Lunch With: An aspiring real estate investor chats with an industry insider
Jordan Mertz and Robert McLeod sit down over some wine and cheese
by Max Fawcett
Photograph Colton Ponto
Young investor: Jordan Mertz
History: Three years ago, Jordan Mertz passed the bar. Today, he’s a 32-year-old lawyer with Bryan & Company practising business law with a focus on commercial real estate. And while he’s happy to spend his days processing and papering deals for other people, he wants to get started on building an empire of his own
Lunch: Cheese plate and a glass of 2012 Domaine Durieu Plan de Dieu red
Veteran investor: Robert McLeod
History: Veteran probably isn’t the right word for Robert McLeod, who’s still squarely in his 30s. But he’s been investing in real estate for a long time, and as the owner of one of the city’s most successful real estate firms, he’s seen his share of deals. He’s also one of the more outspoken real estate voices in the province and an advocate for those who want to take the leap from buying real estate to investing in it.
Lunch: Cheese plate and a glass of 2012 Domaine Durieu Plan de Dieu red
The plan was for Robert McLeod and Jordan Mertz to meet for an after-work drink and nosh, and some conversation about real estate at Edmonton’s Somerville Wine Room & Bistro on 124 Street, but it turns out it’s not the first time they’ve met. They met at an Edmonton investor meet-up organized by McLeod exactly two weeks earlier, and Mertz arrives with a cheque in hand. He’s buying his first piece of investment real estate and he’s buying it through McLeod.
But this isn’t a one-and-done thing. Mertz wants to build a relationship with McLeod, one that might eventually see him handing over much larger cheques than the one he brought today. Eventually, he says, he wants to get into commercial real estate. “There are things I’ve seen through what I do – clients that I’ve had who have done some very interesting things with development and commercial property, whether that’s building it or just purchasing it, sitting on it and flipping it. You start to see it over and over and over – the same people doing the same things. And you think, ‘That’s how it’s done.’ ”
It is – or, McLeod says, it can be. But McLeod suggests there’s a lot of risk attached to those rewards. “Once you get into commercial, it’s sexy as hell,” he says. “It’s triple-net lease. You don’t pay taxes, you don’t pay landscaping, the management fee you pay to yourself and you can charge the tenant – the tenant pays everything. However, when you’re dealing with that building or office or mini-strip mall, you may have one or two tenants. If you have that vacant, you could be writing a cheque for $100,000. Most investors just don’t have that kind of capital.”
Instead, he says, it’s best for them – for him – to start small: with one property, preferably one that’s as low-maintenance as possible, and get comfortable with the process of owning investment real estate. Mertz says he’s happy to go along with that plan for the time being too, given that he’s plenty busy with his career. “That’s what sold me on it,” he says of their first deal together, a pre-sale assignment in a downtown Edmonton condo. “Even when I’m not working, my focus is on that. I know an investor who has about 10 rental properties and he spends his days doing logistics: fixing doorknobs, fixing toilet flappers, fielding calls from them and so on. I don’t want that.”
They talk more about risk tolerance, and how to weather the storms that inevitably blow through any real estate market. McLeod remembers the one that hit in 2007 and 2008, when he scooped up a wide range of properties, from single units to entire buildings, which got put in the discount bin by owners desperate to sell. “I recognized where the market had been, where it had gone and I was focused on the economic fundamentals,” he says. “Everyone’s saying it’s crashing and it’s bad, but our vacancy rate was below four per cent. Yeah, it had tripled in two years, but from nothing to almost nothing. Interest rates were incredibly low, money was cheap and there were lots of capital projects. We still had oil, we still had a strong dollar, and I thought there was only going to be one opportunity that I would have before I was 30 to make a meaningful, massive impact on my financial future. I knew I had to own.” And that knowledge, he says, was only part of the equation. “Knowing that is great, absolutely. But it’s completely instinctual. When nobody’s buying and everyone’s selling, it’s hard not to think the same way. You just have to prepare yourself – and yes, it’s a bit of a crapshoot. The reason people make piles of money in real estate – and lose piles of money – is because it’s a risky game.”
But, he says, there are ways that people like Mertz can prepare themselves for those inevitable downturns. One of them? Make a list of things you want to buy. “It wasn’t just that they fell into my lap. I had been courting those vendors for a long time. I was courting them at the top of the market, and at the bottom, that’s when they were ready.” There’s one property in particular that sticks in his mind, too, a multi-unit residential building owned by an older German man. Every time McLeod passed by the property and saw the man outside, he’d pay him a visit. “My staff knew that if I saw him outside and I ran into him, we were going to drink in the garage and I would need someone to drive me home.” It wasn’t an immediate payoff, either. In fact, it took four years until, one particularly wretched day in February, he called to gently tease the man about the fact that he was still in Edmonton rather than Palm Springs. “His response was, ‘You picked the right day to phone me.’ That’s when it shook out. But those deals take a lot of patience.”
And that, he says, is what Mertz needs to be successful in the long run – along with a healthy dose of dues-paying. “The best mentoring relationship would be that you would actually go and take care of some of my properties, as horrific as that sounds.”
“Some wax-on, wax-off kind of stuff?”
“Exactly. We need to Mr. Miyagi you. Most people can’t handle investing in real estate because they can’t handle people – they don’t like handling other people’s problems. When you’re a real estate investor, that’s all you deal with.”
“Welcome to being a lawyer: dealing with other peoples’ problems all day long and charging them by the hour for it,” Mertz says. “So you have that mentality – you’re ready to get into it,” McLeod says. “But remember: you’re part-time counsellor, part-time cop – and full-time clairvoyant and psychic. You’re not ever going to be away from that. Those people are always going to have an issue, and it’s your job to figure out what that issue is and then figure out how you get your money. Over and over and over again.”
They double back to the big picture and Mertz’s long term objectives. “So, you know how your goal is to go to commercial? I think my goal is to show you that, through residential, you can achieve just as much success with fewer headaches and fewer challenges with financing,” McLeod says.
“And when I said that, the ‘end-game’ is 20 years down the road,” Mertz says. “I want to do something like what you’ve done, and have 40 or 50 doors out there. That would be ideal.”
“Twenty years is not the end-game. How old are you?”
“OK, 20 years is not the end-game,” McLeod says. “Real estate is forever. It’s never, ‘I’m going to hit this pot of gold and sell all of it,’ because eventually the goal is to have enough that it’s providing you with residual income, enough that you can liquidate and the rest is bounty for your family later. No successful real estate investor ever says, ‘That’s it, I’m done. I’m happy. Enough’s enough.’ Because they get it: the more you’ve got, the easier it is and the more you can keep. The hardest guys to do business with are the guys that have been in business the longest because they don’t want to sell anything. Why? Then they have to pay taxes on it and buy something else.”
“Like your old German guy,” Mertz says.
“Like my old German guy. He’s in Palm Springs, and sure as heck after we did the deal he did another deal. He rolled his money into something.”