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Life by Design is a podcast that shares the experiences and tools to help couples align their wealth goals and reclaim their time, enabling them to experience freedom, abundance, and a life by design.
Jessilyn Persson (00:07)
Welcome to the Life by Design podcast we're Jessilyn and Brian Persson struggling to align your financial goals or confidently invest in real estate as a couple.
Brian Persson (00:16)
That's why we created this podcast and the Riches, Relationships and Real Estate program to help you build wealth and strengthen your relationship. Visit weekendwealth.ca to take our quiz and discover your real estate investor type. Let's create the life you deserve together.
Jessilyn Persson (00:34)
Today we're going talk about the ultimate sleep at night investing. We're talking about what we believe to be the most passive way to invest in real estate. As Warren Buffett said, if you don't find a way to make money while you sleep, you will work until you die. And this strategy is it. Let's get started. So Brian, what is the most passive way to invest in real estate?
Brian Persson (00:57)
Well, in Canada, the official name is called the exempt securities market. And you may have heard it called private equity or private capital markets, or sometimes even alternative investments. Whatever the name, it is definitely the most passive way to invest in real estate. And so a quick disclosure for the audience out there, I am licensed in the exempt market and the private equities market. So these, ⁓
And some of the things you're going to hear in ⁓ this podcast are actually from my own experience and my own education and my license.
Jessilyn Persson (01:32)
So tell us what is the exempt market?
Brian Persson (01:37)
Right. This is a, this is a big question I get a lot and, you, you get it a lot as well when you're off in your networking circles. Uh, the easiest way to explain it is it's basically the difference between public and private securities. So if you go buy Apple shares off of, you know, from your bank trading platform or your, or whatever securities trading platform you use, that's public securities, private securities.
Operates very very similar. There's just no public trading platform Effectively, I am your trading platform You need to come to me and we need to decide on what securities that you want to buy and then we you know Do things like that any proper financial advisor should do look at your goals, etc, etc Figure out what's right for you. And then we actually transact ⁓ directly through me. So that's really the only difference is there's no trading platform, but ultimately they work very very similar to
how you buy Apple shares or any other kind of shares out there on the public market.
Jessilyn Persson (02:39)
So why would anyone invest in say the private equity versus say stock market?
Brian Persson (02:46)
Yeah, diversification is the way I look at it. So the first level of diversification is that you are no longer invested in the public markets. Now you have some of your money, ⁓ proper diversification, not all of your money, but some of your money inside of the private equities market. And you have basically a level of diversification right there that you are now no longer correlated.
to the public markets, i.e. your money is not tied to the markets going up and down. A recession comes and all the markets fall, it's potential that your private equity's investment is not going to fall because it's not tied to the public sort of sentiment of what they feel the economy or the market is doing at that moment. It's not tied to anything, it's tied to the investments and the assets behind the actual shares.
Jessilyn Persson (03:33)
So what is it tied to?
Brian Persson (03:40)
So when I say not tied to anything, mean publicly and globally not tied to anything. So if you were investing into say a share that or a piece of securities that had real estate behind it, then it is tied to the price of the real estate, maybe the rent, how well the real estate is performing, all the aspects that make real estate a good investment, the share is actually tied to that. So your dividends and your share price are all.
based on the actual performing asset behind what you've invested in.
Jessilyn Persson (04:14)
So could a person get similar returns? And by returns, I mean, there are different ways to make money in real estate, as we always talk about, and when we own it personally. So we always talk about cash flow, mortgage pay down, tax advantage, appreciation, right? Can a person benefit from those same things through the private equities?
Brian Persson (04:37)
They can, there are ways. ⁓ Like, you know, your public equities, there are a couple different ways to do it, primarily appreciation and dividends. You have ⁓ appreciation and dividends in the private equities as well, but you also can get access to things like tax ⁓ write-offs. So there are ways for, there more creative ways and more unique ways for private equities to ⁓ sort of structure their funds.
that can allow you to have better tax advantages. you can get more real estate in the end because it's under your thumb and you have ultimate control over the whole real estate sort of has the most number of ways you can ⁓ get all the advantages of real estate. But then again, you have to do the work. And that's why we're calling this the ultimate sleep at night investing. When you are doing the real estate yourself,
you're not fully asleep at night because it is under your control and you actually have to do the work of the real estate. Great investment, but you still can't detach yourself from it. With private equities, you can actually properly detach yourself from the investment itself.
