right path for you.
Education sets you down a certain path, but sometimes that path isn't the right one for you. Share on XA-students work for C-students. Was that the old adage?
Don’t say that to our children, August. Last question. If you had $1 million in cash and you had to make one investment today, what would it be?
I’m very bullish on Edmonton multifamily still. Alberta in general as well. I do have current investments in Alberta. I do think this time is different. It’s the last affordable large place in Canada. You’re seeing lots of inter-provincial migration. You’re seeing immigration. Especially now with work from home, it is more possible to do stuff in Alberta even if your economic ties are elsewhere. I’m bullish on Alberta. I’m in Ontario. I was originally born in Hamilton, but I’ve adopted Alberta and hopefully, they’ve adopted me. There is something about the entrepreneurialism here. You’re starting to see the tech sector diversify as well. I’m bullish on Alberta.
With $1 million, you can buy a $20 million apartment building. That’s what he can do. All right great. I appreciate you coming on and sharing your wisdom and knowledge with us. Maybe tell our audience the best way to reach out to you if they need to ask some questions about your services, CMHC, or any other questions they might have.
I’m on LinkedIn so they can look me up on LinkedIn. Create Commercial has a website. My email is Gaurav.Sobti@CreateCommercial.ca. I’ll list my phone number too. Hopefully, I don’t get too much spam but 780-709-6568.
This is very educational. Thank you so much. This is great.
Thank you, guys. You have done a fantastic job. I like how you ran this segment.
Thank you.