Jessilyn Persson (05:53)
Right, so private equities, think a term that's become a lot more common out in the public is REITs, so the Real Estate Investment Trust. within the private equities, you can also diversify amongst different products. Can you kind of explain what some of those are and what we might hear when we're out and about to understand it a little better?
Brian Persson (06:16)
Sure, yeah. there are, this is the way I like to phrase it. It's not perhaps entirely accurate, but just for the real estate investors out there, there are really three different types of investments in private equities. There are REITs, which are real estate investment trusts. And more or less what you're doing is you're buying a fractional share of a large real estate portfolio that could look like a whole bunch of multifamily buildings. could look like.
bunch of commercial, industrial, multifamily buildings. could look like anything that you would consider to be sort of a buy and hold real estate would generally exist inside of a REIT. The second way to invest in real estate is called a MIC, an M-I-C, and that is a mortgage investment corporation. And more or less you are buying a portion of the debt of mortgages. So your money goes into the pool of money.
inside that MIC and then that money is lent out to primary and secondary mortgages generally and that is usually sometimes called like private lending. So if you can't, if you got bad credit or if you can't ⁓ get a mortgage for whatever reason, people can access the funds on the other side of the MIC and get their home or support their business in whatever way they look at. MICs themselves though can't lend to ⁓
businesses because they are, that's why it's called a mortgage investment corporation. So it has to be attached to real estate, which is great because now you're the money that you put into the fund is actually attached to the real estate that it is being loaned against. Yeah. And the third way is I kind of just clump it all as, business private equity. So in our particular brokerage, have a dentist funds, we have some pharmacy stuff.
⁓ industrial maintenance and they're all businesses but they don't have they don't true some of them do but most of them don't have any real estate backing behind them they are just a business of some some unique business of some sort
Jessilyn Persson (08:22)
So, this is not new news to invest in a business, but why would I invest in a business via the exempt market instead of say, my buddy who's about to launch a business?
Brian Persson (08:35)
Yeah, that's a great question. know, well, when it comes to real estate, I'm sure we've told this story numerous times, but your buddy or your family is not necessarily the best person to use for your investments or your mortgage broker or your real estate agent. Make sure that they have the experience that they need. Even if your buddy isn't a very experienced business owner, chances are the complexity of trying to write yourself into the business is...
is going to be a heavy burden. So they would have to rewrite their corporate structure to allow you to have shares unless they were properly set up already, but then they've already taken on a fairly heavy burden to properly structure the corporate side of things in order for you to get your shares of that business. So it's not ⁓ impossible. It's just that
these reits, these mix, and these other private equities have already created the structure for those shares to be a little bit more fluid to come in and out of the business of it. And so people can put their money in, take their money out, and it's not quite as ⁓ concrete as if you invested with your buddy or complex or burden-like.
Jessilyn Persson (09:54)
And generally speaking, investing in the private equities, the business likely has been around for quite a while. Rarely are you going to get a startup in private equities. Also, there'll be history for you to fall back on and look at how they've been producing over the years and can they show the numbers and what kind of returns. Whereas, you know, if I go with my buddy or someone in my family, it's the risk is just higher. There's a lot of unknowns that you can't predict.
Brian Persson (10:22)
Yeah, well, you nailed it. So the overhead to create the structures that you need to invest, like to have ⁓ a fund in the private equities market is generally pretty significant. Like on the small side, it's usually like low six digits. ⁓ And that overhead, as you said, means that they already know what they're doing. Like they're not just creating that fund out of the blue.
Generally, they need a way to like expand that business in some way because they've already been growing the business for some period of time and private equities is a great way for a business to continue to expand and grow their business. But it comes with overhead. Your buddy and his starting plumber business or mortgage business or whatever he's creating is probably not going to invest that kind of capital from the start.
it's unlikely that they're going to do that. They're probably much more concerned about making money and getting the business ⁓ with some traction under it. And so they would have to write you in to the business at the beginning rather than have all that overhead to put you in later on. And your buddy is just probably not going to take on the burden of getting you into that business.
Jessilyn Persson (11:36)
Right. So the way I think I heard it and understand it is if I'm looking at the stock market, obviously I can go into any bank. I can even go online, open my own account and start investing in mutual funds, stocks, whatever that looks like. When it comes to private equities, I cannot. I have to go through someone like yourself, a dealing rep who is ⁓ certified and trained in it, which makes it sound a little bit more exclusive. Yep.
But does that mean only certain people can invest in it then?
Brian Persson (12:11)
Yeah, it does mean only certain people can invest in it. There are qualifications that you have to meet in order to invest in the private equities. I'm not going to really go into those right now just because they do change and I don't want to have this written in stone. But if you're ever interested, come talk to us and we're happy to help you out. But there is some minimum requirements in order for you to invest in private equities. And so it does become a little bit more exclusive in that sense.
They're not massive hurdles, but you can't start off with $500. Like there are, need to have a little bit of investments of some sort behind you before you can actually get into the private equities market.
Jessilyn Persson (12:54)
Okay, so while it is a little bit ⁓ exclusive, it's not ⁓ unattainable. Many, many people would actually qualify. It's just there are certain rules and regulations that we have to follow and that's okay. Kid, I use my RSP or TFSA to invest.
Brian Persson (13:18)
You can, yeah, that's another main advantage to the private equities market is that a lot of the funds are written, their structures are written in a particular way that they can have registered funds. So TFSAs, RSPs, our particular brokerage doesn't do our ESPs, but that's also a potential out there. And if you've been investing with your bank for a long period of time and you're not happy with your returns or your bank is just taking too much ⁓
of the pie through, through like the fees, then you can actually split apart portion of that off of your RSPs or off of your TFSAs and put it into the private equity market. And it can grow tax free inside of your RSPs and you'll own real estate inside of your RSPs, which is fantastic.
Jessilyn Persson (14:08)
Yeah, that's amazing. I know we invested in private equities a few years back now. ⁓ And of course, as I was learning about it, because I'm not licensed like you. So I had to try and understand it. And I get asked a lot of questions, too. And to be able to explain it, ⁓ I want to understand it better. And I know one of the things I loved about it, obviously, I'm super passionate about real estate. So I appreciate that it's backed by real estate. But I just liked the fact that it was the
returns are a little bit more higher and consistent than what I've found I've ever personally got in my ⁓ in the stock market or more mutual funds through the banks and so that of course for anyone you know looking to build their wealth generally you want higher returns especially on a consistent basis.
Brian Persson (14:53)
Yeah, and about the return. that's one of the beauties of ⁓ private equities is that you have this thing called the public markets, which is, you know, NASDAQ, your New York Stock Exchange, your TSX, all these different public things. And they are largely based on how everybody feels about the economy. So, you know, we have our friends south of the border of the United States. If they go through political turmoil, which they're kind of going through a little bit right now,
all the markets tend to get shaky, they get depressed, they, you know, all these things happen to the market based on public sentiment in the private equities. There's no public sentiment. It's like, what is the real estate worth? How much of the rents like our, our prices increasing or rents increasing? Okay, here's your share value. And so people look at it sometimes like, Oh, you know what? can get 15 % in the, uh, in the public markets. Yeah. Because
the public markets are going up by 15 % that year, they're effectively a roller coaster. They're going up and down, up and down over the years. Private equity does have a return per year, but it's always the same return. Very, very rarely, especially with the funds that we have, do they ever not pay out their dividends? And so you end up getting a stacking.
the aspect to it where you always make the same amount and then you ultimately outperform the public markets because there's no roller coaster. You're just on a nice linear line that goes, that goes up and eventually turns into an exponential line because you are, your investments are growing over time and you don't have the up and the down of the public markets. It's a great way to ⁓ invest because they're more stable in that sense.
Jessilyn Persson (16:45)
So less volatile. Yeah. Okay. So yeah, let's, let's maybe share a few reasons. I mean, I know we mentioned portfolio diversification and lower volatility as we just noted, but there are other reasons why we'd want to invest in the exempt market. Passive income potential is something we talk about ⁓ in our real estate portfolio for passive income. But when you say passive income potential, can you talk to that a little bit more?
Brian Persson (16:47)
way less volatile.
Yeah, it's totally passive. the quote at the beginning of the episode here from Warren Buffett, you got to find some way to make money in your sleep. ⁓ And this is ultimately the most passive income because you just have to transact over a piece of paper. You don't have to do any of the work. You have experts behind the scenes in the funds who are doing all the real estate magic and making that fund perform. So.
in terms of passiveness, it doesn't get any easier than putting your signature on a piece of paper and letting your investments grow. heard a quote that was, you know, the ultimate investment or the best investment is the one that you forgot your password to. And this is it because like you can just put the money into the passive or into the private equities and just let it grow for as long as you possibly want and never have to think about it because you have experts.
you know, handling that real estate properly.
Jessilyn Persson (18:14)
Okay, so you're saying I can put X amount in and I will get passive income monthly or quarterly or however, depending on how it's structured.
Brian Persson (18:23)
depending on how it's structured, ⁓
Jessilyn Persson (18:24)
Okay,
so think another, obviously another reason you noted is professional management. ⁓ And I think we briefly touched on tax efficiencies.
Brian Persson (18:35)
Yeah, without getting too complicated in it, there are ways for the funds to pass down ⁓ tax advantages to you. It's usually called return of capital. And what it means is that ⁓ you are effectively, if say you put in like, I'm just gonna use round numbers, $50,000. Well, over the course of five years or 10 years as the dividends are paying you back that money, that looks.
to the taxman, like you didn't, you're not actually getting dividends, you're just getting your $50,000 return to you. And so you don't get taxed on that. And it's ⁓ it's called a return of capital and there are other ways, but that's kind of the most common one.
Jessilyn Persson (19:20)
Okay, and also obviously there is higher potential returns. I know you mentioned it's kind of slow and steady, but always upward versus the stock market, which can be really high peak, but also you can go into the negatives. But there's also a high potential for returns on these as well. I know I've seen some of the products that we currently invest in versus some of the products that we don't currently invest in on the shelf, because you do have multiple products available and just looking at what works for us. And some of them, because we are
still young, we put into some of the higher return options and then some of the more slow and steady ones. ⁓
Brian Persson (19:56)
A lot of, ⁓ this is a very general statement, but a lot of private equities, their main goal is to grow large enough so that they can get taken over by, or bought, shouldn't say taken over, but bought out by a, like the big money, right? Say like, you know, a pension fund of some sort, something with billions of dollars behind it. Right. Yeah. And so, I mean, if you want to...
invest smart, one of the phrases that you probably hear is like follow the big money. You know, what are the billionaires doing? And I always say, yeah, have you ever heard of a fix and flip billionaire? There's no such thing. But you have heard of buy and hold billionaires. There are billionaires out there that just buy swaths of real estate and they just hold it. They're not concerned about like the immediate return of that real estate.
but they are knowing that investing in that real estate, it's going to be a secure investment that in the future sometime is going to pay them back ⁓ quite well. And real estate does that over and over again. So if you wanna invest smart, invest into a fund that is growing quite quickly, has lots and lots of ⁓ assets behind it, and eventually will be bought.
buy the big money, i.e. these pension funds and billionaires and whoever else out there. And at that point, your exit out of that fund is going to be quite nice because they're going to probably buy that fund at a little bit of a premium.
Jessilyn Persson (21:31)
Right. And I think one of great things about private equities is because obviously we're huge fans of real estate in every which way you can do it. But to get into brick and mortar real estate, generally on average, you need about 100 grand to really get something decent or to get started and to cover your closing costs and legal fees and all that. Whereas this, you don't need that much to get started. So if you want to get into real estate sooner,
This is a great way to start and start building up your income and your investments that at maybe some point you'll be at a space where you might decide you want to do brick and mortar. just helps you grow that in the meantime while you're building that ⁓ income or that investment to.
Brian Persson (22:21)
Yeah, the way that I look at it or I should say the way that I often hear about it is people go and they trust their banks. So they get a whole bunch of RSPs and TFSAs and they invest all this money. And then at some point later on in their life, they discover real estate and they're like, wow, like this thing looks way, better than, like my RSPs. And the problem is.
most of their wealth is locked up in their RSPs. So now what do they do? They have to raise that $100,000 to invest in what now around our neighborhood and we're one of the cheaper areas in Canada, Alberta being like one of the cheaper real estate areas in Canada is like the bottom of the barrel almost nowadays. So like you're buying like a sort of the lower end houses for $100,000 and you have to make that work somehow.
Jessilyn Persson (23:16)
Sorry, the lower end houses, you mean the down payment.
Brian Persson (23:19)
Yeah,
sorry, the house is not 100,000, but like to buy the house, you need a down payment of 100,000. Yeah. Yeah. And so that's kind of crazy, right? You have to raise $100,000 just to buy effectively a starter house to try and make some kind of investment at it. Well, why don't you start with private equities a little bit earlier? You know, you've already got your RSPs. So now you can diversify into private equities, put...
25,000 or some other amount lower than 100,000 anyway that you don't have to save up for and get your money working for you inside a real estate sooner than later.
Jessilyn Persson (24:00)
Yeah, and just to clarify a little bit here I think if you have money in RSPs and you decide I want to invest in real estate you will be taxed So hard to pull that out of there. So you don't want to do that now also if you want to invest in the private equities With your real estate with your RSP. Sorry, it's still gonna be the same tax game But you can invest in private equities outside of your RSPs as well where you'll still get great gains
Brian Persson (24:28)
In and out, yeah. So you don't have to worry about trying to liquidate your investments in order to get into actual brick and mortar real estate. You can actually do it right now without having to liquidate anything outside of your RSPs. You just lateral it into private equities.
Jessilyn Persson (24:47)
Yeah, I love private equities and I talk about it a lot and usually when I do, when I'm speaking on stage or in conferences and stuff and I speak about it, I get a lot of interest. People want other avenues to invest their money where it's not, they don't have to go and educate themselves or learn a new thing to do it or do all the hard work. They want just, here's my money, kind of make it grow. And so they're really excited when they hear of other opportunities because they're just so disappointed.
with their RSPs and their stocks and their mutual funds and where they've been growing over the last couple of decades. And one thing I've always kind of thought was an interesting question is why is it private equities, exempt market, whatever you want to call it, not common knowledge?
Brian Persson (25:35)
Yeah, because the banks don't push it, primarily. That's the main reason is that you don't have all the big money pushing the private equities. Secretly, they have their own private equities and behind the scenes, ⁓ but the reality is that they want you to come to them first. the other thing is that over the years that I've been working in this industry,
It used to be very uncommon. Like you would talk to somebody and they would be, ⁓ I have no idea what the private equities is. What was that word you used? But now, years on, I am finding that it is becoming more common. And if you look at the amount of money being invested in private equities, it is increasing significantly. In the last 20 years, I don't have the numbers in front of me, but the growth in the private equities market has been really significant.
like many fold times more than it was 20 years ago. Yeah, so it is becoming common knowledge. And I truly believe that into the future, you're going to talk to people and they're going to say, I don't have private equities and you're going to look at them kind of strange. Like what do you mean? Like you don't have private equities, like everybody invests in private equities. And it'll be the same kind of thing as like, you know, why don't you have RSPs or insurance or some other kind of question.
So it is becoming more common knowledge. And here's the thing is that you can get into the ground level right now, right? Because private equities are still not the majority of a lot of the investments out there, but they are growing very, very rapidly across Canada. And they are a great way for both businesses and yourself to grow your investments and your money.
Jessilyn Persson (27:27)
Absolutely. So I'm going to talk about the most important takeaway that we thought we discussed today. Mine is of course diversification. You can move part of your money out of the public markets and across businesses and real estate types and you don't have to do the heavy lifting. It's literally there's some documentation. Of course we meet with you, we discuss it, but in the end you sign and then we give you ⁓ updates. You don't have to do the hard work.
What's your key takeaway? ⁓
Brian Persson (27:57)
I love yours. There's so many ways to diversify in private equity. I, you, we could create a whole episode on diversification, but for me it's, it's, the ultimate passive investment. Like if I, if you were allowed to, there's Canadian regulations that you kind of prevent you from putting all your money into the private equities. But if you were allowed to during our retirement, like some, some time.
years in the future, I would put all my money in private equities. Obviously we can't because of the regulations, but ⁓ it is the ultimate passive investment in real estate. is the best way to completely detach yourself from the work of investing in real estate and still get a good return.
Jessilyn Persson (28:40)
Thanks so much for tuning in. Listen for more real estate investing stories in the next episode of the Life by Design podcast.
Brian Persson (28:47)
Before you go, don't forget to visit weekendwealth.ca to take our quiz and discover what type of real estate investor you are. We release new episodes every two weeks, so be sure to hit that subscribe button on your favourite podcast app. Thank you for joining us on this journey to create your life by design.
Jessilyn Persson (29:04)
Thanks again for listening. It's been a pleasure being with you today.